Weekly S&P 500 #ChartStorm - 20 July 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. Strictly speaking the S&P500 closed above that 3200 line. Doesn't look entirely convincing but let's see if it can be held. Stocks consolidated near the top of the range last week in quiet summer-like trading – something we haven’t seen too much of. We are back at the June 8 peak. It’s been an interesting dynamic between large cap growth stocks (which garner much of the attention) and small cap value – both have taken turns leading the market higher since late March.

Of course, the S&P 500 is driven by the former. The index remains at an important level as this 3200 zone is right about where the market broke down from in late February. Seasonally, the first three weeks of July are typically quite bullish, then things get more dicey during the final third of the month through much of August.

Also note the RSI at 61 – still within the ‘bullish’ zone between about 40 and 90, but much weaker than it was at the peak at the June 8 high on the SPX. Putting it in perspective, perhaps that is a good thing as the late May into early June timeframe was almost had that melt-up feeling.

Bottom line: The S&P 500 is above the 3200 by a little bit, less than 1%, but it was a choppy-trade to end last week despite a more than 1% advance on the week. Stocks may be dealing with some important resistance at these levels. Let’s call this a very tentative breakout on stocks – but there’s still more left to be proven.

chart of key S&P500 resistance/support level

2. Put. Call. Ratio. Thanks to @ThinkTankCharts for an update on one of our favorite charts – the equity put-call ratio on the S&P 500. This is a red flag if there ever was one. The indicator is back at its June 8 level – beyond extreme. Traders are holding considerably more calls than puts right now, indicative of a frothy market with little concern for downside protection. Corrective price moves can happen fast, and capitulation may come quicker.

ThinkTankCharts provides nice context here – major market bottoms are noted when the put-call ratio spikes, but you can also see when the ratio bottomed as the SPX peaked earlier this year. The June 8 spike down is also evident. Is it different this time? There does not appear to by any good reason why it should be different now.

Bottom line: The bells and whistles should be going off when investors see this chart. It is a huge short-term risk flag being waved. Sticking with the components/theme of this chart, maybe now is the time to consider picking up a little insurance by way of put options to mitigate the risk.

3. Insider selling climax. @BrightramLLC brings us another warning flag for the S&P 500 – price versus insider selling activity (seller/buyer ratio). Since 2007, there has never been a bigger spike, which indicates insiders are selling at a torrid pace. Do they know something we don’t? Well, of course not, that would be illegal, right? Tongue-in-cheek there, but we can compare historical peaks to see how price action followed. Unfortunately, we have never seen the ratio this high, so it’s hard to draw a good comparison.

Nevertheless, the move that stands out is the jump seen in early 2014. Recall that time – the market had just come off a stellar 2013 during which the index climbed about 30% on somewhat low volatility (not unlike 2017 for you younger traders). Perhaps it was natural for insiders to take some profits during the first half of 2014. The middle 2014 to early 2016 was the commodity collapse, which led to a weak global recession when analyzing some historical data points. Another recent spike came in late 2017 – once again after a huge equity market advance.

Now here we are after 50% surge on the S&P 500 from the intraday March 23 low, and insiders are booking profits again. Notice how insiders were net buyers at the market bottom – that’s a tidy little profit!

Bottom line: Chalk this up as another short-term warning flag the market is waving to us. Insiders have been net sellers after stocks have rallied in the past, and it appears to be happening once more. Insiders were buyers earlier this year near the lows, but may be inking the profits now.

chart of insider selling activity