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Weekly S&P 500 #ChartStorm - 11 Oct 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. Checking in on some of the key levels for the S&P500: 3200 proved to be the floor this time, and now we've cleared 3400. It was a classic September swoon as the bears took charge from September 2 through the intraday low near 3200 on September 24. All told, the S&P 500 dropped 10.5% from peak to trough using intraday levels.


The late July lows proved to be ample support for the bulls to re-take the reins and bring the index to its highest level in a month this past Friday. This time, however, the rally is broad-based with small caps and some value stocks making a comeback. Nevertheless, mega cap growth has still done well in the last over the last 10 days, too.


The RSI (14) momentum indicator broke free from range in the upper 30s to 50, and now rests in the low 60s. Back to the price-action, 3400 is in the rear-view mirror with three trend-up days on the S&P 500 to finish off last week. The all-time highs could be in play later this month – the September 2 peak is a bit more than 3% above last week’s settle.


Bottom line: More than half of the September correction has been retraced with 3200 holding as support. There is not much resistance until the all-time high is approached just beneath 3600. The advance in the small cap and transport spaces helps the bulls’ cause in terms of breadth and confirmation of the rally, but October can still surprise market participants with volatility.




2. Breadth Breakout: S&P500 200-day moving average breadth has broken out to a post-crash high. Very interesting development... While small caps and the transports index are important, so too is checking under the hood of the S&P 500 itself. We find that 70% of constituents trade above their respective 200-day moving average. It’s not just the “S&P 5” any longer.


The S&P 500 equal-weight index is finally playing some catch to the top-heavy cap-weighted index. The smaller issues have been rallying hard in the last 10 days. From the closing low in September, SPY is up 7.5% total return while RSP (the EW version) has gained 8.4%. More components holding support and rallying through resistance could bode well for more gains in the weeks to come.


Seasonality turns more bullish during Q4, too. Breadth is now at its best level since immediately before the COVID flash bear market that began on February 19. Looking at history, the percentage of S&P 500 stocks above the 200-day moving average tends to meet resistance near the 80% figure, so this rally could have some legs.

Bottom line: Breadth turned it around just as much as price did over the last 12 trading days. The S&P 500 and smaller stocks have recouped a major chunk of September’s losses. When small-issues outperform, everyone chatters about how breadth is improving. There’s no question that more participation helps build a strong base for a sustained rally.




3. One reason the previous chart matters... "A massive 40% of Stocks are still down >20% from their highs." Thanks to @MacroCharts for this look at the percentage of stocks still feeling the blues. Nearly half of S&P 500 members are down at least 20% from their peak. The “k-shaped”-recovery moniker has gotten mainstream play in the last two weeks, and that narrative plays itself out in stock market price action.


There are clear winners and losers. Online businesses and those with strong balance sheets have weathered the COVID storm well, while smaller firms that depend on face-to-face interaction have struggled mightily. Travel & leisure within the Consumer Discretionary space has been a dismal place to be over the last 9 months while online Discretionary has done very well.


You can almost break-out the Consumer Discretionary & Staples sectors into online vs. brick & mortar to get a better look at the dichotomy of the stock market this year. Energy & Real Estate Investment Trusts also represent areas where so many stocks are nowhere close to their highs of the past few years. While breadth is improving, there are still many industries seemingly left for dead.

Bottom line: Let’s hold off on calling this rally one of extremely high participation. We aren’t there yet. There is still a major cluster of equities trading in bear market territory. The most beaten-down sectors have a lot of work to do in order to catch up with the winners of 2020.




4. Dragging on market breadth has been the more cyclical sectors (good example in US value and global ex-US markets such as Australia). [i.e. big tech has benefited from the pandemic catalyzing a big one-off bringing forward of growth (i.e. accelerating existing trends). while cyclical/value/global ex-US have suffered from the one-off downside shock]

@Kyle_IG shows us how value stocks and international equities are still well-underneath the highs from early 2020.


Mega cap tech of course dominates the S&P 500 relative to value indexes and many international markets. This year has only emphasized trends that have been in place for the better part of a decade. Year after year, strategists put forward their guesstimates that ‘this is the time’ that value and ex-USA equities finally catch up to the growth-focused and richly-valued US stock market.


Alas, it has just not happened for more than a few months at a time; the moment value investors with a global portfolio get excited about a relative comeback, US mega cap tech/growth stocks turn on the after-burners, and break to new highs, leaving the world of stocks in the dust.

It will be key for value stocks and foreign equities to climb above the June 8, 2020 highs. May & and early June was a period of a mini-melt up of small value stocks – a breakout to fresh post-COVID highs will bode well for those areas of the market that have underperformed US growth in 2020.

Bottom line: Cyclical sectors have stunk this year, but are they now finally on their way to a strong finish to 2020? Or is this yet another head fake? Since the stock market low just 12 trading days ago, out-of-favor value stocks have been up big. Non-US equities have actually underperformed though. Many international markets, like Australia’s ASX, continue to find resistance, but a Q4 breakout could further improve global breadth.




5. (similar note) Consumer Discretionaries don't look so hot on a relative basis once you strip out a couple of particular names. H/t to @KennethLFisher for putting a picture to this narrative we have been hinting at. The global Consumer Discretionary sector is made up of extreme winners and losers this year. The winners have been very few, however. Strip out Tesla and Amazon, and the sector goes from a darling to a dud.


Take a look at the blue line – it takes on a ‘rocket ship’ pattern in 2020. Global Discretionary relative to MSCI Total World equity index has done very well since the pandemic. It doesn’t tell the true story, however. The relative gains in the sector have come by way of Tesla and Amazon. Yank those out of the sector, and not only has the past year been lackluster, but the last 5 years have been forgettable for the space.


Remember, this chart shows relative returns. Not many analysts make note of the concentrated nature of the Discretionary sector, but clearly, the last 5-year stretch is exemplary of the overall US market – the big names keep getting bigger, making it tough on small companies to thrive.

Bottom line: Breadth is a theme this week, and the Consumer Discretionary sector has a lot of work to do. When you back out the glamor stocks of Tesla and Amazon, performance in the group has been weak this year and since 2015. In the US, XLY would be doing even better than its 23% YTD total return if S&P would allow Tesla inclusion into the index!




6. Hence, this is where we find ourselves... (for now) That brings us to our old friend – the S&P 500 Value vs. Growth chart. It’s the gift that keeps on giving (since 2006) for growth bulls and value bears. Don’t call it a comeback, but if you use a magnifying glass, you might be able to make out a little bump up on the chart for September 2020. It’s a blip on the radar. Value vs. growth has a lot of work to do.


From a valuation perspective, we expect the value-oriented equity sub-asset classes of the world to feature stronger returns than US large cap growth stocks over the next 5-10 years. We update our Capital Market Assumptions throughout the year, and have shared those on TopDownCharts.com recently.


We also featured the Value vs. Growth charge in our “10 Charts to Watch in 2020” – updated through Q3. We highlight that value vs. growth goes through cycles that often last far-beyond what most investors can stomach in terms of relative losses. Just when value investors begin to throw in the towel, that is when value makes a comeback. We are looking for strong relative value in the space with macro catalysts – alongside a bullish turn in technicals. That trifecta can take many years to develop.

Bottom line: Value vs. growth could finally be closing in on a turning point. The relative chart below has fallen hugely below its trendline while some bullish macro catalysts are finally showing themselves. Some of the catalysts we discuss in the link below include higher bond yields, better growth, and stronger commodity prices.




7. Pandemic winners and losers (part 1). @Theimmigrant84 brings us this Bloomberg chart showcasing S&P members that could get booted from the index. Standard & Poor’s occasionally reconstitutes the index to remove companies that have for whatever reason (usually just poor equity performance) gotten too small to remain in the group of the 500 largest US companies.


Some of the current members of the mid-cap index would take their place. Not surprisingly, two of the worst sectors this year, Energy and Real Estate, feature a disproportionally high percentage of constituents at risk of leaving the index. For 2020, XLE is down 46% total return while Real Estate is off 2.5%.


Financials are the second worst-performing sector, down 16% including dividends, but there are fewer very small banks versus very small real estate firms. While there is break-up talk for the largest Info Tech/Communication Services/Consumer Discretionary names, the more likely near-term change could be replacing some of the S&P 500’s very small stocks with some of the mid cap winners this year.

Bottom line: 2020 has seen a small handful of winners while many stocks have performed poorly. The small names in beaten-down sectors may be at risk of going from the large cap big leagues to the mid-cap B-league. The result could be an even higher weighting in growth-oriented sectors and smaller weighting for the value & cyclical sectors.




8. Pandemic winners and losers (part 2). Keeping up the theme, @BespokeInvest provides this chart of returns since the 2016 election. We analyzed election-year seasonality in last week’s ChartStorm, but let’s focus on sector returns this time. Who can forget then candidate-Trump donning the hard hat to proclaim how much he loved coal back in campaign season 2016?


He sought to revive the coal industry and put miners back to work. Well, market forces are more powerful than rhetoric, and traditional energy has done very poorly in the last 47 months. The energy sector is off more than 50% from when candidate Trump became President-elect Trump.


Meanwhile, green energy & ESG have been stellar in the last few years. What else has been working? The sectors that had done well during President Obama’s two terms – Health Care and Information Technology stocks. So while the pandemic changed the business landscape and brought about a sharp contrast between winners and losers in 2020, the same general trends that were already in place have largely accelerated this year.

Bottom line: Perhaps low interest rates have benefitted high-duration sectors in the last several years more than any other factor – a theme of the past 10 years. The winners and losers of 2020 have been the same winners and losers since late 2016.




9. Pandemic losers (part 3) RIP Income Investors. @Tony_Sagami continues the narrative with this chart showing the number of US large cap firms cutting dividends by year since 2000. 2020 has been the biggest year for dividend cuts & suspensions since the financial crisis. The ‘losers’ have been forced to shore-up their balance sheets to remain solvent.


Companies are often hesitant to slash their dividends since it is an important signaling mechanism to the investment world, but those hit hard by the pandemic haven’t had a choice. Many analysts are now calling into question ExxonMobil’s 10% dividend yield – once the biggest US company by market cap could see its dividend get cut in a big way. Beyond cuts, about 80 Russell 1000 firms have suspended dividends.


That total is nearly double the elevated figure from 2008. Looking at the chart, no companies suspended their dividend during 2019. 2020 shocked many businesses, and income investors felt the brunt of the blow. Those who were on the hunt for strong dividend yields over the last few years have seen their returns suffer.

Bottom line: Beware the high dividend yield. Investors in search of dividends have been hit hard by COVID’s effect on the stock market. Companies around the world have been forced to cut and suspend dividends to stay in business. The result could be value opportunities, but that comes with high risk, too.


proportion of companies cutting dividends chart


10. In some ways, this is kind of the point of tech... Make things work smarter not harder. h/t @andrgarc & @JPMorganAM The Information Technology sector takes a lot of heat nowadays. Regulators seek to break-up the biggest members of the group while investors see the space as highly risky given its high weight in the S&P 500. Even we have written on how the ‘S&P 5’, which are quite technology-focused, command a more than 20% holding in the overall index.


It should be noted, however, that the trend toward technology and away from manual labor and services is a good thing. “Work smarter, not harder” is a natural evolution of an improving economy. The “information economy” is another phrase tossed around.


While many politicians cast rhetoric regarding the goal of reviving the manufacturing sector, knowledge-based jobs and focusing on the efficiency of doing business are likely bigger trends that are not going to disappear any time soon.

Bottom line: The IT sector has a high P/E ratio for a reason – there is more growth potential. The US leads the way in technology market cap versus the rest of the world. No, that bottom line was not from 1999 either!



So where does all this leave us?


1. S&P 500 levels and breadth.

September often features volatility and drawdowns, and that played out in 2020. It was a 10.5% correction from intraday peak to trough over the course of about three weeks. The rally in the last 12 trading days has seen small caps and value stocks play a little bit of catch. One can’t help but also notice the all-time high in the DJ Transports index, too. International stocks have performed relatively poorly in the last few weeks, however. The Australia equity index remains below key resistance from the spring and summer. The equity bulls have their eyes set on the all-time high touched on September 2 just shy of 3600 on the S&P 500 after a successful defense of 3200 last month. An increasing percentage of S&P 500 members climbing above their 200 day moving average is encouraging, but there are still an uncomfortably high amount of stocks 20% or more off their 52-week high.

2. Pandemic winners and losers.

It’s not entirely accurate to describe the stock market as being overly resilient this year. Sure, equities have recovered all of their losses, as measured by the cap-weighted S&P 500 which features a high weight in tech stocks, but you have to look under the surface to find the winners and losers. Some groups of stocks are up 40%+ this year (for good reason) while others are still down 30% or worse in 2020 (also for justified reasons). The stocks that have been hurt by COVID-19s economic impacts may get salt rubbed into their wounds should S&P remove them from the large cap index – Energy and Real Estate are two such ‘loser’ sectors at risk of material rebalancing & reconstitution. But it has not just been a 2020 story, as the same sector trends in place over the last 4 years have largely accelerated this year. Finally, for investors searching for a high yield basket of stocks, it’s been a rough go of it since the onset of the pandemic with an unusually high number of Russell 1000 members cutting or suspending dividend payments.

3. Deeper dive – value vs. growth, discretionaries, the rise of tech.

Value continues to struggle versus growth, but some encouraging macro signals could help bring back the left-for-dead style. Elsewhere, Consumer Discretionary stocks are made of two winners and a pile of losers – remove Tesla and Amazon, and the global sector looks a lot different from an equity performance perspective this year. Taking a step back to look at the US economy, though, and we see that technology-focused jobs and GDP is a hallmark of a more stable and mature economy – but that does not mean there isn’t risk (see: March 2000).

Summary

Q4 is off to a hot start. Breadth has improved since the intraday low on September 24, but risk and volatility are still around with an election a few weeks away. The latest move higher in equities has been focused within US small caps, but US mega caps have still done well while foreign equities have lagged. The ‘winners vs. losers’ trade could be the theme of the year with some industries evolving more in a few months than they had over the prior 10 years. All the while, the losing groups will undergo drastic changes with many firms exiting and entrants taking their place... and no doubt numerous opportunities as the recovery progresses and our new normal life goes on.





See also: Weekly S&P500 #ChartStorm - 4 Oct 2020




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

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