Weekly S&P 500 #ChartStorm - 23 Aug 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. Well, it's official now, new closing ATH secured. Here's some interesting stats: the S&P 500 on a YTD basis is now up +5.2%. The drawdown from the 19 Feb close to the 23 March close was -34%, and the rebound so far from the 23 March close to Friday's close is +52%.

Fast and steady wins the race? It’s been a heck of comeback for the S&P 500 from the March 23 bottom as the rally surpassed the 50% threshold in the last several days. Recent gains have been led by some familiar friends – mega-cap tech. FAAMG is on fire. No two ways about it. Apple soared another 5% on Friday alone. A 5% move on the world’s most valuable company was an addition of more than $100 billion in market cap. AAPL is now up nearly 30% since announcing its split back on July 30. We won’t even get started on Tesla’s post-split announcement advance. The fervor is at a fevered-pitch for the FANG+ Index. As for the rest of the S&P 500, trading action is much tamer. Nevertheless, the equal-weight version of the S&P 500 is still chugging along.

The onus is now on the bulls to hold the line with respect to the February 19 closing peak. Seasonality turns sketchy through early October, and that is seen in the S&P 500 volatility index futures curve which suggests slightly higher volatility priced into the market from late September through the third Friday of October. We talked about this last week.

Bottom line: The COVID-crash is in the books. New highs, both on a daily and weekly basis, are etched in stone. Some say a bear market does not officially end until new highs are made. If you were hiding under a rock this year, then simply looked at the S&P 500’s total return of 6.5%, you might say ‘ho-hum’. But what a ride it has been.

chart of YTD performance for the S&P500

2. Here's the 2020 flash-bear vs other 30% declines. Thanks to @HondoTomasz for this look at drawdown recoveries since the 1960s. Blink, and you would’ve (almost) missed it in 2020. It took just over 100 trading days, not even 5 months, to claw back all of the losses during the 5 weeks from February 19 to March 23. Contrast 2020’s "flash bear market" to 2007-2009; the peak was October 2007 near 1570 – that level was not eclipsed until early 2013. We’ve all heard of a ‘flash-crash’, but perhaps we can aptly describe 2020’s craziness as a ‘flash-bear’. While history may rhyme, every bear market is different, too. Who can forget all of the bear market analog charts that were crafted during the height of volatility earlier this year? They proved not so useful.

While the S&P 500 has made it to the promised land of fresh all-time highs, other areas remain significantly below their recent peaks. Small caps, value stocks, foreign equities .. all have work to do. The huge move in large cap US stocks leaves the S&P 500 richly valued with future returns likely below historical norms.

Bottom line: That was fast. It took 6 months for stocks to drop 34% then rally 52% to make new all-time highs. If you want to find similar lightning-fast moves, you have to go back to the post-1929 crash and ensuing volatility. Back then, of course, US large cap stocks did not make new highs until 1954. May you live in interesting times..

chart of historical falls of 30% or more

3. While the S&P500 is making new All-Time Highs, the 52-week New Highs club remains very exclusive. H/t to @McClellanOsc for this chart contrasting new highs on the S&P to the lack of 52-week highs among the broader market’s single issues. Remarkably, last week’s all-time high took place on declining NYSE new highs. Prior breakouts in the S&P coincided with more than 300 NYSE index fresh 52-week highs.

This time around though it is a third of that figure. The 52-week high club is apparently quite hard to get into. Tom also noted that there were occasions during which the S&P did not yet put in a new peak, but NYSE components were breaking through to highs. During such times (early 2019, middle 2019, early 2020, and even early July 2020), SPX went on to further gains. What will come of today’s action (marked in red on the chart)? The lack of participation is concerning – call it a ‘red’ flag.

Bottom line: Bull markets are built on broad participation. It’s troubling when just a handful of names are leading the way. Cracks can lead to crashes (in worst-case scenarios). The bulls want to see smaller names and beaten-down sectors show better signs of life. There was solid rotation from mid-June through early July, but that rotation got stuck in the last few weeks.

chart of market breadth vs S&P500

4. S&P500 Short Interest... extreme low. And where shorts are heroically being placed, it's mostly in Energy stocks (and Real Estate, Utes, Consumer, Financials etc) @Schuldensuehner delivers us this chart from Goldman Sachs displaying 15-year lows in short interest on the median stock in the S&P 500. Investors are shying away from placing short bets on the mega cap names, but are still somewhat active in the beaten-down sectors.

Ironically, the chart did not spike during the flash-bear market earlier this year. The trend has been downward since 2008-2009, though there was a brief spike in early 2016. The stealth global bear market of 2014-2016 hit energy stocks hard with oil falling from above $100 per barrel to under $40; so the bears pounced by shorting some of those names. As the energy sector has gotten smaller and smaller (relative to the S&P 500), there may be less juice left to squeeze out for the shorts. But then again, those Long/Short managers need to find something to take the other leg of their trades.

Bottom line: As the S&P makes fresh all-time highs, short interest continued down, making 15-year lows. The two usually go hand-in-hand. This contrarian indicator could be cause for concern for the bulls.

chart of S&P500 short interest

5. Bye bye Buybacks. Buybacks took a lot of heat during the first half of the year as bailouts were requested by firms who had steadily repurchased shares over the years as a means of juicing EPS for investors. The tax structure makes buybacks more favorable than issuing dividends to shareholders despite a low tax rate on dividends right now. Buybacks are also by their nature more flexible than dividend policy for corporations.

The trend in the last few months is thus not surprising – buybacks have taken a sharp turn lower. Companies are cautious, too. There is high uncertainty regarding if the consumer will take a hit from a possible second wave of COVID-19. And what if Congress doesn’t act with another round of stimulus? Dividends have declined, too. Many firms hit hard by the pandemic’s effects were forced to cut dividends to shore up capital. The ironic thing is stock prices have shot higher. Total shareholder yield has likely dipped significantly from the past few years’ average.

But take a look at the 2007-2009 period. A similar event took place with share repurchases moving down big and the dollar amount of dividends turning lower. The market obvious