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. S&P 500 Check-in. The index climbed above its 200-day moving average last week, also jumping past the 3000 level following weeks of consolidation. The all-time high is 3393.52 while 3100 could be more near-term resistance from a psychological point of view. The shorter-term 50-day moving average has turned up, indicating a near-term uptrend is in place, but we don’t need a moving average to tell us that.
The ascent from the March 23 low has been among the sharpest in history. Stocks had drifted lower during the middle of May, but the back half of the month brought about another buying burst to bring stocks to within shouting distance of the February highs. The rockier time of year from June through September lies ahead and there is of course an election just 5 short months away – so there will be no dearth of headlines.
Bottom line: Cash on the sidelines and doubtful sentiment readings have perhaps created a ‘wall of worry’ for this market. Few market participants from a fundamental stance can justify the current market advance. The dichotomy between the economy and the stock market seems as great as it has ever been. Nevertheless, you have to respect price action.
2. Stocks above their 50-day moving average. @MichaelBatnick brings us this chart of a remarkable statistic: “~96% of S&P 500 stocks are above their 50-day moving average, the highest reading of the 21st century." As of Friday’s close last week, it has been 48 trading days since the March 23 closing low (we’ll get into whether it was ‘a low’ or ‘the bottom’ later on). So Michael was timely with this stat, indicative of the huge market recovery in the two+ months. Notice how it comes after basically hitting 0% at the March lows.
Many individual stocks now show ‘overbought’ readings on momentum indicators and oscillators, but perhaps any natural pullbacks will be met with some buyers. It’s hard to tell obviously, but the bounce back in stocks has featured solid participation among the 11 equity market sectors. Some of the most beaten down industries were also those that recovered the sharpest. Heck, even department stores had a strong move in May.
Bottom line: Stocks rose nearly as quickly as they fell. 2020 has been an interesting year, and there is still more than halfway to go. We are seeing more technical indicators of a legitimate bottom having been put in place, but some volatility persists. Longer-term, there are even some equities making fresh 52-week highs.
3. 52-week highs. @macro_daily noticed an uptick in S&P 500 stocks making new 52-week highs. Though the measure is only at 6% as of late May, that is the highest reading since February. Mega cap growth tech stocks are getting all the press for being the best to whether the COVID-19 storm, but companies like S&P Global, Regeneron, Dollar General, and PayPal are among the 52-week highs on the S&P 500. Even Lululemon notched a 1-year high last week. So it’s not as if FAAMG is the only game in town.
Notice how it is obviously rare for this market stat to get much above the 25-30% level – even with the S&P 500 was making all-time highs during January and February, the percent of companies making individual highs was only above 20% for a brief period of a day or two.
Bottom line: More stocks are making 1-year highs. They are also coming from a variety of sectors and industries with market cap level that range from the low-end to several hundred billion dollars. So the move has been perhaps more broad-based than many like to acknowledge. Can stocks keep up the pace into next month? Or will there be a June swoon?
4. THE bottom? @TimmerFidelity from Fidelity Investments publishes so many great charts, but we liked this look and the story (and debate!) it tells (and draws). Timmer points out the S&P 500’s move in 2020 and from the Great Financial Crisis with bolden lines on the chart. This year’s recovery off the March low (bottom?) was comparable to that of March 2009’s.
In fact, as of the close on May 28, 2020’s rebound has actually been fractionally greater than it was 11 years ago. Interestingly, 2009 featured a sideways market for more than two months during May and into early July before taking its next leg higher into the fall. The point is though, if this is just a dead cat bounce, it really does not have any good analogs given the amount of the move and its duration. The last 48 trading days are more reminiscent of rallies off bottoms.
‘Bottom’ line: Analyzing the stock market with an unbiased mind is not easy. Removing our priors from the equation is a challenge no matter what area of life. Using history as a guide though, we can gain some confidence in the range of possible outcomes. There is a good chance the March 23 low was in fact THE bottom, but who’s to say we won’t have a second wave of selling later this year? Keeping an open mind and being flexible to new information is key.
5. May was risk-on. The S&P 500 gets a lot of the attention (and we are guilty as charged!), but let’s take a broader look at other assets last month. Commodities and US Master Limited Partnerships (MLPs) were the best performers – not surprising given the huge rebound in crude oil. WTI had its best month ever and the overall commodity index surged. May was arguably among the most important months for the energy & commodity complex in history – it was make or break. The group survives for now.
Beyond hard assets, emerging market debt recovered nicely during May while Frontier Markets finally showed signs of life. What was not so great? Emerging market stocks did not keep pace with their local debt counterparts. REITs also continued to struggle on a relative basis.
Bottom line: US MLPs have been the hardest hit area of the financial markets this year (check out the column on the right – way at the bottom) with collapsing crude oil prices and a credit crunch despite the actions of the Fed. That said, May was a solid month for the space. But there was broad participation among risky assets – stocks across the market cap spectrum performed well.
6. Looking long-term on the S&P 500. We like to monitor the S&P 500 monthly chart with the 10-month moving average as an overlay. The 10-month moving average is essentially the same thing as the 200-day. May’s price action brought the index back above the moving average as we detailed earlier, and it also marked an uptick in the moving average.
It has been a volatile trading pattern since early 2018 after 2017’s steady, non-volatile uptrend. Q4 2018, May 2019 and the COVID-19-induced "bear market" of 2020 all brought the index price below the 10-month MA. The last 20 months have been more reminiscent of the mid-2014 to early 2016 period of volatility and generally sideways price-action. Of course large cap US stocks have done very well on a relative-basis this time around, so there have been all-time highs notched along the way recently.
Bottom line: It has been a volatile period for stocks since Q4 2018 even with all-time highs being hit for the S&P 500. May was a month of continued recovery with the index barely closing above the 200-day and 10-month moving averages. Stocks now must contend with a historical shaky summertime period, but the good news for the bulls is that it is an election year, and the usual summer swoon has historically been less pronounced when an incumbent is up for re-election.
7. Expected Returns. We update our capital market assumptions as new information comes in. The latest revision to real expected returns shows a drop given the major rebound in valuations since late March. Our 5-10-year outlook is not optimistic for US stocks, but there is hope for global equity investors. We expect developed markets outside of the US to perform well, near 6% per year after inflation. Emerging markets should do even better at more than an 8% per year rate of return on an inflation-adjusted basis.
We are also pessimistic on fixed income returns given the low-yield environment. We anticipate negative real total returns on both US Treasuries and from cash. Inflation even at 1.5% to 2% will be very difficult to overcome for fixed income given current yields around 1% on Treasuries and cash near 0% (nominal).
Bottom line: Foreign stocks have not been a good place to be in the last 5-10 years as US equities have greatly outperformed. But taking a step back and looking at longer-term valuations, international equities present an attractive entry point right now – even with the rebound from the March 23 low. Global investors with a longer-time horizon need to ensure they are not being myopic about what has been performing the best of late. While momentum is an important factor to consider, longer-term risk & reward analysis is critical to achieving strong returns.
8. Seasonality in stocks. June though September has historically been a rockier time of year for the S&P 500 as we have mentioned throughout this weekly chart storm write-up. Volatility also tends to rise from the middle of year into early October. And oh yeah – there is a Presidential election in early November to consider. The VIX term structure already highlights a bit of political uneasiness come November.
The equity market rebound in 2009 and following the October 2011 bottom featured some summer struggles. What will this time hold? Of course it is a crystal-ball kind of question. Adding to the uncertainty is that 2020 has not exactly played out like historical normal. I mean, how often does the stock market hit an all-time high only to fall 35% in just a few weeks following that all-time high? 2020 has been its own animal.
Bottom line: History suggests the next several months could be more volatile and shakier for stocks. It might fit the narrative for the current stock market though. Maybe we in fact need a breather after rocketing higher off the March 23 low. The VIX has retreated from near 90% to about 27% today – what a swift downturn that has been. It took about 7 months for the VIX to fall that amount in 2008-2009.
9. The new buffett indicator: market cap vs. M2. @Schuldensuehner brings us this Bloomberg chart which may trigger some folks. It suggests the current equity market valuation is below average when compared to the money supply, meaning there is still more room to run for US stocks. The Fed has been so aggressive in their bond buying, boosting the money supply, that total market cap for the S&P 500 has not been able to catch up even with the huge rise in the last 9 weeks.
Who knows if/when the US Federal Reserve plans to reduce their balance sheet given the amount of recent purchases, but Powell seems uninterested in even considering the risk of not providing a backstop for the credit markets. While the Fed can help ensure liquidity, the solvency of business is more difficult to control. There is no shortage of doubters out there when it comes to the rise in the stock market given the Fed’s actions.
Bottom line: Don’t fight the fed.
I was tempted to leave it at that, but let’s go for a bit more insight. The Fed is the scapegoat for just about everything in finance these days it seems. But their actions, buying bonds & boosting M2, likely plays a role in confidence among investors. While emergency rate cuts during periods of immediate crisis are not encouraging, longer-term bond buying after the worst of the storm passes seems to quell concerns. It did in 2008-2009, 2011 and has again worked this time around so far.
10. Private equity’s dry powder. @VertexCapital comes at us with this chart of private equity’s cash reserves heading into 2020 – nearly $1.5 trillion of dry powder among global PE firms. It was not just the Fed who was willing to step in and swoop up risky financial assets during 2020’s downturn. Cash had been building for private equity firms for several years, maybe waiting to pounce on solid opportunities.
Expected internal rates of returns on projects has been declining in recent years and fewer fat pitch opportunities have been available according to the market pundits. Perhaps there is just too much cash chasing too few projects today versus many years ago. Is that indicative of valuations needing to be higher? Could be, but it’s always aggressive to suggest it’s all that different this time.
Bottom line: There is cash on the sidelines among individual investors following the market volatility, but there was plenty of private equity dry powder even before the downturn. PE’s cash position may have aided the broader equity market’s recovery. It will be interesting to see how much of this cash was put to work and what kind of IRRs and NPVs private equity was able to secure.
So where does all this leave us?
1. A new month & looking ahead.
April & May were excellent months of recovery for stocks, but now we enter a new month with challenging seasonality ahead of a US Presidential election later this year. Nevertheless, market breadth and improving technicals should help the stock market get through natural (and scary) pullbacks along the way – at least that make sense to fit the bullish narrative. Many stocks are trading above their 50-day moving average while new highs are finally starting to tick higher – and they are not just from mega cap tech growth companies.
2. Valuations & expected returns.
Looking longer-term, however, we naturally reduced our capital market expectations with regards to 5-10 year forward real returns given the huge rise in stocks over the past couple of months. That said, we live in a world with very active central banks around the world, and traditional valuation measure may have to be adjusted to account for aggressive asset-buying as a result of money printing. It is interesting to consider these new market dynamics when analyzing what lies ahead for global equity investors.
3. Dry powder.
So we have the Fed out there on a buying-spree and we also have private equity behind the scenes with a very large cash position acting as dry powder to capture higher NPV projects now that there is distress among some areas of the economy. We have written about how there has been cash on the sidelines among individual investors, but what can really move the needle is big league institutional cash being put to work. Perhaps that has aided in this 35%+ equity market recovery.
Summary
Tying it all together, investors may be catching their breath from several months of wild market moves. The summertime period is usually one of sideways trading action on low volume as we all enjoy a little R&R, but this year will be different. Focus may begin to shift away from near-term COVID-19 analysis and back to other happenings in the financial world – at least that is the hope as we continue to recover from the pandemic. We have gotten through a bulk of Q1 earnings season, and while more dismal economic data is to be reported, gradually ‘less bad’ data should be on the way. Financial markets discount news of course, and we have seen prices reflect that precept. Prudent investors need to be realistic about what may lie ahead.
See also: Weekly S&P500 #ChartStorm - 25 May 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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