Weekly S&P500 #ChartStorm - 24 March 2019

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 Levels and Checks: First up is a check in on the market. Despite a very dovish pivot by the Fed, the market sold off late in the week, but still managed to close just above that fabled 2800 level. Fans of moving averages will also notice something interesting in this chart (aside from the 200dma commencing a slight upwards slope).

The 50-day moving average is getting ever closer to breaking above the 200 day moving average, also known as a "gold cross" - a very slow moving signal which is designed to tell whether a market is in an uptrend or downtrend. By its nature it shows up late, and many dismiss the indicator, but it is still something to keep an eye out for.

Bottom line: The S&P500 managed to only just hold the 2800 level.

S&P500 price chart - 2800 level and close to golden cross

2. S&P500 Bearish Breadth Divergence: This chart showed up last week too, but I also highlight how the short-term bearish breadth divergence signal currently playing out almost seems to echo the larger bearish breadth divergence pattern which preceded the correction late last year.

Early signs are that this short term bearish breadth divergence (higher highs on price vs lower highs on the indicator) is resolving to the downside, and it lines up with a few other tactical/short-term indicators (e.g. put/call, VIX, etc) which likewise seem to point to more water going under the bridge short-term as some post-Fed indigestion seems to promulgate.

Bottom line: Short-term bearish breadth divergence looks to be resolving to the downside.

S&P500 bearish breadth divergence chart

3. Fed Announcements vs the Market: Another short-term chart, this one by Martin Enlund of Nordea Markets shows an interesting side-by-side comparison of trading action around the announcement of QE2 vs the announcement to cease/taper QT1 (quantitative tightening part 1).

I you (correctly in my opinion) consider ending quantitative tightening to be effectively an easing measure (from a flows standpoint it means more purchases of treasuries - particularly given the twist (ABS to treasuries)), then this could be quite an interesting analogy...

Bottom line: When the Fed announced QE2 markets likewise experience indigestion before heading higher; the same could end up true for ceasing QT1.

Fed QE/QT announcement vs market

4. The "Sweet Spot" Indicator: This is one of my own wacky indicators, I call it the Fed Sweet Spot Indicator. This indicator simply subtracts the Fed funds rate from the Atlanta Fed wage growth tracker: the higher the reading the more supportive it is for stocks, and vice versa.

The logic is that higher readings reflect both the stimulus effect from lower (relative) rates and in so far as higher readings reflect higher wage growth also imply a confidence/flows effect. The key point is this indicator has been steadily falling (both as a result of higher interest rates and wavering wage growth in recent months).

Bottom line: The Fed Sweet Spot Indicator is steadily leaving (left?) the sweet spot...

Fed stockmarket indicator

5. Labor Cost Mentions: This unique chart shows the number of mentions of "Labor Cost" in quarterly earnings calls by S&P500 companies. Interestingly there has been a steady rise over the past couple years as the US labor market has really tightened up. The downside of this is the possibility it also implicitly reflects profit margin pressures.

Bottom line: S&P500 companies seem to be more concerned about wage pressures lately.

corporate labor costs as an issue chart

6. Yield Curve vs Stockmarket: This rather timely chart from Jeffrey Kleintop of Charles Schwab shows the US treasury yield curve (in this case the 10-year minus 3-month yield) against the MSCI World (global stocks). It also shows recessions shaded in grey.

The key takeaway from this chart (also --- by the way, in case you missed it (!), the US yield curve under the above definition inverted last week) is that almost always (the exception being example no. 2) a US yield curve inversion occurs within some proximity of a major market top.

Bottom line: The yield curve may be signalling a major market top is near.