Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes to explore with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!
The purpose of this note is to add some extra context and color. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.
So here's another S&P 500 #ChartStorm write-up!
1. S&P500 Status Check: First up is a quick status check on the S&P500's latest price action. This past week brought two key short-term milestones for market; first the downside test of the 200-day moving average failed, second the index finished above the key 2800 level. This of course does not preclude another test to the downside, and the coming days and weeks will tell whether the tentative breakout can be sustained, but with these two hurdles cleared it's points scored for the bulls.
Bottom line: The S&P500 broke back above the 200 day moving average and the 2800 level.
2. S&P500 200-day moving average breadth: Since we're talking about 200-day moving averages it's salient to also explore the market breadth picture, and from first glance it's not nearly as convincing as the previous chart. For starters, only 55.6% of S&P500 components are trading above their 200-day moving average, and for the technicians, the breadth indicator is displaying short-term bearish divergence against the index (higher highs on the index vs lower highs on the breadth indicator).
This divergence can be resolved in a benign fashion by breadth simply improving, but it's enough to cast some doubt on the short-term outlook.
Bottom line: Market breadth presents a less convincing picture for the short-term outlook.
3. Change in real yields vs the S&P500: Staying with the short-term outlook, here's another ping against the previous pong, this chart shared by Francesc Riverola of FXStreet.com, shows how the movement in the US 10-year real yield provides a slight lead on performance of the S&P500. In that respect it's saying the market still has a little steam left, with the lead indicator pointing to positive rolling quarterly performance through April. But again, that leaves us guessing on the outlook further out.
Bottom line: The movement in 10-year real yields points to positive short-term performance.
4. Broker Dealers & Exchanges relative performance: One observation from Tom Bruni of All Star Charts will certainly add some doubt to the outlook (another pong against the previous ping!), this chart shows the relative performance of the broker dealers and exchanges sector - a sort of super-cyclical sector which is highly sensitive to changes in the market/cycle. The relative performance line is clearly challenging that support zone, and a break to the downside will be points scored for the bears. This is definitely one to add to your radar for the coming weeks.
Bottom line: The broker dealers and exchanges sector has been underperforming; a bad sign.
5. Weekly Equity Fund Flows: This chart of fund flows is quite interesting and both bulls and bears can get excited here. On the bearish interpretation you could say that investors are throwing caution to the wind and while Dec/Jan saw "FONGO" (Fear Of Not Getting Out), we're now returning to FOMO (Fear Of Missing Out). The bulls will say that after missing out on the rally (fund managers, hedge funds, and retail have all carried lower equity exposure than usual through the last couple months, and cash on the sidelines has indeed been an actual reality), investors are finally getting back on board.
In other words it could be a sign that risk appetite is returning as the Fed has pivoted along with many other central banks, and investors look through the recent weakness in the data as a transitory thing. Just a theory. Anyway, let's keep watching this indicator, follow-through will be key.
Bottom line: Equity fund flows surged last week after a period of outflows.
6. Quantitative Tightening vs the S&P500: Speaking of the Fed policy pivot, it's interesting to note the impact of quantitative tightening as a headwind to risk assets. The chart below shows the beginning of quantitative tightening aka balance sheet runoff, and the subsequent acceleration. It's certainly not a one-for-one relationship, and my comment around the middle of last year that investors were underestimating/forgetting about QT seems prescient in hindsight.
Anyway, Fed chair Powell has been talking about the concept of a "normal balance sheet" and hinting that they may be nearing this level - and that they may look to cease QT1 later this year. It's entirely possible that they announce the end much sooner though, so this week's Fed meeting is going to be possibly a very interesting one indeed.
Bottom line: QT1 has been a headwind for markets, thought the Fed may cease QT soon.
7. Global Equities vs Global Central Bank Balance Sheets: Staying with the topic of central bank balance sheets, here's a new indicator I have developed which is designed to capture the impact of central bank balance sheet expansion/contraction on global equities. At first glance there is a fairly obvious and intuitive relationship - expanding central bank balance sheets tends to be bullish and contracting balance sheets tends to be bearish (e.g. 2015, 2018).
At the moment this indicator is still on the bearish side, but it will be important to watch in the coming months for any signs of a global policy pivot which may drive a new extend and pretend bull market. Whatever your opinion is on that, it's a key factor to be mindful of.
Bottom line: Central bank balance sheets have gone from tailwind to headwind for global equities.
8. US equities relative to DM Ex-US Equities: Since we're talking global equities, it's interesting to revisit this relative performance chart which shows US vs DM ex-US equities. Simply put, this chart is astounding. This simply extreme run of relative performance says as much about the strength of the US market as it does about the weakness in global ex-US throughout this period. In fairness, there is nothing to say that this chart has to mean-revert, because relative performance can be a non-stationary series e.g. if one asset structurally outperforms another due to permanently higher growth, etc.
But to believe that we don't see at least some correction in this chart would rely on an assumption that growth will permanently be higher in US than DM ex-US, and/or that the US dollar will remain strong and get stronger (never forget the FX aspect when dealing with global equities!). The other factor to think about is valuations.....
Bottom line: US vs DM ex-US equities relative performance has been simply extreme.
9. Global Equity Valuations: And of course I have a valuation chart for you. This one shows valuations for the major chunks of global equities. Notably, following the extreme performance in the chart above, a substantial valuation gap has opened up as DM ex-US PE10 trails that of the US. What's also notable is by themselves, US looks expensive vs history and DM ex-US looks cheap vs history.
My view is that over the longer term valuations tend to speak for themselves. There's always a lot of if's but's and what about's, but in my experience numbers and facts beat anecdotes and narratives more often than not. Doesn't mean there's any guarantees (there never is!), but I consider this chart to be one of the most important for the next decade in global multi-asset investing.
Bottom line: US looks richly valued vs history and its global peers.
10. Passive Ownership of the S&P500: This chart shared by Tracey Alloway of Bloomberg news shows the rise and rise of passive ownership (as a percentage of outstanding equity). I will quickly note that this is only counting the proportion owned through mutual funds and ETFs, which though there is some institutional participation in these instruments, are largely the domain of retail. Institutional investors will often implement passive exposure through an SMA (Separately Managed Account) or run it in-house (basically with spreadsheets and a dealing desk, or less commonly with futures or swaps).
Anyway, the point is passive investors own an increasingly large share of S&P500 companies (albeit, ~15% is not astronomical by any means). It's certainly a sign of the times in the investment world, and it prompts one to consider the various critiques of passive e.g. that passive owners will be more hands off on important issues of governance and efficient allocation of capital. I'll leave you to ponder that.
Bottom line: Passive vehicles now own 15% of the S&P500 index.
So where does all this leave us?
This week there's probably 3 main topics/themes...
1. The Short-Term Outlook
On the short term outlook there was a bit of pinging and ponging as the breakout above the 200dma and 2800 level, along with the movement in real yields, and possibly also the spike in flows building the bull case, while the less than convincing breadth picture and underperformance of broker dealers and exchanges cast some doubt over the short term outlook.
2. Central Bank Balance Sheets
On central bank balance sheets we saw how QT1 has acted as a headwind to the stockmarket - but also noted how this headwind may be removed as a possible Powell policy pivot is underway. We also looked at how global central bank balance sheets have been impacting on global equities and the conclusion is they've gone from tailwind to headwind.
3. Global vs US Equities
On the global front we saw the historically extreme relative outperformance of the US stock market against developed market equities, and (how as a result) the US stockmarket now looks expensive vs its own history and relative to EM and DM ex-US.
With a murky but arguably overall bullish short term outlook, we're still left looking to central banks to see whether and how a policy pivot progresses. But one thing we learned or confirmed this week is the widening gap between global vs US equities. As I said there are no guarantees, but going against extremes tends to payoff in the longer run.
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