Weekly S&P 500 #ChartStorm - 15 June 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. Equities vs. Fixed Income: Junk bonds say yay, Treasuries say nay. So let’s first talk stocks which are moving alongside junks bonds - the S&P 500 had an eventful week – failing at key resistance just above the 3200 area while finding support at the 200dma and prior range highs just above 2960. Volatility perked up last week, rallying from 24% Monday to 44% intraday Friday before settling at 36% - the highest weekly close since May 1.

For the S&P500 and (SPY), the weekly candle barely avoided a bearish engulfing pattern care of a late-session bounce from 2984 to the 3041 close. The S&P 500 and JNK are about where they were during late May despite a significant loss for the week – a strong rally (some may call it a melt-up) from May 14 to June 8 (+13% on SPX) left plenty of room for a pullback. While overhead supply is in the 3200-3400 range, there is now a respectable demand area from 2800-3000 from the April-May range.

Junk bonds have always been seen as having significantly more credit risk than interest rate risk, so their performance has been nearly lock-step with equities. Treasuries, meanwhile, fake out the market earlier this month with the 10-year yield popping above 90 basis points for a time before quickly settling back below 70 basis points. The Treasury bears are not quite ready to lift yields.

Bottom line: Pick your poison in bonds. If you are in the recovery camp, then junk bonds are your weapon of choice, but if you expect a rocky and volatile back half of the year, Treasuries may be the play. Bear in mind that yields are not bound at 0.00% as we have seen clearly in Europe.

chart of S&P500 and the bond markets

2. "healthy correction" vs "next wave down". An update on that chart by @ThinkTankCharts from last week. The equity put-call ratio finally rebounded last week after falling to (and even beyond) bubblicious territory the prior week (which we also highlighted in the last writeup). A 5% pullback in stocks will do that. Still, the CPCE is still well into ‘Bubble’ territory as shown by ThinkTankCharts.

It begs the question – was last week the resumption of a downward trend in stocks? The CPCE is at similar levels to mid-February; a time when equities were still near their all-time highs before falling fast. Similar to the junk bonds vs. 10-year yield chart – this is another chart that asks what camp do you fall into?

Bottom line: The equity put-call ratio has been a popular one on the finance Twitter-sphere as of late. The statistic still suggests equities may have further to fall based on historical similar levels.

S&P 500 put call ratio chart - risk of a stockmarket correction

3. MACD Sell Signals. @bullmarketsco brings this look at the S&P 500 with the percent of components exhibiting MACD sell signals in the past 10 days. The figure hit near 40% - the highest since last fall. Just for some quick chart school (or a refresher course), the Moving Average Convergence/Divergence oscillator subtracts a longer-term moving average from a shorter-term moving average and turns the difference into an oscillator – so in effect you get a trend-following and momentum tool.

What is happening on this chart is the shorter-term moving average is moving away from the longer-term moving average on many individual stocks at the moment. @bullmarketsco notes that 38% of SPX stocks have triggered this sell signal, indicating that many individual names are rolling over on their respective charts. He sees a similar pattern among NASDAQ 100 components as well.

Bottom line: Big spikes in the number of S&P 500 stocks with MACD sell signals has spelled trouble for the market in recent years. It took just a few days for the jump to occur – the question is how long does the volatility go on? It can’t be just a few days, can it?