S&P 500 #ChartStorm - 1 Nov 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. Happy New Month! November is upon us.. October brought us a little bit of everything. The month was strong at the onset following a rocky September, but a sharp second wave of COVID-19 and associated lockdown measures brought stocks into the red for the back half of October. Technically, the 3200 level is key for the bulls to hold while the all-time high just shy of 3600 from early September is significantly to the upside. The S&P 500 lost 2.8% while US small caps managed a 2% advance. Foreign developed market equities dropped 3.5%, but emerging market stocks rallied more than 1%. High yield bonds managed to provide a positive return despite shakiness in the credit market and interest rates that drifted higher.
Our first chart shows how the last 3 years have been fraught with gains, then sizable corrections. 2017 was a year of extreme calmness as the S&P 500 rose big and the VIX hardly budged higher than 15%. Q4 2018’s near-bear market was a precursor to the 2020 COVID crash. Of course, the US stock market jumped following the March 23, 2020 bottom, erasing the entire 34% decline in about 4 four months.
It’s been two months, though, since the September high. Looking ahead, we now enter the historically bullish November through April stretch, but uncertainty is running extremely high with an election, potential stimulus, record-breaking COVID numbers, and corporate earnings season continuing.
Bottom line: October looked to be a rebound month with the S&P 500 up 4% in its first 8 trading days, but the final 14 days featured a drop of 7.5% for large cap US equities. Emerging markets outperformed in this latest move lower. Will bullish seasonality take hold as we approach year-end?
2. That 3200 area -- Springboard? or Diving board? All eyes are on the 3200 level of the S&P 500. It was key before the COVID crash, then the index cut through it like butter in late February. The rebound in early June, led by small caps, was the first test (which failed). The index finally climbed above 3200 in mid-July and then went on to a stellar August before the top in early September.
A 10% correction during September took the S&P from 3600 to 3200 in a successful hold of support, but a failed October rally brings us to today. 3200 is once again in play. Headline risk is currently very high with more lockdown news from Europe over the weekend. Bulls need to defend the 3200 area once more or a move to the 3000 price point could be on the doorstep. What might fool even more market participants is if stocks simply traded sideways with volatility through year-end between 3200-3600.
Turning to the RSI (14) indicator above the price chart, we settled last week below 40, and the small uptrend from mid-September was broken – so momentum is on the side of the bears. The RSI also failed to reach the peak from early September at the October high (while the S&P also failed to crack news highs).
Bottom line: Bears are in charge right now when analyzing the price chart and momentum. The line in the sand is very clear – 3200. The June high, July breakout, and October bottom played out well, but is it different this time? With volatility running near 40%, we will likely find out very soon.
3. Anything could happen this week, but by GS analysis, it seems the polls, prediction markets, and the stock market all agree on one thing... @carlquintanilla takes us into our first deep dive – and what better topic than election polls and prediction markets? Goldman Sachs Investment Research produced this chart of Democrats controlling the Senate (betting market odds, in blue), a tax basket-implied probability of future corporate tax rates (black), and the likelihood of a Clean Sweep by the Democrats (superforecaster likelihood, in gray).
These indicators point to a very strong Tuesday night and Wednesday morning for the Democratic Party. Clean Sweep chances have been on the rise all year, and currently stand near 80% according to Good Judgement, Inc. Like any good analyst, no one data point can tell the whole story, however. The betting markets suggest a 60% chance the Democrats win the Senate. One thing we know with virtual certainty under a Democratic regime would be higher taxes for corporations – perhaps 28% according to the experts.
When tracking a tax-basket of forward implied tax rates, there has been a small dip recently – indicating some uncertainty heading into election day. Sure there are blips here and there, but it doesn’t take a CMT to see the trend is from the bottom left to the upper right. The market is coming to expect quite the change of power in the US government.
Bottom line: Polling data and betting markets are gravitating toward a Biden victory and a very strong showing in the Congressional races this week. Imagine this time next week when all of this uncertainty is behind us – yeah, right. The market will always find something to worry about. But at least we won’t have to deal with the political commercials and sponsored tweets much longer.. we think.
4. Those tech flows... (as a side note, it's probably fair to say that big tech regulatory risk has become more or less a bipartisan issue). @MacroCharts steers us away from politics and betting markets to global sector fund flows. No surprises here – money has been pouring into the Information Technology sector over the last 12 months. In an interesting juxtaposition perhaps, talk on Capitol Hill (.. and we are back to politics) has been on the increase regarding the potential for a breakup of big tech. While there is nothing imminent on the horizon, a blue wave on Tuesday could portend an easier path for lawmakers to pass legislation against the behemoth US tech firms. It could be a major regulatory risk for a sector that has been the darling of investors for many years, but particularly in 2020.
But what else is happening on this chart? Health Care received massive inflows during the spring as the first wave of COVID hit hard, and investors looked to the best vaccine plays. And here we are approaching year-end without a vaccine, but most expect one at some time in early 2021. The rest of the sectors, however, have been ho-hum in cumulative global fund flows over the last 52 weeks. Interestingly, the 4th best sector has been the left-for-dead energy space.
Bottom line: Technology has been the clear winner through the pandemic. Traders have bought-up single-name tech stocks and grabbed shares of many types of IT sector and industry ETFs this year. Investors should always be forward-looking and consider future risks. Could a blue wave make it easier for a breakup of Big Tech?
5. Related note, big inflows from foreign investors into US equities (aka, everyone loves tech stocks). @sentimentrader continues us down the path of where the money is moving. This chart goes way back to the 1970s, but we will focus on the last 20 years. Foreign investors have been dumping money into US equity markets. The key difference between ex-USA and USA stocks is the IT sector. Technology commands a huge portion of the US stock market while it is just another sector outside of the States.
So moving money from foreign markets to the S&P 500 is largely a play on the performance of mega cap tech firms. What’s interesting here though is just how much money has been put to work in the S&P 500. Foreign net purchases have climbed to the highest level over the last 12 months since the 2007 peak.
October 2007 was also the top before the Great Financial Crisis. A similar move of flows occurred at the 2000 dot-com bubble peak. One caveat here though is that we are looking at nominal rolling 12-month sums of net purchases – so today’s $200 billion value is much less relative to total market cap versus 2000 and 2007.
Bottom line: Money has been flowing into the S&P 500 over the last 12 months as the domestic market has beaten foreign indices, thanks in large part to the strong performance of mega cap tech firms. The last 12-months mark the biggest rolling 1-year cumulative net flow into the US since the 2007 stock market peak.
6. Big swings in earnings surprises over the last couple years from up to down... PMI now points to a big swing back to the upside (but is it already priced in?). @BittelJulien brings us a chart from Pictet Asset Management analyzing the 12-month change in S&P 500 earnings relative to expectations along with the US ISM Manufacturing index.
Bittel notes, “At current levels there’s certainly room for improvement, but barring a further leg higher in ISM, this has already been fully discounted by the market.” The earnings decline over the last year has been sharp – FactSet reports that the current year-over-year change in earnings for the S&P 500 is -9.8% - and that is a big improvement given the strong beat rates seen in the Q2 reporting season and thus far for Q3.
Relative to this time a year ago, however, earnings have verified 24.8% worse than what analysts were expecting. Meanwhile, the US ISM Manufacturing index has rebounded to 55.4% for the September reading. We will get the October figure on Monday. Of course, earnings and manufacturing data are backward-looking while the stock market is forward-looking. Much of the recovery in data & corporate earnings has been priced-in. The market expects an EPS recovery when analyzing historical trends between the trailing 12 months of S&P earnings and the monthly reading of the ISM manufacturing index.
Bottom line: Economic data points to a strong rebound in US corporate earnings in the next year following the last four quarters’ massive decline. It’s baked in the cake that corporate profits will be on the mend, so there will have to be some other catalyst to drive equities higher.
7. Interesting to note: clear downtrend in accuracy of analyst earnings estimates... @mbarna6 provides an interesting feature of recent reporting seasons. The phrase “in-line with expectations” has not been uttered as much in recent quarters versus history. Analysts are having a very difficult time predicting individual company earnings per share amounts.
It’s not surprising given the extreme quarter-to-quarter swings in S&P 500 EPS. Just 1.4% of analyst estimates have matched what US companies have reported. A common phrase you will read on finance-twitter during reporting season is that companies don’t ‘miss’ or ‘beat’ earnings – analysts do.
The accuracy of analyst earnings has been in freefall this year given the volatility business environment. At least they can’t get much worse from here – sellside earnings analysts have that going for them in 2021. The good news for investors is that companies are ‘beating’ estimates to the tune of 80%+ during the Q2 and Q3 reporting periods (for what that’s worth!).
Bottom line: Wall Street analyst EPS estimates are perhaps less relevant than ever. So be careful when figuring forward P/E ratios and using analyst consensus data to form market positions.
8. Could be relevant to the previous chart... Equity Research headcount remains in decline.
@markets provides a nice follow-up to the last chart – as the accuracy and usefulness of Wall Street consensus data has declined, there are fewer equity research analysts at the major banks. More than 20% of the headcount has disappeared since 2012. The investment world sees less value in mainstream equity research.
What could be driving this trend? We all know the move to passive investing and the rise of computers driving flows into and out stocks. Also, the proliferation of smaller shops has hurt big banks. Meanwhile, there are more CFA charter holders than ever before, so that is almost making matters worse for those looking to enter the space – more competition for fewer positions. Finally, it’s become less of a secret that Wall Street analysts are just not very good about predicting the future. While their research can be useful, their price targets and buy/sell recommendations are notoriously wrong a lot of the time.
Bottom line: Equity research at the big banks is on the decline. Investors continue to wise-up to the games and conflicts of interests that are prevalent between the big banks and the firms they cover. It is important to have unbiased research when managing money and trading stocks.
9. (do you have a moment to talk about value vs growth?) Yet another stark extreme historic chart of Value vs Growth performance. At some point it will reverse, and it will be glorious.
@jsblokland brings us a long-term.. we are talking VERY long-term… chart of value versus growth. This one goes back to the early 19th century. If you’re a value investor, hide your eyes. The Financial Times reports that the cumulative loss of the value factor versus its last peak is the biggest in about 200 years.
The relative drawdown is 65% from the mid-2000s peak of the factor. In other words, value has lost to growth over the last 15 years by more than any other period in recorded equity market history. This is the ultimate falling knife chart. Many investors have placed their bets for a rebound in value stocks, but that has left those attempting to pick the bottom with nothing but smelly fingers and unrealized losses.
Whenever the rebound happens, it will likely be massive, but who knows when that will take place. Investors will want to pay attention to macro trends and key turning points in various sectors. It is important to have the best, unbiased research and charts to identify that potential inflection. Key sectors to watch will be energy and financials as those heavily lean to value.
Bottom line: Value continues to suffer relative to the S&P 500 and the growth style. The last ~15 years have been the worst stretch on record for the value factor.
10. Another tail of 2 extremes In the long-run crude oil likely gets relegated to a quaint industrial commodity for making old style plastics. But as for now, fossils keep the wheels turning - the addiction won't be broken overnight.. @ChrisBennettCFA brings us home with a look at one of the remarkable market trends of 2020 – the outperformance of clean energy stocks. This chart from S&P Dow Jones compares global clean energy equities versus traditional energy stocks.
Oil, coal & gas firms performed just fine from 2015 through late 2018, but then interest in clean energy (like solar, wind, and storage) took off. The last two years have been shades of the mid-late 2000s when companies like First Solar skyrocketed. It took more than a decade for the niche to come back to glory.
The COVID crash certainly did its damage, but it did not take the wind out of the group’s sails very much. Investors have shunned oil & gas stocks this year as they flock to wind & solar equities. A $100 investment in the clean energy index back in March would be worth nearly $250 today while that same $100 has yielded a negative 30% return for traditional energy.
Bottom line: Renewable energy has once again caught the eye of investors. We’ve seen it become a glamour group before. There is a lot of promise in the value of renewables, but still, oil & gas power the industrial areas of the global economy. It’s a long time between now and 2050, and plenty of oil will be used and natural gas will be burned to keep many industries chugging along.
So where does all this leave us?
1. The technical take.
It was a tough week for the bulls to end October with. Stocks fell 4%+ as the VIX soared to 40 for the first time in months. The journalists will pin the move to extreme uncertainty regarding COVID, the election, stimulus, corporate earnings (the list probably goes on), but the S&P 500 remains in a range from 3200 to 3600. It will likely be a volatile start to November, too. Will there be more certainty a week from now? Maybe, and what also could be helpful for the bulls are strong seasonal trends from November through April. A break of the 3200 can throw a lot of that out the window though.
2. Longer-term perspectives.
Money continues to pour into the IT sector despite regulatory and break-up fears. Betting markets suggest a blue wave that could send corporate tax rates higher next year and there is apparent bipartisan support for dismantling the dominance of mega tech. Maybe we’ll know more this time next week. A theme that could be tougher to break is the move of foreign capital into the US markets. USA indices have beaten ex-USA for the last decade – when and how swift that turn takes place is unknown, but paying attention to key macro themes will be important when identifying the turning point. The same goes for the value vs. growth theme. Value has lost out to growth for the last 15 years.
3. Wall Street trends.
Sellside analysts at the big banks have struggled mightily this year. Earnings volatility has resulted in very few ‘in-line’ with estimates earnings reports in the last few quarters. Bigger picture for the industry, there has been a sharp reduction in traditional sellside analyst positions among Wall Street firms. It’s a tough environment for those looking for that type of gig. Speaking of earnings, the last year has seen a massive earnings miss, but more real-time manufacturing data has rebounded, and that implies earnings growth in the coming quarters. Much of the improvement has been priced into stocks at this point. One more trend that will go down as a key theme of 2020 is the move of clean energy stocks versus traditional energy. While Wall Street analyst jobs are on the decline, huge employment gains are being had around the world in the renewable energy industry.
October was a topsy-turvy month that ended on a fantastic note – for the bears. What will November bring? There is no shortage of headline risk and uncertainty right now. If you are looking for certainty and a return to a peaceful market (a la 2017), you might have to keep waiting. While the wake of the 2016 election brought about a wave of buying, anything could happen in the next several weeks. Whatever the outcome, the market will do what it almost always does – fool most of the people most of the time. Again thought, I reckon come election day... as long as there is a clear result (no guarantee there!!), we likely see a rally as hedges and underweights get unwound. In any case, good luck out there this week!
See also: Weekly S&P500 #ChartStorm - 25 Oct 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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