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?
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?
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.
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.
5. Retail Options Buying... "CAUTION: Clean up in progress" A friend to the ChartStorm, @SentimentTrader shows us that retail options traders are getting a little more skittish, but are still hoping for (and positioned for) more rising equity prices. Call buying activity remains noticeably above put-buying activity according to the latest data. This chart could be the ultimate ‘tell’ in the market given the massive increase in small traders buying-to-open call positions versus bearish puts in 2020.
The trend from 2017 through 2019 featured a relatively narrow range despite some bumps in the road on the S&P 500 price chart. This year’s trends of free trading, free apps, free time, and free money have led to an explosion in retail options trading – particularly for calls. For market-watchers and traders, the dramatic fall in the blue line suggests we might revisit the historical range of 1-2% to complete the topping process. If that’s the case, then more declines in US stocks could be in the cards.
Bottom line: We’ve been monitoring retail sentiment and positioning throughout the year given their enhanced activity during 2020. Could we finally be on the verge of a wash-out among small traders? It’s possible given the move already seen among ma & pa traders in the options world – but there’s still a long way to go to complete the topping pattern. This is another warning flag that near-term price action may favor the bears.
6. Another case of punters buying the dip? Largest ever weekly inflow to $TQQQ (3X Leveraged Long Nasdaq 100 ETF) Thanks to @SarahPonczek for this chart of weekly fund flows into the triple-levered long Nasdaq 100 ETF (TQQQ). Options activity and flows into leveraged ETFs are among the more interesting sentiment gauges out there. What’s this one telling us? The really speculative money is buying the dip in TQQQ while the traditional Nasdaq 100 ETF (QQQ) actually saw a major weekly net outflow.
The two ETFs don’t always align in terms of net fund flows, but the story seems to be the quick-traders are betting on a recovery in non-financial Nasdaq equities (i.e. mega cap growth tech names). When have we seen similar giant leaps in weekly TQQQ inflows? Back in early Q4 2018 and during this past March. The two periods contrast each other in that the former was a bad time to be betting big on tech stocks since the S&P 500 would go on to fall nearly 20% by Christmas. TQQQ fell nearly 60% from early October 2018 through late December, peak to trough! The latter was of course a great buying opportunity.
Bottom line: The last two week’s massive inflows into the 3x leveraged long Nasdaq 100 ETF may add fuel to the fire if stocks continue to pullback. The past has been difficult to gauge in terms of what individual weekly flows mean, but perhaps it is concerning that flows went into the speculative 3x product while the index ETF QQQ saw its biggest weekly outflow since early 2018.
7. More perspective on Tech flows... Next stop for tech sector ETF market shares = 50% or 15% ?? At @topdowncharts we can analyze the Information Technology sector in more detail. Let’s take a look at flows into all tech ETFs and their market share. The tech sector is about a third of the US stock market now – well above the 10-15% range from the mid-2000s through mid-2010s. Not surprisingly, quarterly net ETF flows have been solidly on the incline since the Q4 2018 correction on the S&P 500.
The question is – do we pull-off another 1999-2000-like event and see tech stocks continue to explode higher on both a nominal basis and relative to other sectors? Or are we finally seeing cracks in the wall, and are on our way back to the 15% weighting area? In many ways we are in a new normal, but I am always wary of calling for a "new paradgim"! (or worse: "a permanently higher plateau")
Bottom line: Leveraging our vast data networks and charting methods at Top Down Charts, we can plot price action and fund flows. We've seen an initial shot across the bows in flows edging out of big cap tech and into some of the beaten-down (relatively) areas of the market. Is this just a blip on the radar, or is it an omen of some more interesting investor shifts?
8. This one is global equities (but obviously US is a major part): it provides a stark perspective on the parabolic rise and rise of growth/momentum/cyclicals. Another macro perspective from... myself!
Here we combined a few of the hot trends in the last several years:
1) The Momentum factor versus the world of stocks
2) Growth versus Value
3) Cyclical sectors versus Defensive sectors
The story is clear the trends have been impressive. Investors have been rewarded for sticking with mega cap technology stocks over the last decade-plus. What has worked just keeps on working, so the momentum factor has been persistently working. The trends also have international implications – this chart looks at global equities, which the US accounts for nearly 60% of right now (nearly an all-time high). Non-USA stocks have been very poor performers since 2010 due to their nature of being less-concentrated in tech and growth.
What’s also interesting about this chart, when looking at historical patterns, is that both 2000 and 2008 featured unwinds of the momentum/growth/cyclical moves higher; 2020’s flash bear market did not though. You can’t even tell that something went wrong in the stock market this year! 2020’s flash bear market and sharp recovery only exacerbated the relative strength among these groups of stocks. Is this kind of move sustainable? We talk more about the narrative here.
Bottom line: the pandemic has catalyzed a parabolic extension of the existing trend of relative outperformance of growth and momentum stocks. Momentum/Growth/Cyclicals versus the world of stocks has gone parabolic this year. Maybe it can hold in the near-term, but history suggests it is not sustainable over the long-haul.
9. "It's not what you said, it's how you said it..." The invisible factor is becoming more and more important in corporate balance sheets. @tracyalloway provides this chart from the Bank of America Research Investment Committee & Aon. The composition of S&P 500 corporate balance sheets has undergone a massive shift from tangible assets to intangible assets since the 1970s. The middle part of the 20th century featured a boom in US manufacturing and blue-collar jobs. In the last 50 years though, those blue collars have largely been exchanged for white collars. This year everything was put away and PJs and workout gear are the new attire themes with the work-from-home movement. I digress.
As of 2018, a whopping 84% of S&P 500 assets (by market value) are intangible. Intangible assets are more difficult to value versus tangible, and often feature a greater valuation multiple. The ‘knowledge economy’ is here, no doubt about it. This trend goes hand-in-hand with the Information Technology and Communications sectors increasing their market share while energy, industrials, and materials lag behind. Recall how this also favors growth stocks versus value equities. The narratives of so many trends can be told.
Bottom line: It’s clearly a tech-driven, fast-paced, knowledge-based economy we live in. But have we come too far, too fast? We could have drawn the same conclusions back in 1999-2000 – and we know how that boom ended. Placing sky-high valuations on technology and intangible assets has its risks, but at the moment, the market values intangible assets quite highly versus tangible. Call it ‘the invisible’ factor.
10. The prospective/forward-looking Equity Risk Premium went from about 8% in March to now -5%. Stocks were a buy during March 2020. We constantly update our Capital Market Assumptions (CMA), and at the end of Q1, we talked about how equities offered a significant opportunity for solid returns in the coming 5-10 years. Now, however, forward return expectations are significantly less appealing since we likely pulled-forward the bulk of the gains.
The "prospective" equity risk premium has declined notably over the last six months as a result, leaving investors uneasy about where to put money to work over the intermediate-term. Two areas of the market we highlight in a video from last week are ACWI stocks minus the Global Aggregate Bond Index and US Large Caps minus US Treasuries. The risk premium offered by stocks has fallen, but international stocks are slightly better than US equities.
Bottom line: While equity risk premiums don’t look too bad when analyzing the earnings yield versus bond yields, it still may be a challenging environment for equity investors in the coming 5-10 years given current valuations, particularly in big cap US stocks (i.e. the S&P 500).
So where does all this leave us?
1. Technicals & Sentiment.
The S&P 500 has finally seen a material pullback from an impressive summer rally. The nearly 7% decline from earlier this month was felt mainly among big cap tech stocks, but oil’s decline also hurt the beaten-down energy sector too. Is more pain ahead? Options traders are still on the bullish side of the ledger and there is bullish speculation taking place in the highly-volatile TQQQ triple-leveraged Nasdaq 100 ETF. Traders will want to keep an eye on the 3300 level on SPX and its rising 50dma.
2. Cycles & Seasonality.
We are about 50 days from the US presidential election, and that means its high times for analyzing the S&P 500’s election cycle. Stocks tend to have periods of weakness ahead of early November, particularly when the incumbent party goes on to lose the White House. So far in 2020, the historical analog of the executive branch party switch is playing out. While we are indifferent and agnostic about political outcomes, there are important S&P 500 price-action effects. A broader composite from Ned Davis also shows that we are following historical patterns nicely. The implication for traders? It may be wise to play defense for the next six weeks as stocks have gone on to show more weakness in this part of the cycle. Volatility, currently near 28%, may not have peaked just yet.
3. Macro & forward returns.
It’s important not to get too short-term oriented in this environment. The composition of S&P 500 company balance sheets continues to shift away from hard-assets and toward the value of knowledge, services & strategy. Comparing today to the past is useful, but often must be taken with a grain of salt. Along the same lines, we expect some reversion to historical means in the coming 5-10 years with equities providing soft and potentially volatile returns while non-US stocks playing a little bit of relative catch to US equities.
Summary
It’s that time of year. Volatility is known to show itself, and corrections can be sharp and quick. Political risk is heightened in 2020 and speculation is still running rampant among retail traders as big money is significantly more defensive. All eyes are on the price-action of big cap tech given the IT sector’s 11% decline over just the last six trading days. The wall of worry could finally be cracking, so investors need to monitor the charts, the data, and the macro perspective.
See also: Weekly S&P500 #ChartStorm - 6 Sep 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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