Weekly S&P 500 #ChartStorm - 21 April 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. US Cyclicals vs Defensives and the Echo Bull Market: First up is a really interesting chart which has drawn out a bunch of both bullish and bearish comments. But basically my take on this is that there is a distinct possibility that the rally we are seeing in cyclicals vs defensives relative performance is a sort of "Echo Bull Market" - in many ways similar to the new bull market of 2016-18, which was primarily driven by cyclicals.

The obvious bullish implication is that we may see another year or two of gains as the echo-bull runs its course. The bearish take though is that it's a 'fake rally' in cyclicals, which is not matched by improvement in the types of factors which drive cyclicals vs defensives (i.e. improving risk appetite and an improvement in the economic pulse). In that case the market is purely running on fumes and downside risk is elevated. My base case is the former.

So I think it's one worth paying particular attention to, especially as the divide between bulls and bears seems to have deepened in recent weeks.

Bottom line: The strength in cyclicals may drive a new "echo bull market".

S&P500 cyclicals vs defensives - the echo bull

2. Global Cyclicals vs Defensives - Synchronized Uptick: Taking a global perspective, the next chart shows the same type of analysis, looking at cyclicals vs defensives across the major regions/countries of global equities. The standout feature in this chart is how across all geographies, there has been a synchronized upturn over the last couple of weeks.

This chart was a key reason I advised caution last year given that cyclicals vs defensives rolled over across the globe, but of particular note was emerging markets, which was the first to rollover and the first to recover (which again was very useful in timing EM equities in particular). My point is, just as weakening performance here was a red-flag for risk, I think the strength we're seeing here is the closest thing to a green light for equities that you can get. Especially given some of the economic green shoots...

Bottom line: Cyclicals vs defensives have perked up across the globe, which is a positive sign.

3. Equity Market Performance after Green Shoots: Speaking of "green shoots", Martin Enlund of Nordea Markets shows an interesting chart here which maps out how equity markets performed following a period where there were an increasing number of stories mentioning economic green shoots. It looks like there may be some upside left, but then on average performance tapers off (I guess this makes sense as markets are quick to price in expected improvement -- remember: markets are forward looking, not backwards looking).

As a side note, some have murmured that we shouldn't even be talking about green shoots as the last time we really talked about green shoots was in 2009, following a major global economic recession and financial crisis. But if you look at the performance across global markets in 2018, yes it wasn't the same scale as 2008, but there were some very substantial drawdowns in risk assets, and if you look at the hard data it has all the hallmarks of a potential global recession... so I think it is fine to call it green shoots. But then again, my base case has been that we are looking at a passing growth scare and not a prolonged/deep global recession. Just my opinion...

Bottom line: Equities tend to see a little bit more upside after everyone starts talking about so-called economic "green shoots".

green shoots market performance

4. Dumb Money Confidence: This next one is quite an interesting one, perhaps a little controversial even, and comes from the ever-insightful and excellent Sentimentrader. The main point is that their composite view of "dumb money" sentiment has reached a decade-high. When sentiment becomes very stretched it often spells the end of a move, or certainly at least a bit more volatile trading.