Weekly S&P500 #ChartStorm - 11 May 2020

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. 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. Enter the Twilight Zone. The snapback was swift in late March through mid-April, but US stocks have consolidated gains in the last three weeks. The 200-day moving average and the 2900 level present near-term resistance. Much was made of the 61.8% Fibonacci retracement resistance point earlier this month as the S&P 500 backed away from it initially, but the index is approaching the key level once again. Meanwhile, the 50-day moving average is beginning to flatten, indicating an improvement in the intermediate trend – some of those horrific days of early and mid-March are rolling off.

Meanwhile, all’s quiet on the 10-year yield front. As stocks have soared off the low, the 10yr has just plodded along between 60 and 75 basis points. The relative calmness in the treasury space is interesting as the market has digested awful economic data in the last month. And there is more to come. I am paying close attention to treasuries, this lull in volatility will get shaken off at some point, and there will be probably some big opportunities when that happens.

Bottom line: A consolidation of strong gains off the bottom is probably not a bad thing from the bulls’ perspective. Look at it this way – stocks fell during a 5 week stretch peak to trough, and it has now been 7 weeks since the low. Bears would have preferred to see the snapback sold into more heavily. The bulls still have work to do with noted resistance above the current price.

S&P500 chart vs treasury yields

2. Tech turns green. As the chart below indicates, perhaps no better sector was poised to weather the COVID-19 storm better than Information Technology. It drew headlines last week as the mega-cap growth-heavy arena crossed back into positive territory for 2020. The firms at the top of the sector are cash-heavy and of course rely more upon internet and broadband usage versus bricks & mortar. Energy remains the laggard despite massive percentage gains from the March bottom.

Many of the top industry performers in the last 7 weeks are found in the beleaguered energy patch. While many market-watchers are left wondering ‘how can the stock market be only 15% off the high given the economic backdrop?’, one must dig deeper to see what has held up well and what areas have not.

Bottom line: Tech leading is obviously nothing new. Markets trend. COVID-19 was just another narrative to help explain a broad stock market theme of the last 10+ years.

S&P500 sector performance

3. The range-trade. @the_chart_life brings us this 2-year zoom of the S&P 500, noting the battle-zone at the 2940 level. It was resistance twice during 2018-2019. Later, it was an area of congestion from May to October 2019. More recently, it marked a very near-term low during the Feb-March 2020 decline. Now here we are. It is not surprising to see the market taking a breather at this point.

Sometimes it is not a bull market or a bear, but rather a "crab-market". A choppy-trade around current levels may be the path of maximum frustration for the most traders.

Bottom line: The market remembers old battlegrounds. 2940 has the hallmarks of disputed territory among traders. It is already emerging that the bears are defending this area on the chart.

S&P500 key levels - range trade chart

4. Advance-decline lines holding up. David Keller, CMT (@DKellerCMT) shows us how important breadth is - "Can't be too negative on stocks until I see cumulative advance-declines breaking support then making a lower low." From large caps to small caps, the trend is higher on A-D lines, but precariously so as depicted Keller’s charts beneath the index price.

David was President of the CMT Association for many years, and technicians emphasize participation during market trends. A trend is called into question when it is led by a relative few names, but so far that is not what we are seeing off the March 23 low. A-D lines act almost like momentum for the stock market – momentum tends to turn before price. So keep an eye on this one.

Bottom line: This is a good set of A-D line charts to watch (large caps, NYSE common stock only, mid-caps, small caps). The A-D lines have all trended up in an orderly fashion, but a break in trend could spell doom for the overall index.

S&P500 internal technicals risk indicator chart

5. THE Bottom? “Bottom” is a gutsy word in finance twitter parlance. The safer phrase is “a low” versus “the bottom”. Jurrien Timmer from Fidelity Investments (@TimmerFidelity) produces great charts throughout the week, and this one in particular caught our eye – analyzing market bottoms since 1906. While history matters, every market scenario is different and new. History rhymes, but it also has a way of fooling a great many in the present.

Nobody knows if March 23 was THE Bottom, but it is a good exercise to review what market bottoms look like. Timmer emphasizes the March 2009 bottom along with how our current price action is trending. The two situations are not dissimilar whatsoever. October 2009 was an eerie period if you will recall as S&P 500 broke trend, but then resolved higher through year-end (and beyond).

Bottom line: Of course nobody knows when or where market bottoms occur. A good trader weighs the evidence and takes a more probabilistic approach to portfolio management. Nevertheless, extremes get hit at bottoms and powerful new trends emerge. “What if” that was it?

6. “What if” this is like 2009, not 1999? Last week I wrote on how “the biggest risk to markets is that the liquidity crisis turns into a solvency crisis”. Rates have fallen, but so too has banks’ willingness to lend. The stock market tends to lead the economy, of course, as noted: “deteriorating credit conditions can reinforce downward spirals in the economy and financial markets.”

What’s interesting from a technical perspective is that the stock market peaked in early 2000, then the Fed loan officer survey was tightest in advance of the market bottom. In 2009 though, the survey and market nadirs were one the same. “What if” this event is a one-off shock, and resembles a coincident low between the survey and stocks? Something to ponder.

Bottom line: Monetary & fiscal policy from the US has been huge. Liquidity is there, but now solvency risks from economic shutdowns loom. If managed well, this could be contained to a brief economic shock.

Fed loan officer survey vs S&P500 chart

7. “What if” volatility is here to stay for a while? Volatility arises during bear markets; we all know this. Volatility can also rear its head during euphoric bull markets. Volatility rose in advance of both the 2000 and 2