S&P 500 #ChartStorm - 8 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. Where to next for the S&P500? Here's a couple of useful lines to help frame risk management and triggers: leaves us at yet another make-or-break moment... A lot has happened in the last two months. Just last week we had the October ISM Manufacturing report, the US election, an FOMC decision, and the Friday October jobs report. Equities fell hard in the week before the election only to recoup those losses (and some) over the last five trading days.

Taking a step back, however, we see that the S&P 500 has consolidated over the past two months. A coil pattern has developed. Last week’s settle just above 3500 marks the top end while 3250 is support. The question we are left to ponder is, ‘do stocks breakout here?’. Or will profit-taking from last week cause equities to fall back and continue to consolidate? It’s always important to monitor momentum on the S&P 500 – the RSI (14) broke its downtrend resistance line from the September peak, so the bulls have that going for them. Overall, Friday’s price action was one of indecision and a pause of the swift advance off the 3234 low from October 30.

Bottom line: The S&P 500 managed to hold its September low during the October pullback, setting up the best election week performance since 1932. Price-action was not too dissimilar from how it traded around the 2016 election. Do we see a repeat of optimism through year-end this time around? The bulls could have their work cut out for them given the current resistance level and the Sept/Oct highs just above the current price.

chart of S&P500 key technical levels

2. One thing in favor of a move towards the upside: seasonality. @RyanDetrick suggests indeed more gains may be had through year-end. This chart from LPL Research shows that the November-December period of election years usually features respectable and consistent gains. Since 1950 for all years, the final two months of the year average 1-2% gains, though December has been somewhat weaker in the past 10 and 20 years.

Election years follow the same general pattern. Seasonality is best used as a secondary indicator to price action, but it’s important to acknowledge that the stock market has entered a strong part of the year. The November through April timeframe is known to feature the bulk of annual returns dating back to 1950 – there are numerous studies on this trend.

Of course, any one year can be its own animal (see 2020). This year, stocks posted massive gains during the usually weak May through October period. With two decent pullbacks in our rearview mirror (September’s decline was 10.55% while October’s was 8.9%, intraday peak to trough), the weak hands may have been shaken out, allowing for more upside to finish off the year.

Bottom line: Last week cleared up a lot of uncertainty. The bulls are feeling rather good about themselves, and now they have strong seasonal trends in their corner. Amid a changing of the guard in the White House and surging COVID-19 cases in Europe and the USA, stocks rallied hugely (not sure we can say bigly anymore) and now look to break to fresh all-time highs during what is often a bullish portion of the calendar.

3. Is this chart crime or chart sublime? Bitcoin making a break for it... so the curious/spurious correlation with the S&P500 is definitely in focus. Can you believe it’s been three years since Bitcoin had its massive, parabolic upside move? 2017 were simpler times – the stock market seemed to rally each day with no volatility, there was no COVID-19, and families across America were talking about Bitcoin at their Thanksgiving table.

Bitcoin advanced from $740 in early 2017 to $19,870 in December of that year. A nearly 85% decline then took place over the next twelve months. A successful test of the low finally happened in March 2020 which helped to ignite another impressive rally in the last 8 months. Interestingly, and we might be guilty of a chart crime here, Bitcoin and the S&P 500 appears to be correlated in 2020.

While nobody in their right mind would complain about a 117% YTD gain (while SPX is up just 9%), some investors like to own Bitcoin for diversification benefits. It appears the cryptocurrency is just another risk-on asset (on steroids, perhaps). Regardless of how Bitcoin fits in your portfolio, the chart had an upside breakout earlier this year when it moved from $9000 to $12,000. We’ve seen massive volatility in this space before, and it’s ticking higher once again. Last week, it approached $16,000, so the all-time highs are in sight.

Bottom line: It will feel like old times to hear family members making big scores in Bitcoin during holiday get-togethers (even if only via Zoom). The major cryptocurrency is up more than 100% in 2020 after experiencing a tumultuous last three years. A breakout during July helped fuel the rally. Interestingly, Bitcoin and the S&P 500 seem to be correlated over the last 12 months. If stocks rise, perhaps that means Bitcoin can make a run at its all-time high near $20,000.

4. S&P500 priced in Bitcoin... Let’s have some more fun with Bitcoin. Instead of it priced in USD, let’s price the S&P 500 in terms of Bitcoin. The ratio of SPX to BTC is roughly 0.2x today, but go back to early 2011 when Bitcoin was just a few dollars, and the ratio was well above 100x. Technicians can look at this chart and deduce that the trend of larger degree is lower. A bearish triangle pattern had developed in the last several years, but that appears to have broken down during the back half of 2020 (which is bullish for Bitcoin relative to the S&P 500).

Could new lows be in sight? Will the early 2017 bottom hold? These questions could be answered soon. The implication is that Bitcoin keeps outperforming US equities. There was a similar pattern in 2013 through 2015 when Bitcoin underperformed SPX, but that was just a corrective move within the broader trend. It wasn’t long before Bitcoin continued to move higher relative to US stocks.

Bottom line: Bitcoin often features great chart setups for technicians to get excited about. Not only did a key upside breakout take place earlier this year, but we could be near an important juncture on the chart of SPX priced in Bitcoin. The clear trend is lower in the chart below, which means US stocks have sharply underperformed Bitcoin in the last 10 years and over the last few months. It’s not to suggest that stocks are going to crater from here, but rather Bitcoin could be poised for stronger relative gains.

5. The CNN Money Fear & Greed indicator... After a brief reset: now middle of the road. Turning from Bitcoin to equity market sentiment… investors were most giddy at the early September peak when mega cap tech stocks were on fire. The September correction took the wind out of the bulls’ sails, but then equities recovered into mid-October. Yet another dip, almost 10%, occurred in advance of election week. Sentiment, as measured by the CNN Fear & Greed indicator, made a lower low. It hit the weakest point since April.

The 9% trough to peak rally off the October 30 low only brought the sentiment index modestly higher to a reading of 40. CNN declares 40 still within the ‘Fear’ zone despite stocks being not far from all-time highs. A year ago it was 91 in the ‘Extreme Greed’ range.