Weekly S&P 500 #ChartStorm - 18 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. About 69% of companies are set to report Q3 earnings over the next two weeks. @LarryAdamsRJ kicks us off with a timely view of earnings season. This week and next carry the bulk of third quarter results from S&P 500 companies. Last week, several big name Financials revealed decent Q3 operations, but now the market turns its eyes to other sectors to get a gauge on just how well corporate America coped with continued economic trouble as a result of COVID-19. The $600 federal unemployment benefitted ended on July 31, so that deadline was thought to have hampered consumer spending.

Nevertheless, the US reported record retail sales last week – which should bode well for the Q3 reporting season. FactSet notes that the S&P 500 is expected to report an earnings decline of 20.5% for the third quarter which would be the second largest year-on-year earnings fall since Q2 2009.

S&P 500 earnings fell more than 30% during the second quarter, but the beat rate was actually the best in the last 20 years. While it was a dreadful economic and business environment, firms were able to top expectations on revenue and earnings (or at least limit net losses). Partly as a result of the strong beat rate, Q3 EPS expectations have been on the rise versus initial estimates during the summer. Looking ahead, the big tech names report later this month with Microsoft’s earnings date being October 28. Apple and Google report October 29. Amazon reports this week on Thursday.

Bottom line: Q2 2020 was dreadful when it came to S&P 500 earnings, but it was much ‘less bad’ than analysts thought. Earnings revisions have been strong for the Q3 reporting season, and now it’s time for corporate American to show its cards. The American consumer has been very resilient, so expectations are likely higher this season than last. Expect volatility.

chart showing earnings calendar

2. Hulbert Sentiment: sharp gyrations from Sep to Oct. Worth noting that sentiment is better for picking bottoms than tops, but fair to say risk is elevated when indicators move like this. @JesseFelder brings us this chart of sentiment and the DJIA. The Hulbert Newsletter Sentiment Index shows that the average recommended stock market exposure among short-term market timers has climbed to its highest reading since early 2020. The red line surged from falling below zero in mid-late September.

Despite risks that lie ahead like earning season, stimulus uncertainty, and the election, recommended equity exposure is very high. Perhaps seasonality of the market plays a role here – stocks tend to perform well from mid-October through year-end. This time last year, the index was softer in the 40-50% range. Equities rallied impressively in the last few weeks, though gains were largely consolidated last week.

The S&P climbed more than 7% off its September lows, allowing many investors to feel better about dipping their toes back in with any cash on the sidelines. Volatility also eased back into the mid 20s on the VIX. Bulls should always take caution when market timers turn sharply bullish, however. Stocks were not far from short-term peaks earlier this year when the Hulbert index rose above 60%. Now here we are at 75%

Bottom line: The September swoon in stocks was rather quick and orderly. The S&P 500 fell into correction territory only very briefly on an intraday basis. A late-month rebound eased fears that the markets would fall hard into the election, and it has been a solid first half of October, too. Sentiment almost always follows price action, and now there may be just too many bulls roaming around at the moment.

Hulbert sentiment chart

3. Speculative futures positioning has gone from net-short to net-long, not extreme by any means, but certainly a significant turnaround. Continuing the theme, we pulled the chart of total US stock index speculative futures positioning from our vast library of macro views on Like the Hulbert Index earlier, the red line went from below the 0% mark to back above – indicating a move from net short to net long positioning among spec futures traders. Interestingly, the net aggregate position has not swayed to extremes during 2020 despite high S&P 500 volatility.

In previous years, net open interest would peak near +10% and fall to nearly -10%, but the range has been muted this year on a relative basis. The break above the 0 line recently indicates that there is less fear today versus a month ago – it’s been an impressive reversal in market sentiment over a short period. Our own Twitter sentiment poll last week showed the same bullish reversal. Once again though, sentiment indicators are often used as contrarian signals. It will be fascinating to view these charts a month from now.

Bottom line: Investor sentiment has improved markedly from its nadir last month. September is often a time for the bears to shine and for volatility to spike. And we were witness to that, but it’s been hard to keep stocks down for long since the March low.

chart of US equity futures positioning

4. Sign of things to come? Simply clearing the event risk off the table by getting the election over and done with could itself be a key upside catalyst for equities. @Saburgs shows us a neat chart of equity flows before and following the US presidential election (via Goldman Sachs Global Investment Research). To explain the chart, we are looking at the 12 months before and 12 months after the election on the x-axis and fund flows as a percent of AUM as of November of the pre-election year on the y-axis. 2020 has followed the analog nicely – so far. Equity fund flows have been on the decline (a trend that has been in place for a while now).

The question is, “does money pour into the stock market after November 3, 2020?” We’ll just have to wait and see, but history suggests confidence should build and uncertainty should ease once we find out who will be POTUS come January of next year.

A caveat to the chart & data is that we only have 5 instances to learn from since 2000.. not exactly a vast data set. The elephant in the room from a political standpoint is the expectation among many investors and fund managers that the election will be contested. The latest Bank of America Global Fund Manager Survey showed that more than 60% of those surveyed expect the US election outcome to be contested – the group also felt that was the biggest risk to equities.

Bottom line: Anyone can speculate on the election outcome and the stock market’s reaction to it, but recent history suggests money should return to equity funds following election day 2020. Equity flows have been negative since November last year, much like the five election year analog composite, but a rebound could be in the offing.

chart of election and fund flows