Weekly S&P 500 #ChartStorm - 13 Sep 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. Key levels and triggers: September has not disappointed. Volatility kicked back up with tech stocks feeling the brunt of the selling pressure. Several heavy distribution days have taken place since the September 2 intraday peak just shy of 3600. The S&P 500 pulled back about 7%. Last Friday finished just off Tuesday’s closing low, but also managed to print a fresh intraday nadir.

Support is near the 50 day moving average, currently rising at 3322, less than 1% below last week’s settle. For round number support, 3300 should provide some help as well – that level was briefly resistance in mid-July. The RSI (14) ticked below 50, but remains in the ‘bullish’ zone between 40 and 90.

We’ve said it before – seasonality is difficult for the bulls through early October. Volatility also tends to be on the incline as Q4 approaches. The VIX spiked to 38.28 on September 4, but has since pulled back to 27 – above the long-term average and higher the summertime lows between 20 and 21.

Bottom line: The 50dma and 3300 should provide some support for stocks, but a break of those levels could bring about a fresh wave of selling pressure and spike in volatility. Bullish momentum would likely be lost as well should the RSI drop below 40. Will the bears make it a 3-week winning streak, or can the bulls finally get their act together after the holiday-shortened week?

chart of S&P500 key levels

2. S&P500 Daily Sentiment Index: when this happens... @MacroCharts Bring us this chart of the S&P 500 and a potential rollover in sentiment. The Daily Sentiment Index (DSI) 3-month moving average approached the key 80 level – a significant line in the sand when analyzing historical trends. This 4-year view shows 80 was resistance in each of the last three years – could 2020 be the fourth?

It remains to be seen, but the key takeaway from S&P 500 traders is that when the 3-month moving average on the DSI peaks, the stocks tend to selloff. Modest to sharp pullbacks in price occurred at each DSI rollover event. Some of the retreats in large cap US stocks were fantastic ‘buy the dip’ opportunities, but also features is the COVID-crash earlier this year. It might be prudent to be on the defensive this time around.

Bottom line: By smoothing out daily sentiment readings, we can get a gauge of the broader trend among equity traders. When the Daily Sentiment Index 3-mo moving average hits the 80 mark, the bulls need to be on the lookout for a potential correction. We’ve already been witness to a 7% dip the S&P 500 – is more on the way now that sentiment is just starting to turn lower?

chart of S&P 500 daily sentiment index

3. Seasonality/Cycle Composite: right on schedule... Thanks to @edclissold for providing us this Ned Davis Research chart featuring historical cycle trends on the S&P 500 all the way back to 1928. The blue line is an equal-weight composite of:

-the one-year seasonal cycle – which we know tends to be strong during the spring, weak during the fall, and quite strong very late in the year

-the four-year presidential cycle – which is often quite strong in year three of the US president’s term while year four can be a mixed bag, but there is often volatility immediately before voters head to the polls in early November.

-the 10-year decennial cycle – years ending in 5 are awesome for some reason while years ending in zero feature some rather ominous pullbacks and even bear markets.

So what does it all mean for us in the next few weeks? Potential bearish implications. The dashed orange line is the realized S&P 500 price so far this year. SPX topped about when the blue-line composite suggested we should have. Curve-fitting perhaps? Maybe, but this is another data point indicating that the bears may in charge at the moment. The blue-line composite suggests bearish price action through late October before a sharp rise into year-end.

Bottom line: Seasonality continues to favor the bears – and may do so for the next 6 weeks, according to NDR. Volatility always seems to rear its head before US voters venture out to the polls, but combing the one-year S&P 500 seasonal cycle and the 10-year decennial pattern, we get an even more pronounced bearish look for September and October.

chart of S&P500 cycle composite and seasonality

4. On seasons and cycles, if this correction continues it could have implications for November the 3rd: @ISABELNET_SA delivers us another look at the cyclical nature of large cap US stocks from 1936 through 2016. This chart displays price action depending on whether the incumbent political presidential party won or lost. Of course, President Trump and former Vice President Biden are the wildcards in this situation. What could go wrong?? Could the S&P 500 tell us who wins on November 3? Let’s explore that topic.

The dark blue line is how stocks behave when the incumbent party loses the general election in November. It’s actually following the script quite well this year since stocks indeed fell through mid-March, then rallied into August. And then the S&P500 (SPY) peaked earlier this month. 2020’s price trends have not mimicked the usual nature of when the incumbent executive branch retains the White House, however. In the latter situation, equities usually rise early in the year, then pullback in early Q2 before a slow & steady rise through year-end as if everything were goldilocks. So this historical pattern may be hinting at a future President Biden.

BTW, I feel I need to spell it out given the societal mood right now: for the record, we are politically neutral (being based in NZ), so factor that in before you go throwing stones (or cheering for that matter)!

Bottom line: We don’t care about politics, but we are interested in where prices go from here. It could be more pain for the bulls if the dark blue analog plays out. The good news for the bulls though is that in either case, stocks usually head higher from late October through the end of the year. But buckle-up – volatility may not be over just yet.

chart of how the market trades in an election year incumbent win vs lose