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. Happy New Month! The S&P 500 gained 5.6% during July to mark a fresh all-time closing (month-end) high. Prices continue to build from the March 23 low. Mega cap tech of course led the way, but there were still very respectable gains for US midcaps and small caps – both climbing more than 4%. Volatility dropped last month with the VIX falling from near 30% to under 25%. Sector-wise, Consumer Discretionary, not Information Technology, was the leader with a 9% advance. Energy lagged again with a 5% drop – the only sector to finish in the red despite oil prices holding their own near $40 per barrel. Energy has now fallen to the lowest rung in the ladder of sector weights in the S&P 500. Exxon Mobile, the biggest company in the SPX not long ago, is now a fraction of the market cap of Apple.
Bottom line: While COVID-19 cases and deaths were on the rise across the United States, stocks marched higher. The wall of worry ahead of the election 3 months away continues to be climbed. Valuations grow evermore as the P/E ratio of the big 5 companies moves north of 30x. Speculation also appears to be quite high as measured by a few indicators we will detail later on. Still, a bull market appears to have legs with a fourth straight monthly gain for the S&P 500.
2. Not so happy new month: negative seasonality kicks in from Aug. Seasonality tends to peak in early-mid July for US stocks ahead of the notoriously volatile August-September-October stretch. Technicians view seasonality as a secondary indicator, but it is still something to pay attention to. Where do we stand right now? It may be prudent to lower expectations for equity returns in the next two months while respecting the possibility of heightened volatility. The VIX is stubbornly holding the mid-20s – above the long-term average (something to keep in mind).
One caveat for the S&P 500 is that it is an election year, so there is some variation in seasonal trends ahead of voting day in the States. August through mid-September have historically performed a bit better in year 4 of the election cycle, but late September through much of October can be rough. Of course we all remember what happened in the fall of 2008.
Bottom line: Negative seasonality begins to enter the picture this time of year. Every year is different, of course, and seasonal stock market trends are simply an average over decades and decades. It’s easy to get lulled into putting too much weight into the average. Price and momentum are primary indicators while seasonality should be secondary in the toolbox of a trader.
3. Stocks say yay, bonds say nay. It was a happy end to the month for stocks, finishing near fresh rebound highs across various sectors & indices, but where can we find some all-time lows? Interest rates. Maybe I should put a positive spin on that – fresh all-time highs on bond prices! The US 10-year Treasury yield printed an all-time weekly and monthly closing low last Friday at slightly under 54 basis points. On a daily basis, only March 9, 2020 was lower. We can attribute that (blame?) the Fed, and leave it there, but let’s dig a little deeper.
Buyers continue to emerge in bonds, bringing down interest rates as inflation expectations remain low despite some commodities rising in price. A number of market pundits would argue that for a more optimistic economic backdrop to evolve, we’d like to see interest rates slowly rise in the expectation of better growth. It seemed like we were getting to that point in early June when the 10-year yield climbed to near 1%, but that was short-lived. It’s odd implying the 10-year near 1% was high.
Bottom line: Simply looking at stocks would suggest everything is hunky-dory, but interest rates hit a new all-time monthly low close during July. Economic growth expectations beyond this year are not all that optimistic. An active Fed has at times led to a ‘buy everything’ mindset, and that is kind of what we witnessed in July.
4. ETF Put/Call ratio tracking at what appear to be fairly reliable tactical contrarian bearish levels...@hmeisler gives us a look at our old friend the equity Put/Call ratio. This time, the chart is of the 21-day moving average of the ETF Put/Call ratio. Even when smoothing it out, the Put/Call ratio is at extreme levels – on par with the top in stocks from earlier this year and from early 2018. It’s a typical contrarian indicator. More folks are buying up call options versus bearish put options. It goes hand-in-hand with the ‘Robinhood’ trader narrative – the latest episode featuring Kodak stock. It’s interesting to see frothy signals like this while cash remains somewhat elevated within investors’ accounts.
An interesting feature on the chart is that the Put/Call ratio did not spike too hard during the peak of fear earlier this year. We saw much greater readings back at the early 2016 equity market low following the global commodity collapse and in late 2018’s nearly 20% SPX drop. Perhaps free options trading has something to do with it? Hard to figure, but there’s no doubt that a super-low Put/Call reading today is a major red flag for the bulls.
Bottom line: Chalk this up as a warning signal to those wishing for higher stock prices in the coming months. The ETF Put/Call ratio near 1.0 is near very ‘optimistic’ levels – not good news for the stock market as it is a classic contrarian indicator.
5. And an interesting follow-on: Put/Call ratio for large tech stocks is at extreme levels. Thanks to @sentimentrader for this chart highlighting the Put/Call ratio specifically for Apple, Microsoft, Amazon, Facebook and Google – the vaunted FAAMG or Big 5. The price of the NASDAQ 100 ETF (QQQ) is shown in white. The Put/Call reading is at the lowest levels in at last 6 years – likely surprising nobody. I imagine you have to go back to the Dot Com bubble to find a more euphoric period for big cap tech in general.
With Apple stock doubling off the intraday low back in March, investors have been rewarded for taking as much risk as possible in the last few months within the Information Technology space. Same goes for Communications’ Google & Facebook and Discretionary’s Amazon. How will the party end? Hard to say. Perhaps some major regulatory move from Washington D.C. will shake things up – but it’s hard to see that happening so close to an election.
Bottom line: Has there ever been a more powerful group of stoc