Weekly S&P 500 #ChartStorm - 31 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 - A Golden Cross is Coming: First up is a quick check in on the recent price action; last week the S&P500 managed to hold that critical 2800 level... which at this stage is tentatively looking like the new floor/support level. But probably the more interesting thing in this chart is how the market is on the cusp of putting in a golden cross (when the 50-day moves above the 200-day moving average).

The "golden cross" is a slow moving signal which is designed to diagnose whether a market is in an uptrend or downtrend, so keep watch for that. I will talk more about this signal and how it's looking with regards to global equities also, later in the week.

Bottom line: The S&P500 is on the cusp of putting in a golden cross.

S&P500 gold cross chart

2. Bearish Breadth Divergence Continues: And as bullish as that previous chart was, this one is decidedly on the bearish side. It's a classic case of what technicians call "Bearish Divergence" i.e. where price makes higher highs and the breadth indicator makes lower highs. It is a sign of some sort of underlying weakness in the market, As I noted on Twitter, these divergences can resolve in a benign fashion, so it's not a done deal by any means, but something to be mindful of.

Bottom line: The bearish breadth divergence signal continues to loom.

3. Institutional Investor Confidence: The next chart shows the State Street investor confidence index for North America - this indicator is built off actual activity by institutional investors in the custodian accounts of State Street's multi-trillion dollar global custodian business. Basically this indicator collapsed during the correction and stayed low, indicating that institutional investors substantially de-risked going into and out of the correction, and have been very reluctant to add risk.

The bulls will say this is a good thing because it amounts to potential future buying (aka "cash on the sidelines"). The bears will say it's a bad thing because institutional investors are better resourced and can see the writing on the wall. I think it's actually probably a mix of both.

Bottom line: Institutional investors have been reluctant to re-build exposure to risk assets.

State street investor confidence - North America chart

4. US Yield Curve Outlook: One concern that has been plaguing investors in the last couple of weeks is the topic of the Yield Curve. The concern is that an inversion in the yield curve is a major signal of a recession and bear market. Much of the focus has been on the 3m vs 10yr, but a more traditional version (in my mind at least) is the 2yr vs 10 yr.

In this respect, we still have not yet seen inversion in the yield curve as defined by this version. The chart below shows how there has indeed been flattening in the curve, but it is still not quite there. That said, as this leading indicator (and a few others I have) show, we should expect the 2's 10's curve to invert in due course also.

Bottom line: The other yield curve (2's 10's) is still yet to invert.

5. So-What About Yield Curve Inversions? A nice follow-on chart, this one by Ryan Detrick of LPL Financial shows what happened the last 3 times the yield curve inverted. Not only is it not an *immediate* death knell, it can actually be followed by a decent period of solid performance.

This is the challenge of late-cycle investing. Everyone wants to jump off the ride before it ends, but sometimes the ride can go on longer than you expect and folk end up left behind. There is no easy answer to late-cycle investing conundrum, you either have to be ok with getting off too early or too late, or be very confident that you have a reliable process that will help you find some sort of middle ground.

Bottom line: The yield curve is not an immediate death knell for markets.

yield curve implication on stockmarket charts

6. Quarterly Earnings Trends: Next chart from FactSet shows the drop in EPS estimates through the first quarter. It's the worst drop in earnings since Q1 2016. All sectors saw declines, but those with the largest declines were Energy (-34.0%), Materials (-16.3%), and Information Technology (-8.3%). This trend will hit the YoY picture particularly hard given the base comparator is overstated by the impact of the corporate tax cuts this time last year.

Bottom line: Expected earnings took a dive in Q1.

earnings collapse chart