Weekly S&P 500 #ChartStorm - Something for Bulls and Bears

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. A new All Time High for the Market: How could the first chart this week be anything other than a snapshot of the S&P500 making its first new all time high since September last year? Not really much else to add with this one, other than the point that the total return (dividends) index had made its new high earlier (duh) and that the index closed at the new ATH on Tuesday and then also closed the week on another new ATH. Not a sign of weakness.

Bottom line: The S&P500 made its first new all time high since September last year.

S&P500 makes a new all time high

2. Small Cap Stocks lagging the S&P500: But while the S&P500 is making new highs, its small-caps counter-part, the Russell 2000 is lagging far behind. I think this reflects a few things, namely folk have gone down the path of least risk in the rebound with large cap quality, shunning the sometimes riskier and lower quality small names.

But whatever narrative you want to run with on that aspect, I think the more interesting question is not "why", but what happens next? Whenever you see a gap or divergence in markets you should pay closer attention, because some very interesting opportunities and signals can come. I know I will be spending some time looking closer at small caps this week!

Bottom line: Small cap stocks have *not* made a new all time high, and are lagging behind.

3. Market Breadth - Green Light: This next chart comes from Mark Ungewitter and shows how cyclical bull markets are normally signaled by breadth recoveries greater than 50% following breadth "wipeouts" (i.e. falling to less than 20%) - just like what we are living through right now.

Like just about all signals and indicators, it is not completely infallible, but I would say it has worked enough times in the past that it merits due attention.

Bottom line: The breadth recovery seems to be signalling a new cyclical bull market.

market breadth chart and rule

4. Sentiment Recovery Lagging: This next chart stands out to me because while sentiment has certainly rebounded with price, it has lagged behind. As we saw earlier the market has gone on to new highs, but charts like this show (to me) a lingering sense of skepticism. I talked about this in my weekly report, where I took a broader look at sentiment, it's a uniquely mixed picture.

Some tactical indicators say risk of a pullback is high, yet other indicators show large investors quite lightly positioned. It's one of those situations where there's a little something for everyone: the bulls will say the skepticism is a source of future capitulative buying power, and the bears will say people are right to be skeptical!

Bottom line: Sentiment has rebounded, but has lagged behind the recovery in price.

sentiment up but lagging

5. SPY (S&P500 ETF) Short Interest: This next graph from hedgopia shows short interest in S&P500 ETF (SPY), it fell further through April and is now close to the lows of Dec 2017 after squeezing down substantially from the highs back round the turn of the year. Hard to short a market that has been this strong... Last point to make, from a sentiment standpoint this is starting to look contrarian bearish (not much more shorts to get squeezed into buying power, and a lack of shorts signalling increased optimism). Short interest doesn't always work as a contrarian signal, but it is another piece of info to take note of alongside the broader sentiment/positioning picture.

Bottom line: Short interest has dropped back towards late 2017 levels.

SPY etf short interest

6. Thomson Reuters Most Shorted Stocks: Speaking of shorting, the next chart shows the Thomson Reuters Most Shorted Stocks index (i.e. a map of performance of the most shorted stocks). Interestingly this index has lagged behind the S&P500... which means basically traders were right to short those stocks.

One thing I would note is that the path of this index looks very similar to that of small caps (see chart no. 2), so on that respect, I guess we know how traders are positioned there. Which again, makes small caps seem all the more interesting.

Bottom line: The most shorted stocks have lagged behind the S&P500.