Weekly S&P500 #ChartStorm

Those who 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. But inevitably if you keep an eye on the charts they tend to help tell the story, as you will see below.

So here's another S&P 500 #ChartStorm write-up!

1. The S&P 500 Levels: First up is a check on price. The index has traded rather sideways in a choppy fashion for the last week and a half, consolidating gains from the March 23 low. The 50-day moving average proves to be resistance in the near-term. The February low that was apparent support now appears to be adding to resistance. So there is a bit of confluence of supply at current levels. Still, the bulls are holding their own on this bounce, not allowing significant downside as emotions continue to run high. Things seemed bleak on Tuesday last week as the index settled at the low of the day, but marked the low of week.

A key indicator we are watching is relative performance of retail versus heath care. The XRT vs. XLV ratio chart below fell off a cliff from late February through early April, and has seen only a minor bounce since. Bulls would like to see the chart breakout in some fashion to help give the recovery in the broader market some legs.

Further, one of our favorite ratio charts, global airlines versus China health care (JETS vs. KURE) is at the lows, even after stimulus news for US airlines. As a pandemic barometer indicator, this is one cause for concern.

Bottom line: The current consolidation in the S&P 500 appears to be constructive, and it has the hallmarks of a bull-flag pattern, but the bullish scenario needs some confirmation soon. Bull flags that get extended tend to resolve in a breakdown. Also complicating the outlook is the 200-day moving average is further above near the psychological 3,000 figure.

S&P500 technicals chart

2. Cyclicals vs. Defensives: Arguably this chart shows the battle between stimulus & social distancing. Once again, despite the major rebound in the S&P 500 in the last month, the ratio of cyclical stocks to defensive equities hovers near the low. In normal circumstances this would represent a lack of confirmation. Investors are still sour on industries susceptible to weak consumer spending and those areas dependent on physical movement. Within defensives, it has been a mixed bag among food & beverage stocks, but the move defensive grocery store space remains a safe-haven.

Bottom line: Cyclicals vs Defensives is a powerful confirming indicator, and the below chart is not providing a signal that investors are bullish on a return to normalcy any time soon. Perhaps this chart can be included in the longer-duration “U-shaped” recovery fundamental narrative. Also see how the trend had been down in advance of COVID-19. So the bulls have a lot of work to do here to see a secular turn toward cyclical names.

US cyclicals vs defensives chart

3. Stocks, Bonds & Gold: This one from our friend J.C. at Allstarcharts. A cascade of liquidity has helped propel most assets sharply higher in the last 5 weeks. We are big fans of intermarket analysis, and it’s always telling when everything moves together. Stocks have shot higher as we discussed, but so too has gold and long-term treasuries.

At times during the February-March collapse, precious metals and bonds were sold as a source of funds, but they have been bought-back in a fury. What happens in the next down-move for one of these assets? How will the others respond?

Typically these 3 markets are more inclined to march to their own beat e.g. a more constructive growth outlook would boost equities at the expense of treasuries. So in a way you could argue this is another corner of indecision in the market.

Bottom line: It’s possible all three asset classes can continue to be highly correlated for quite some time, but we will be on the lookout for relative weakness should it evolve.

intermarket analysis chart

4. Bloomberg Consumer Confidence vs. S&P 500: The next chart shows consumers haven’t felt this tentative since before the 2016 election, which is stunning given the highs recorded just two months ago as the S&P 500 was above 3,300. The current state of the American buyer contrasts the nadir from Q4 2018 which barely saw a hiccup in confidence as stocks fell about 20%.

The disconnect between equities and consumer comfort is staggering. It’s easy to point out that the stock market is a forward-looking, discounting mechanism while consumers are focused on the here-and-now and more impacted by recency. Jurrien Timmer notes that the S&P 500 bear market low tends to lead the end of recessions by 2-4 months, so it is certainly not uncommon to see stocks bottom on terrible news and consumer despondency.

Bottom line: Consumers are likely pinching-pennies as they did during the Great Financial Crisis as stay-at-home orders continue. Equities seem to be pricing-in a return to typical consumer buying behavior this summer, but who know how individuals will actually act. Low gas prices are not the trick. It will take time for the damage down to the psyche among individuals to get back to the way things were. Until then, we’ll keep enjoying our Zoom meetings.​

consumer comfort vs S&P500

5. FOMO on the Rise: Troy Bombardia provides this look of the S&P 500 with news stories mentioning “FOMO”. Large cap growth continues to charge ahead. Same old story. There has been a spike lately in stories mentioning the Fear Of Missing Out, “FOMO”.

In the past, these spikes have eventually led to market pullbacks. Will the same happen soon? Bulls want to see better participation among smaller issues and perhaps value stocks. Panic buying frenzies (driven by fear, in a sense) are not the healthiest forms of equity market rallies.

Bottom line: The S&P 500 hasn’t immediately declined during prior instances of “FOMO” news-mention spikes, but eventually the prior gains were given back. This relationship indicates that investors may have been buying in capitulation. Technicians want to see accumulation days and stronger breadth for sustained rallies.

FOMO chart

6. Most Volatile Years: Here’s a great look from @MacroCharts displaying a take on realized volatility. 2020 is tracking as the 6th most volatile year ever. A great insight is on the right – while we have experienced more than 40 1%-days already, similar years went on to accumulate more than 100. There’s a long way to go according to history. It’s interesting to see similar years – the grouping is littered with Great Depression times and years this century. There are sharply positive and major negative return periods in analogous times.

History suggests when volatility turns up, it happens swiftly but then takes a while to return to low levels. Recall the V