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Weekly S&P 500 #ChartStorm - 20 Sep 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. The S&P500 closed below its 50-day moving average [50dma] on Friday, but for now the 3300 level is hodling. The S&P 500 continues to drift lower from the September 2 high at 3588. Last week was another 0.6% decline bringing the intraday peak to trough decline to 8.2% at Friday’s low of the day. Tech shares are down nearly 12% from their closing high earlier this month. The 50-day moving average is rising at 3343 – it was the first settle below the key technical level since June 28. The 200-day moving average is further down near 3100.

The RSI (14) momentum indicator remains in the bullish zone between 40 and 90, but barely so. Large cap US stocks were at extremely overvalued levels during late August and early September, led by big cap tech. The last three weeks have seen the darling FAAMG stocks pull back significantly while value, small caps, and foreign stocks have generally been down to a lesser degree. As for the SPX, 3300 is the line in the sand. Can the bulls defend it as they have on two occasions so far this month?

Bottom line: September is notorious for volatility and reversing gains earned from the spring and summer. As is the case for 2020. The S&P 500 consolidated losses last week, ranging between 3300 and 3430 as volatility continues to be elevated. Watch for a break below 3300 for another potential move lower heading into the end of Q3.

chart of the S&P500 and key level

2. Still, just over 50% of S&P500 constituents are trading above their respective 50dma. (albeit, breadth has rolled over; breaking down from previous bearish divergence). The percentage of stocks trading above their respective 50dma has also pulled back to the 50% line. August’s gains featured poor breadth with mega cap tech shares rising big, leaving the smaller issues on the S&P 500 in the dust.

As a result, there was a bearish divergence with SPX making all-time highs while fewer components of the index were in near-term uptrends (as measured by the percent of stocks above the 50dma). Aside from the flash bear market of the COVID crash, the 40-50% line seems to be a point at which the index builds from. Bears will be ready to pounce if more stocks break-down, however. If stocks continue to drift lower, there could be the fewest percentage of stocks trading above the 50dma since April.

Bottom line: It’s not just FAAMG that has pulled back – poor price-action among many sectors and industries has resulted in a decline in the number of equities in uptrends on SPX. Over the last month, just the Materials and Industrials sectors are more than 1% higher while Communications, Information Technology, and Consumer Discretionary are down about 3% with many names breaking below the 50dma.

chart of S&P 500 market breadth

3. A familiar ominous sign in gamma exposure.... Thanks to @MacroCharts for providing us this update on the 21-day gamma exposure of the S&P 500. The market might be at a broad switching point from long gamma to short gamma. There have been two prior instances in the last few years when the 21-day gamma exposure reaching similar levels to right now. Middle 2017 and early 2020 were near-term peaks for the stocks followed by a choppy trading range during the former and a crash for the latter.

MacroCharts highlights a potential target zone off the gamma reversal peak to the zero-line – a level that was eventually hit following the prior peaks. Interestingly, the highest reading ever for the GEX was on August 18, 2020 at 13.5 billion, and it has since moved dropped like a rock to -1.1B on September 17. So the 21-period moving average is set to continue to reverse lower, perhaps with the target zone in sight. Will price follow?

Bottom line: The options market has played a critical role in the movement of equities index this year. The GEX reversal since August is something to pay attention to as prior reversals have led to trouble for the S&P 500. When there are extreme imbalances in options positioning, volatile underlying price action usually occurs – and we have seen that with the VIX trading in the high 20s and 30s over the last month.

4. Similar picture in leveraged ETF trading (ratio of leveraged long vs short ETF volume traded). Not quite in oversold territory yet... Here’s a look from @topdowncharts at leveraged ETF trading – you’ll notice a reversal in leveraged long volume relative to short. While the move does not bring the market to oversold conditions yet, that could be the next stop. Once again, notice the action that took place in late 2018 and early 2020 – major jumps in net volume in leveraged long products followed by sharp reversals lower – accompanied by price action on the S&P 500 (-19% and -34% drawdowns ensued).

There are several of these warning signs and red flags of positioning at the moment as tech shares have slid. There appears to be significant money shifting out of what had been working during Q2 and Q3.

Bottom line: The market has taken a breather at the very least. Options positions have been unwound and leveraged long ETF trading has pulled back. Prices have modestly dropped – the question is, “is this is a healthy pullback to remove some of the frothiness or is there significantly more pain to come?” Do we have to reach significantly oversold conditions to shake out the loose hands in the market?

5. The IPO market is running hot, as evidence in IPO performance: @LarryAdamRJ shows us the state of the IPO market – it’s on fire! The Renaissance IPO Index has sharply outperformed the broader stock market since the March low – and has even climbed in the last several days as the S&P 500 has moved lower. The index ETF (ticker: IPO) simply tracks the performance of recent IPOs.

When scoping out the makeup of 2020 IPOs, you’ll see a clear theme – Information Technology & Health Care. Whenever you are tracking performance, sector bias is one of the first things you should dig through. The growth sectors of tech and health care have been fantastic niches of the market this year. Names like Zoom, Moderna, and Peloton are all up more than 250% this year – each of those names is a top holding in the IPO ETF.

Be on guard though, the Renaissance IPO ETF can go through major periods of pain. It fell nearly 40% from 2015 to early 2016, more than 30% in the back half of 2018, and about 40% once again during the COVID crash. Volatility on the ETF has also averaged more than 22% since the 2013 inception. Heck, in 3 trading days from September 2 to 4 it collapsed more than 15% from intraday peak to trough. Alas, it closed Friday pennies from the high of the week.

Bottom line: Another sign of 2020 – a red hot IPO market in terms of performance following the first day of trading. The Renaissance IPO Index ETF (IPO) has more than doubled from the March low, far outpacing the S&P 500.

chart of IPO index performance vs S&P500

6. (as such) We've seen a surge in IPO filings, which to some degree reflects a scramble to get a piece of the action... Are we surprised by this next chart of US IPO filings? The blue line has more than “V-bottomed” with the 3-month sum of planned filings surging to the highest levels dating back to 2007. IPO withdrawals, which often happen to due ‘market conditions’, has dropped back to near its lows versus history.

Interestingly, the IPO market was quite poor following the US elections of 2016, and since then has finally returned with full-vigor in advance of the 2020 election. But the big driver of the enhanced appetite to go public? See chart 5 above.

Money has been chasing recent IPOs like few other periods in history. Any enterprise that has been considering taking their business private may be getting lured in by recency bias. All of that can change quickly though should volatility and lower equity prices persist. Nothing halts a hot IPO market like a sharp correction or bear market. Layer in policy uncertainty given a possible change in the tax code next year, and the IPO fervor seems to be built on a shaky foundation.

Bottom line: The last three months have seen a rapid uptick in requests for IPO filings while withdrawals are very low. Private firms are looking to take advantage of what has been an impressive performance put on by recent IPOs. The problem is not every company is a Zoom or a Peloton. The work from home and learn from home movement has created new opportunities for niche firms to pounce, but it’s hard to imagine so many companies in that kind of prime position. But you have to get in on the action, right??

US IPO activity

7. All your tech are belong to us: Apple currently has a $1.85 trillion market cap, Microsoft ($1.5T), Amazon ($1.5T), Google aka Alphabet ($990B), Facebook ($720B) – the FAAMG stocks. They are split among three sectors – Information Technology, Communications, and Consumer Discretionary. Together, those three sectors are about half of the total market cap of the S&P 500. The highest since 2000, though off the September 2 highs.

During the oil and emerging market boom of the mid-2000s, the three darling sectors were just 27% of the market as Exxon Mobile was the biggest company in the US and the energy sector had its heyday. We are now 12 years removed from that reversal period of late 2008. Tech dominates. Online shopping, remote-work, and searching random stuff on the internet and social media are the new normal. Many of these stocks are also priced to perfection with P/E ratios north of 30x and P/S ratios between 5x and 10x.

Bottom line: Tech, social media, and online shopping stocks are now about half of the total US stock market. It’s been an incredible ride over the last decade-plus, potentially culminating with the COVID ‘new normal’ of 2020. Is this year the final burst higher for these groups of stocks? Or is it just yet another period that marks the continuation of an evolving theme? The narrative suggests these stocks are here to stay while valuations show they are priced to perfection.

chart of market concentration/ sector weights

8. BIS analysis suggests Fed actions have been responsible for ~50% of the rebound in the S&P500. Thanks to @LizAnnSonders for sharing this view of central bank influence on stock prices around the world. According to a paper from authors at the Bank for International Settlements, the US Federal Reserve is responsible for about 50% of the S&P 500’s recovery and about 1/5th of the Euro Stoxx 50’s rally from the March bottom. This gets into the weeds somewhat quickly, but researchers Fernando Avalos and Dora Xia attempted to decompose recent stock market gains into short-term and long-term components by analyzing dividend futures on the S&P 500 and Euro Stoxx 50.

According to Bloomberg, the analysis concluded that long-term dividend futures contracts have advanced much more than near-term contracts (think of it like long-dated Treasuries moving much higher while short-term T-bills barely advance). With interest rates falling (thanks to the Fed, of course!) the value of long-term dividends has increased in a big way (when you lower the discount rate, the present value rises particularly for high-duration assets). The narrative lends its way into the growth versus value debate – growth stocks have benefitted from lower interest rates since they do not pay near-term dividends to the extent value stocks do. Another impact is real yields that have dipped further into negative territory – helping commodities and gold stocks.

Bottom line: We can thank the global effort of central banks for the stock market rally. Ok, it’s not that simple! But lower interest rates obviously help to increase the present value of all risky assets. Growth stocks benefit the most since their value is seen well into the future as opposed to value stocks that pay out significant dividends in the near-term. Growth stocks are said to have a higher duration than value equities. You can read more about the analysis here.

BIS study on the impact of Fed policy

9. Forward EPS growth coming back from the brink... Q2 earnings season is in our rear-view mirror, and it was a sight to behold. Index earnings dropped more than 30% year over year, but the EPS beat rate was 84% - the best in at least 20 years. In aggregate, S&P 500 earnings verified about 22% better than the forecast (according to FactSet). So things were absolutely awful, but actually not as bad as everyone thought. As a result, the earnings outlook for the S&P 500 has rebounded notably as measured by the Earnings Revision Ratio. The Ratio measures changes in Wall Street analyst opinions on upcoming earnings figures. The ERR recently spiked to the highest reading since 2017 following the US Tax Cuts and Jobs Act passage.

The bottom chart shows the percentage change in forward 12-month S&P 500 earnings, year over year, along with the trailing earning rise or fall from a year ago. Naturally, the forward earnings line follows the trailing (realized) line closely. The realized earnings line usually features a small lag to the forecast, and you’ll notice that the black line has indeed turned higher. S&P 500 trailing 12-month earnings will begin to climb off the Q2 2020 y/y lows.

Bottom line: S&P 500 earnings, driven by tech and health care stocks, are on the rebound following huge year over year losses in Q2. The third quarter earnings season, set to begin in a few weeks, will be another significant decline versus the same quarter a year ago, but it won’t be as negative as Q2. The ERR has moved higher in recent months as firms report ‘less bad’ numbers and analysts grow more optimistic.

chart of forward EPS growth

10. Longer term earnings estimates turning up. One of my own charts, this one shows a long-term earnings growth outlook chart that portfolio managers should pay close attention to. Not everything is short-term. When taking a step back, we find that S&P 500 earnings have bounced from the post-COVID lows. This year’s trough matched the lowly estimates from the Great Recession and post-commodity collapse of 2014-2015.

Interestingly, the earnings growth outlook is nowhere near the levels from the tech bubble and the impulsive optimism following the 2017 Tax Cuts and Jobs Act. It’s hard to say there is a ‘normal’ figure for long-term earnings growth expectations – it can vary wildly depending on market sentiment. The near-term and long-term S&P 500 earnings growth outlook appears to have turned a corner, but the next wildcard will be how analysts respond to potential political changes next year.

Bottom line: It’s healthy to see the short-run and long-run earnings outlook improve – the caveat is that stock prices have already advanced about 50% from the lows, so perhaps much of that optimism is priced-in. In fact, with the S&P trading at a relatively high PE10, earnings better show themselves in the coming years.

chart of longer term earnings estimates

So where does all this leave us?

1. Correction continues.

The S&P 500 has pulled back 8% peak to trough during September so far. QQQ reached a 12% drawdown at the low Friday, settling at the lowest since August 11. The leading stocks during the summer are finally retreating to reality perhaps. As for indicators and levels to watch, the 50-day moving average could be resistance since the S&P 500 settled below it last week. The 3300 line remains a key psychological number. As the pullback continues, fewer stocks are trading above their respective 50dma – just about half of SPX constituents. Options and leveraged ETF trading & positioning has played a role in recent volatility.

2. Investment themes.

IPO performance has been tremendous during the tumultuous year of 2020. Actions often follow price, and we now find a surge in IPO filing requests while IPO withdrawals are very low relative to history. Technology changes and health care advances have helped new players emerge who wish to take their businesses public. Speaking of tech, the broad tech group of stocks – FAAMG – are found split among three sectors. IT, Communications, and Discretionary are now about half of the total S&P 500 market cap, up from 27% in 2008. Naturally, many suggest we are near a top, but the trend persists.

3. Prices & earnings.

Recent research suggests the Fed’s actions to keep interest rates low for a long time have hugely influenced equity prices. Authors at the BIS conclude that central banks' actions may account for about half of the S&P 500’s rally since March. The US market’s growth-orientation has benefitted from lower rates since growth assets are seen as having a higher duration versus value stocks. Meanwhile, earnings outlooks continue to improve ahead of the Q3 earnings season next month.


There’s no lack of interesting themes right now with an apparent correction underway during what is normally a dicey time of the year for equity bulls. The election is less than 50 days off, too. Volatility continues to run above the long-term average. Recent market action has been indicative of rotation at best, and risk-off at worst. Clearly, the meteoric daily rises from the big base in March may be done for now. Knowing the trends and key macro themes are critical to navigating this environment... not to mention a bit of luck! Keep watching the charts, and keep things in perspective.

Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.

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