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 stocks in the S&P 500? Perhaps, but the big 5, as we endearingly call them now, have exploded in dominance – just this year alone. Investors are more optimistic than ever as shown in the Put/Call ratio. Perhaps too much so.
6. It is different this time in many respects... but at this stage it's reverted to the greater fool theory with valuations at these levels. @trevornoren shared this look at valuations from Goldman Sachs Investment Research. The big 5 mega cap tech stocks (though FAAMG are spread across three sectors) now trade at more than 30x 2021 EPS. For comparison, the rest of the S&P 500 is at a much more manageable 18x. It’s interesting to look at history on this one – back in the late 90s the five largest stocks (which were Microsoft, General Electric, Cisco, Exxon and Walmart in 1999) traded at much higher valuations. Something that is also very important to the P/E ratio for baskets of stocks is the nature of interest rates. Obviously, rates are basically at all-time lows today while the 10-year yield was above 6% in the late 1990s. Lower interest rates allow for higher equity market multiples, all else equal.
While FAAMG trade at what feels like nose-bleed valuations, it’s still not quite on par with the late 90s bubble. And the “S&P 495” is just in the middle of its 20-year valuation range – again consider much lower interest rates today versus the average of the past 20 years.
Bottom line: It’s important to challenge your narrative sometimes. At face value, mega cap tech & growth stocks are stretched, but history suggests they can become more stretched (rather quickly, I might add). For valuations to go much higher however, the market will have to completely disconnect from fundamentals. Enter: The Great Fool Theory.
7. The S&P 500 vs the S&P 5 (this time with a bit more history, but no less stark). This performance view is one of the most stunning charts you’ll come across. @DavidInglesTV brings us this look from Bloomberg showcasing FAAMG’s stock market return versus that of the rest of the S&P 500. Since the start of 2015, the “S&P 5” has been nearly a four-bagger while the TOTAL cumulative return of the rest of the S&P 500 is a relatively puny 25%. Annualized, it’s about 25% for FAAMG and 4% for ‘the rest’. COVID-19 turned out to be the latest catalyst to further divide the leading stocks from the more sensitive smaller market caps.
Bottom line: A chart says a thousand words, so I kept this one short & sweet. The dominance of the biggest of big US stocks seems to grow by the day. It’s been happening for a while though. It begs the question – what will it take to close the alligator jaws on this chart?
8. Tech fund flows. Valuations and stock market performance are interesting enough, but what’s going on under the hood? ETF flows show investors are piling into Tech sector funds as you might expect given some of the indicators we have highlighted this week. We analyzed the situation in Tech (and value vs. growth) in our video here. We discuss trends in relative performance, valuation shifts, and what it would take to turn the trend in value vs. growth. It’s a must-watch for portfolio managers.
As for the chart, Tech ETFs’ market share took off in the second half of 2016 and hasn’t looked back. The most recent 12 months specifically has seen an explosion in quarterly net ETF flows into ETFs like QQQ & XLK. Today, Tech ETFs make up about one-third of total ETF AUM. That number was under 10% back in 2008 – a time when Exxon Mobil, not any of the FAAMG stocks, was the market cap leader in the USA.
Bottom line: We are at the stage when money of all kinds is flowing into what has worked the best – big cap tech funds. It has huge ramifications for asset allocation. Nothing bifurcates like tech – i.e. value vs. growth, US vs. non-US, large cap vs. small cap. Knowing the risks in this space is paramount for investment managers.
9. Most crowded trade = long big tech: Bank of America’s famed Global Fund Manager Survey poses the question of ‘what is the most crowded trade?’ @PaulWHKim brings us the results. Survey says – long US tech stocks. By a wide margin.
This makes it tough – if nearly three in four fund managers think big cap tech is too frothy, maybe the tech ETFs can keep moving higher. Consider that gold recently moved to all-time highs (in nominal dollars) – a headline like that would seemingly command many to suggest the advance in the shiny rock is overdone, but only about 12% of respondents think gold’s trade is most crowded.
Bottom line: Can there be a bubble if portfolio managers agree that long tech stocks is the most crowded trade? Probably so, but there is at least a curtain of doubt as to how sustainable mega cap tech’s move has been. Markets love to climb walls of worry, and this survey result could make that wall just a little bit higher, leaving more room to climb.
10. "value/EM/commo/small caps is just inverse USD" @WallStJesus brings us another look from Bank of America research. The aforementioned move in gold gets us thinking – given the recent turn lower in the US Dollar Index, what are asset returns like in historically similar environments? We can look back to the 1970s and the 2000s to find periods during which the DXY was in a downtrend. Where would portfolio managers have found the best sub-asset class returns? Emerging markets, commodities, small caps and value stocks. Not found: big cap tech. In fact, large cap growth stocks significantly underperformed during these two decades.
Of course, a couple of months does not make a trend – especially in the currency markets where cycles in the Greenback can last several years or more, but many market-watchers are clamoring about how the US Dollar has moved to near two-year lows of late. All the while, US large cap growth stocks continue to perform well. What’s going to give? Will the USD rise toward the 100 level again, or will there finally be a sustained shift to other sub-asset classes?
Bottom line: IF the inverse-Dollar trade were to play out, it would be a reversal of the last decade. What’s interesting is that the US Dollar hasn’t exactly been flying high – it is flat since 2015. Maybe the ‘left for dead’ areas of the investment universe need a little more than a boost from a lower Dollar to get going.
So where does all this leave us?
1. Market Pulse.
A new month brings a review of the markets. The S&P 500 rallied sharply during July, continuing the theme since late March. Many are left waiting for a pullback while Robinhood traders open their apps each morning at 9:30am to trade the latest hot mover (well, maybe). The S&P 500 printed a new all-time monthly closing high last week, led by the Consumer Discretionary sector (where you will find Amazon) while Tech stocks actually finished just in the middle of the pack among the 11 market sectors. Seasonally, things could get a bit rougher – Q3 is infamous for featuring volatility at times, though the VIX is still in the mid-20s, above its historical average. Also, stocks tend to perform a bit better in August of an election year versus other years. But traders should focus on price and other signals – seasonality is secondary. It’s not all about stocks – the bond market may be telling us something, too. While US large cap equities coast near all-time highs, the 10-year note’s yield had its lowest weekly and monthly settle ever. Maybe the Fed’s actions have led to another ‘buy everything’ moment. Elsewhere, gold is near nominal all-time highs as well. Turning to market indicators, the ETF Put/Call ratio suggests euphoric sentiment. The last time the ratio was this low was right before the S&P 500 peaked in February.
2. Big Tech.
The Put/Call ratio is even more extreme when looking at the “S&P 5” aka FAAMG. JC O’Hara at MKM put together a chart displaying the performance of the QQQ NASDAQ 100 ETF and the monthly Put/Call ratio of just FAAMG. We may have to bookmark that one for years to come. Valuation-wise, FAAMG is north of 30x forward earnings while the rest of the US large cap space trades at a more reasonable 18x. As for performance, Big Tech has been a big winner since 2015. A $100 FAAMG investment has turned into about $375 while that same $100 would be just $125 if invested in the remainder of the S&P 500 since Dec 31, 2014. Finally, fund flows show Big Tech keeps raking it in; the most recent 12 months are particularly lucrative.
3. Portfolio Positioning.
All the while, portfolio managers are concerned about the move in mega cap growth & tech stocks, according to the most recent BofA Global FMS. The question of ‘what is the most crowded trade’ is not even close – the response is definitive long US tech stocks. So what if they are right, and there is a reversal in asset allocation? What could prompt the shift? Maybe a move in the US Dollar Index? We can look to the 70s and 2000s for a glimpse into the world of a falling DXY. What hasn’t worked in the last 10 years were the winners then.
Summary
In recent weeks I've highlighted a number of charts that look tactically bearish, or certainly at least raise red flags around the risk of a selloff or correction. While I still lean bullish over the medium-longer term on the basis of substantial stimulus, and at least at a global level, still reasonable valuations (especially relative to bonds)... short-term I can't help but fixate on those risk indicators, particularly given the doomish tone of the news flow, the busy calendar ahead, and the mixed but on average bearish slant to seasonality in the next couple of months. As I noted, shorting tech just seems like one of those widow-maker trades given the sheer force of momentum and fervor around it. As a minimum, I am spending more time on those sectors and assets that have been left behind by the rip-roaring rally in big tech.
See also: Weekly S&P500 #ChartStorm - 26 July 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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