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Weekly S&P500 #ChartStorm - 4 May 2020

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. Happy new month! For the S&P 500, March’s steep drop (-12.5%) was followed by a sharp April rally (+12.7%) as volatility persists. The monthly chart shows a pattern of increased volatility since 2018. Price has weaved back and forth between the 10-month moving average indicating indecision. Similar trading action was seen during the 2014-2016 period which was characterized as a soft global recession while the US avoided negative growth but still saw lackluster stock market returns.

Many market watchers are waiting to see if this snapback rally, among the most explosive in market history, will find significant resistance. Widely noted last week, the 61.8% Fibonacci retracement from the February peak to the March 23 trough was tagged, followed by a 3.6% drop on Thursday and Friday.

Bottom line: Keep a longer-term perspective. May will provide clues as to the next significant move.

S&P500 monthly chart and 10 month moving average

2. March & April asset class returns: US large caps (S&P 500) were among the best performers in March (least bad, perhaps better said), but then rallied relatively well in April too. It’s the same old story from the 2010s – US large cap growth (mega cap tech) has continued to lead. Perhaps huge cash hoards on the balance sheets of the biggest of the big companies helps during this volatility.

US MLPs, namely those related to the energy sector, saw perhaps the most pronounced inflection during the downturn. It’s particularly fascinating when you glance down at the worst April performer - commodities! Was it the final washout for the beaten-down energy sector? We’ll wait & see, but May could be the market tell to see if April was just a big head fake.

Bottom line: The S&P 500’s leadership during March & April masked some steeper declines across small cap stocks and foreign equities. The latter issues fell about 10% during the two months while the US large caps were nearly flat.

monthly asset class performance charts

3. Mind the gaps: This chart from the prolific @MacroCharts underscoring the 1-month net gap direction on SPY. Recall the slew of opening bell “limit-down” instances in March – add them all up, and the month featured the biggest net gap down on record. April had the biggest net gap up. Welcome back volatility! It makes Q4 2018 look like child’s play.

2007-2009 gets a lot of play as the primary comparison, but take a look at the time around the 2000 peak. That topping & bottoming process was more drawn-out in nature, and the market experienced many volatile months. Huge net gap-up months were seen closer to the market top than bottom though.

Bottom line: The market of stocks has to prove itself. Technicians will look for confirmation that the final low is in, but it is too early to make that call.

S&P500 ETF chart - market gaps indicator

4. Hedge fund positioning: @hedgopia brings us this look at the CFTC Commitment of Traders report. The CoT report can give traders clues as to where the smart-money is positioned. Hedge funds’ net shorts are at the highest level since October 2015, prior to the early 2016 market bottom. Go back to the European debt crisis and US downgrade period of Q3-Q4 2011 – the CoT report showed sharper net shorts then, however.

Interestingly, shorts were higher at two key times: 1) October 2011 which was a stock market bottom and 2) September 2007, near a market peak. So net positions of hedge funds are a tricky thing to analyze at market inflections. Indeed, it can even be a sign of a transition from the "buy the dip" vs "sell the rip" mentality.