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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.


So why the fear? (1) Breadth remains weak with small cap & value stocks lagging, (2) strength in safe-haven bond assets undermines the move in risky stocks, (3) the CBOE put-call ratio is still seeing bearish activity, and (4) finally the number of 52-week highs is not very high given where the index currently trades. The bullish factors that determine the Fear & Greed indicator consist of (1) market momentum as the S&P 500 is more than 7% above its 125-day moving average and (2) junk bond demand being quite strong.

Bottom line: Bulls want to see breadth improve and money move away from safe plays. While it's great to have the leaders leading, it’s usually not ideal to have other areas of the stock market turning lower. “Rotation” is an over-used term, but that is exactly what the bulls want to see as we head into year-end. If positive rotation takes place, the Fear & Greed indicator will almost certainly turn from the Fear zone to the Greed zone.


6. Individual investors think there's a high probability of a crash. @rjparkerjr09 brings us a chart from Dr. Shiller’s research at Yale University. MarketWatch posted a story on where investors stand with regards to the expectation of a huge stock market crash. This sounds juicy, doesn’t it? Let’s dive in. The most recent reading (September 2020) of the “U.S Crash Confidence Index” is 24% for US institutional investors and 15% for US individual investors.


So what does that mean? The survey asks investors what they think the probability is of a stock market crash similar to that of October 1929 and October 1987 happening in the next six months. A response of 0% suggests it can’t happen, 100% means is it sure to happen. The Crash Confidence Index is the percentage of respondents who think that the probability is strictly less than 10%.


The chart’s currently low reading means that more individual investors believe a crash is likely since just 15% of respondents think the chance of a crash is BELOW 10%. The data suggests fear as of this past September. Shiller has been taking this survey since the crash of 1987 as a means of demonstrating the saliency of past market crashes and their impact on stock market performance expectations. Interestingly, when the fear of a crash is in the highest 10% of historical readings (like we are in now), the average S&P 500 total real return over the next 12 and 24 months is 24% and 46%, respectively.

Bottom line: Investors have been trending more fearful since the March bottom in stocks – at least when asked what they believe the chances are of another stock market crash. It sounds odd considering stocks have rallied in that timeframe, but it seems as equities advanced, investors grew more fearful that another shoe was sure to drop. This pessimism is bullish for the S&P 500 over the next 12 and 24 months (as of September) according to Dr. Shiller’s research.



7. The number of firms in the S&P500 with Negative Equity is near an all-time high... @RadicalAdem shifts gears from sentiment to the balance sheet of S&P 500 firms. The number of companies with liabilities exceeding assets is near an all-time high. Here is a data point for the bears to lick their chops over. Record low borrowing rates and the growth of intangible assets has led to an explosion of ‘negative equity’ firms.


If a prolonged downturn were to take place in the economy, it could mean very bad things for corporate America given the state of many company balance sheets. Leverage is high. Duration is also high. If interest rates ever turn higher, it could spell doom for companies that depend on debt to finance their operations.


You’ll notice in the chart below that the last 7 years has seen a marked increase in the number of negative equity companies – that happens to be the same timeframe as interest rates falling hard. In late 2013, the 10-year yield was 3%, having increased from the 2012 low of 1.4%. Another leg higher came when rates dropped again from 3.25% in 2018 to the range this year from 0.5% to 0.9%. High duration and the growth of intangible assets should make the bulls uneasy.

Bottom line: While the common narrative on Wall Street is that corporate balance sheets are better than they have been in recent years, the number of negative equity firms calls that into question. Record low interest rates and the incentive to buy back stock (to reduce equity’s relatively expensive portion of the capital structure) has led to record-high liability values relative to assets. We may be on borrowed time.


8. On a related note, the number of firms IPO'ing with negative earnings is likewise near an all-time high. Not surprisingly, the profitability of companies going public is low. 2020 has seen a boom in IPO and SPAC activity, and stocks that have gone public have done quite well in terms of their market performance.


This year has been a little reminiscent of the late 90s with so many IPOs. And many of said firms are not profitable – like we saw in 1999 and 2000. Of course, the dot-com bubble burst in March 2000 which helped dry up the IPO market in the years following. Another feature of the post-dot-com bubble world of the 2000s was that firms that did go public did so with better profitability.


Tides come in and go out, and we have returned to a period of negative-earnings IPOs. This could be a sign of frothiness, and IPOs could be another area of the financial world that would get hit hard by an economic downturn.

Bottom line: The IPO market has been creeping up in terms of its irrational exuberance. The number of firms going public has been on the increase this year and so too have the number of companies doing so with no profit.


9. SPAC-fever has ruined my IPO charts... (maybe I should start a SPAC to buy up new IPO charts!) This chart demonstrates just how active the IPO market is this year. Filing requests to go public are the highest since at least 2007. Like many charts this year, the y-axis had to be expanded big time.


Blame it on the SPACs (Special Purpose Acquisition Companies). SPACs are entities with no commercial operations – they are created strictly to raise capital through an IPO to buy another company. SPACs can be a quicker process of going public versus the traditional IPO route. Private capital is seeking to put money to work, and SPACs have been one of the primary mediums to do so this year. The trend probably continues into 2020 barring a major market event.

Bottom line: While investor sentiment is fearful, the IPO and SPAC markets are the hottest in 20 years. Institutional money wants to move quickly in terms of taking companies public. Meanwhile, IPO performance is also very strong this year – ticker:IPO is up 66% YTD (relative to SPX) making it the top-performing equity factor in 2020.


10. Longer term perspective on IPO volumes... @topdowncharts wraps up this week’s ChartStorm with a look at IPOs since 1960. Here’s a chart to put the IPO market in perspective. The last few months indeed feature the greatest volume of IPOs dating back to the dot-com era. The high-flying 1980s were also some glory days, before the crash in 1987.


Continuing to travel back in time, the tumultuous mid to late 1970s was no time to IPO amid high inflation and shaky economic growth. Notice that each spike in IPO activity somewhat coincides with a peak in the S&P 500. Investors should be on guard for other signs of a market top, but the huge ramp in firms going public is a data point the bears have on their side suggesting investors are getting too excited.

Bottom line: If you weren’t sure about the market being in an IPO boom, well here’s your sign. Monthly, there have been more IPOs than any other time in more than 20 years. SPACs are fueling the surge as private capital seeks to accelerate the process of going public in this world of record-low interest rates and strong support from the Fed. The bears see this chart and tweet, “this probably won’t end well.”



So where does all this leave us?

1. Price charts, seasonality & sentiment.

2020 has brought us no shortage of interesting themes and charts. The 34% COVID crash bottomed on March 23, then stocks staged one of the swiftest recoveries in history. The last two months, however, have been a period of consolidation. Lower highs and higher lows have been put in place since early September. The S&P 500 now trades at an important junction – do stocks breakout to new highs or fall back within the consolidation range? Seasonality suggests a move higher is the more likely move. Stocks tend to perform well during November and December, particularly post-election. Investors are still fearful of a potential market crash, so that could mean the wall of worry continues to be climbed.

2. Bitcoin & the S&P 500.

It’s shades of 2017 when examining the performance of Bitcoin this year. The major cryptocurrency is up more than 100% during 2020. Since going mainstream many years ago, Bitcoin has generally outperformed stocks, but it has also gone through its growing pains with sharp drawdowns along the way. Bitcoin broke out earlier this year and could be making a run at all-time highs. Interestingly, it has traded with a decent correlation to the S&P 500.

3. Balance sheets & IPOs.

While Bitcoin could be a sign of decent investor risk-appetite, corporate balance sheets have been turning more leveraged. The number of negative equity companies in the S&P 500 is at the highest level in more than 25 years. Low interest rates and relatively expensive cost of equity have created interesting incentives for financial managers. In the same vein, the surge in IPO and SPAC activity this year shows that private capital wants to move fast to take companies public – it feels like the 1990s in the IPO world. These are certainly signs of frothiness and perhaps excessive risk-taking. When exactly the party ends is anyone’s wager – keeping abreast of key macro trends and inflections in the data is more important than ever.

Summary

The election came and went. We can all take a deep breath and enjoy all of the certainty we now have. Yeah right – investors remain uneasy while stocks are near their highs. It’s an interesting juxtaposition. While volatility has eased from a week ago, a VIX in the mid-20s is still above the long-term average, so expect significant day to day swings to persist. The bulls want to see increased participation in the upside move while bears see resistance on the chart of the S&P 500 after the election week bounce. But as we've mentioned previously, the typical post-election pattern is a relief rally: return of equity flows... and we've got end of year seasonality. So let's see what happens





See also: Weekly S&P500 #ChartStorm - 1 Nov 2020




Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.

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