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. FINRA Margin Debt (used to be called NYSE Margin Debt) - back towards the highs.. Much has been made of the Robinhood Trader in 2020, drawing concerns about an overvalued and frothy stock market. Another question to posit is, “What are bigger traders doing?”. Well, first up this week is a look at margin debt. It is thought that more sophisticated traders leverage their accounts with a debit balance, hoping to score big gains (typically from the long side).
Some technicians consider margin debt to actually be a smart money indicator, meaning it is bullish as it breaks to new highs, but by simply looking at history, you can be your own technician and see that peaks in margin debt often coincide with peaks in the stock market. The chart below from Topdowncharts.com goes back to the late 1990s – the three market peaks are evident (though early 2020 did not set a new record high margin debt figure) while lows in margin debt happen at stock market bottoms. We find ourselves today venturing back toward the 2018 peak as traders turn more optimistic.
What’s interesting about the latest move is that it comes during a period of heightened volatility. The VIX has averaged nearly 30 this year, which would make 2020 the third most volatile year since 1990 (next to 2008 and 2009). A rule of thumb in the trading community is to limit your position size when volatility turns up, but that doesn’t appear to be happening. A common ‘but actually..’ response to this chart is to adjust it for market cap gains over the decades – we’ll analyze that in chart 2.
Bottom line: Traders are leveraging up their accounts the most since 2018 as the 2020 stock market continues to generally grind higher. We now see a little more participation from small caps, and even non-US stocks are hanging in there. Volatility is still elevated, so a quick move lower could shake out these leveraged long positioned traders.
2. And here's price-adjusted growth of margin debt... After a period of deleveraging, traders are piling back in. @topdowncharts brings us this chart of margin debt growth minus the S&P 500’s performance on a 1-year rolling basis, along with the S&P 500 in black. For those clamoring about how bearish it is that margin debt is spiking, well this one may cause them to hold their horses.
Things are not as frothy as they may have appeared. The rally in the stock market has been exceptional in the last several years while margin debt growth has been lackluster. What jumps out on the chart are the huge spikes in the red line during 1999-2000 and 2007. Bear in mind that the S&P 500 was rallying during those periods as well, so the growth in margin debt was explosive then. We aren’t seeing that now.
Equities are rallying without a ton of help from leveraged long traders. In fact, the 2018 to early 2020 period saw some of the biggest relative declines in margin debt versus S&P 500’s growth. That brings us to today. After two years of unwinding leveraged positions, traders have turned more aggressive. The red line has crossed back above 0% - meaning margin debt has grown more than the S&P 500 in the last year. Call it normalization after the COVID-crash storm maybe, but it should also be a warning sign of some complacency.
Bottom line: Sophisticated traders (who knows how sophisticated they actually are..) are turning more bullish as evidenced by the year-on-year growth in margin debt versus the S&P 500’s return. It is by no means a bubble environment, but deleveraging may be over for now.
3. Similarly, hedge funds seem to be "all-in" on equities. @MacroCharts gives us a different view, but a similar conclusion – leverage is on the upswing once again. Hedge fund gross and net leverage has surged to the highest levels in several years. Low borrowing rates and better access to capital now versus earlier this year may be aiding hedge funds’ ability to juice-up their accounts. It’s fascinating to analyze various groups of traders and investors regarding their sentiment and positioning.
While some indicators point to ho-hum sentiment and with retail cash holdings being elevated, bigger traders (i.e. hedge funds in the below chart) are positioned hyper-aggressively. We mentioned volatility earlier – if another correction is on the horizon, the move could be hard & fast given hedge fund allocations right now. Then again, maybe these hedge funds are also doing a little performance chasing into year-end after a tumultuous year.
Bottom line: Brokerage accounts and hedge funds have turned much more aggressive in the last several months as optimism cascades across the financial markets following the massive February-March bear market. Portfolio managers should be on-guard regarding this uptick in frothiness among some investor groups.
4. Interesting take on election cycle stock market performance... Note the top and bottom lines. @MikeZaccardi grabbed this chart from Bank of America Global Research displaying the elephant (or donkey) in the room – the election. Twitter traders have been shown many angles on returns around a US presidential election in the last several months, but perhaps this is a new spin on it. This chart has an impressive history – nearly 150 years of data.
We are looking at S&P 500 (composite) returns under various party-to-party changes (or continuations). For example, in 2016 the regime went from Democrat to Republican – which is the dark blue line. The betting markets indicate there is a ~65% chance 2020-2024 will be in the ‘Republican to Democrat’ group.
How has that transition played out in terms of S&P 500 returns from December following the election to December of year 4 of the POTUS’s term? Actually quite strong – the gold line averages a 4-year total return of more than 30%. The bearish scenario (the bottom dashed line) is when a Republican term follows a Republican term (think 2008!). You can slice and dice these election charts any way you want, and while the election cycle has proven to be a rather decent indicator, other macro trends are usually driving price action more strongly.
Bottom line: History suggests a bullish outcome if Joe Biden, the Democrat, wins on November 3. The change from a Republican POTUS to a Democrat has been bullish since 1872. If the past is a guide, a 2nd term for Donald Trump could spell weak stock market returns and volatility through 2024.
5. Bye bye buy backs. Authorizations down -66% vs last year.. @ISABELNET_SA delivers us a telling chart of buy backs in 2020. Share repurchase authorizations are down huge versus the surge in 2018 and 2020. This year ranks with the post-GFC period among the lightest buyback years since the early 2000s.
The optics of corporate managers using cash (or debt) to repurchase stock is particularly poor right now given the need for massive fiscal stimulus and even bailouts. Many Consumer Discretionary industries are on the brink of ruin if they do not receive more federal assistance. Among the last things on the minds of airline executives is to reduce their share count.
The recent BAML Fund Manager Survey revealed that investment managers have little interest in seeing companies use cash to buy back stock – rather, they want to see capital used to bolster balance sheets and compensate employees more. But this is all par for the course following a bear market.. recency bias kicks in, and virtually all stakeholders demand cash be used in a more defensive manner versus aggressively repurchasing stock.
Bottom line: It took a few years following the GFC for share repurchases to turn significantly higher. Confidence in the economy and public relations play a big role in corporate decision-making on uses of cash. Despite record low interest rates, firms have significantly reduced the game of issuing debt to buy back stock this year.
6. Relative performance of S&P500 Buyback Index shows market may have already priced-in the lack of buybacks. The ‘buy back’ factor has been on the decline for all of 2020. The market has discounted the lack of share repurchases by selling equities that have engaged in the biggest buy backs over the years. This is a relative chart, meaning the buy back factor is compared to returns on the S&P 500, but the comparative loss is startling.
The group of stocks has now underperformed the S&P 500 for nearly 10 years. It seems like just yesterday that there was this warning-flag narrative of how the stock market would crash if buybacks were halted. Perhaps that turned out to be true for a short period earlier this year, but since March 23, clearly the stock market can rally without massive buybacks. Of course, maybe the Fed has played that role this year.
Bottom line: As buy backs have ground to a halt, the performance of stocks that typically engage in hefty share repurchases has soured. The ‘buy back’ factor, which was respectable from 2012 through 2019, has been terrible in 2020.
7. Proportion of stocks beating the S&P500 over a 12-month window.... clearly this is a lop-sided market. @KailashConcepts turns our attention to the percent of stocks beating the S&P 500 in the last year. We have written on the “S&P 5” several times this year, and this chart drives home the point that the market has been led by a handful of mega cap winners. Mid caps and small caps (not to mention foreign stocks) have been left in the dust. The corresponding narrative is that value stocks have also been left for dead as the group of winners has been in the growth space.
This chart shows that only two other points in time featured fewer equities beating the S&P 500 over a 1-year period – 1973 and 2000. Both times were not great opportunities to be long large cap US equities. The good news is that there has recently been an uptick in stocks advancing with small caps rising, too. But we’ve seen this before – just when everyone gets their hopes up for a broadening-out of the rally, FAAMG surges to new all-time highs once again (and the market grows more concentrated).
The story does not end there, however. It today is like the past, the next few years could see a reversal. Notice how both historical instances of weak breadth then led to jumps in the percent of stocks beating the market. Are we on the precipice of a small cap rebound? It’s a leading question many have been asking for a while now.
Bottom line: The market rally in the last year has been very top-heavy and confined to mega cap growth stocks. FAAMG has surged and thrived through the pandemic as small stocks have struggled to stay in business. The result is a relatively concentrated market, but a turning point could be developing.
8. Winningest winners... "market cap of the FAANMG stocks now exceeds that of the 7 largest European countries COMBINED" @VincentDeluard puts in perspective the sharp rise of FAANMG. The group of six mega cap US growth stocks is now worth more than much of developed Europe. It was a different era in the mid-2000s when commodity prices were surging, emerging markets were the hot trade, the US Dollar was on the decline, and even European equities were strong.
It was a great time to be a diversified global investor. Not so much anymore. Holding anything but mega cap US tech-oriented firms has probably produced weak performance versus the S&P 500. The ex-USA markets are composed of more value-oriented industries (though some of the biggest emerging market stocks are now Info Tech/consumer plays).
But sticking with the chart, it’s remarkable that the European Bourses (whole indices) may now be less important than the US Tech Horsemen (single stocks). It’s been a secular bear market for Europe since the 2007 peak while FAANMG has returned about 20% a year since the mid-2000s.
Bottom line: We all know that US tech has done the best over the last decade, but charts like this put in perspective the success of a handful of companies, perhaps at the expense of other regions. Europe has been a lousy place to invest since the high-times of the mid-2000s. The major indices like the DAX, FTSE 100, and CAC 40, once stalwarts on the world stage, are now valued at mere fractions of the biggest US companies.
9. Rubber futures vs S&P500 Due for a bounce? @the_chart_life takes us down the road of rubber futures. Yes, the pun opportunities are plentiful. I’ll try to keep my cool. For futures traders, this is one to watch as a breakout appears to be taking place. Ian McMillan’s chart shows that the continuous prompt-month of rubber futures has moved up big in the last few months, but maybe more importantly, the RSI (14) has been trending higher since late 2015. Constance Brown is one of the RSI gurus, and she proclaims that the bullish zone on the RSI is between 40 and 90 – sharp upside moves in the RSI should not be dismissed as an ‘overbought’ reading, but rather as often coinciding with bullish price trends. A bullish divergence has been coiling up for years now.
Rubber futures peaked in 2011 shortly before the European Debt Crisis, and like virtually all other non-precious metal commodities, it’s been a tough slog since. Commodities as a whole are up sharply from their 2020 lows, but still have a way to go to fix so many of the broken charts in the space. We believe commodities are an attractive area in the next 5-10 years given the early stage rebound seen this year after a decade of underperformance.
Bottom line: Momentum often turns before price, and that is playing out in the chart of rubber futures. The RSI (14) has turned sharply positive after trending higher in the last few years while price has declined. This bullish divergence is now proving itself with the prompt-month of rubber snapping back to 1-year highs.
10. It's a competitive game, and not all are created equal... "Over the 10yr period ending in June, nearly *40%* of US equity mutual funds failed to survive." @ToddCFRA via @NateGeraci wrap up this week’s ChartStorm with data from the latest SPIVA scorecard. A whopping 40% of US equity mutual funds either merged or closed outright over the last 10 years – and this in a bull market (sans a few hiccups – Q3 2011, Q4 2018, Q1 2020). It’s a tough and competitive environment for long-only mutual fund managers.
Not only are there nearly 200,000 CFA charter holders around the world, but money is also feeling the equity fund universe. That’s a tough combination for even good funds to stay on top and thriving. Survivorship bias used to be confined to the hedge fund space, but now it’s a legitimate issue in the mutual fund world. Advisors and 401(k) representatives like to tout how they have hand-picked the best funds, but that can be a deceptive measure as the worst performing funds are simply gone. Portfolio managers and traders need independent macro research now more than ever – Topdowncharts provides that each day to our clients. Relying on the old methods of research and stock-picking just doesn’t cut it anymore.
Bottom line: Do you own a great performing equity mutual fund? If you do, maybe it’s just due to survivorship as so many US equity funds have been forced to merge or shutter due to poor performance or simply a lack of flows (likely both) in the last decade. The trend of fund manager attrition shows no signs of stopping.
So where does all this leave us?
1. Margin debt & leverage.
While cash balances in retail investor accounts are still elevated, sentiment and positioning have turned more frothy among big traders and hedge funds (but then again maybe they're right?). Margin debt in investor brokerage accounts (often used by more sophisticated traders) has jumped sharply in the last several months while leverage used in the hedge fund space is at multi-year highs; there is a risk-on appetite among some big money. An unexpected event outcome soon (gee, what could that be?) could violently shake out these leveraged long positions. Still, margin debt’s latest increase simply reverses a bearish trend of the last few years, and as a percent of market cap, it’s still below levels of prior years.
2. Lopsided markets.
2020 has produced some incredible charts displaying a trend that has been 10+ years in the making – the dominance of mega cap growth stocks. From the “S&P 5” composing a quarter of the S&P 500’s total market cap to Apple being worth 3x the entire energy sector, the makeup of today’s stock market is about a 180 from 15 years ago (which freaks out a lot of investors). The latest feature is that six US tech-oriented growth stocks are now collectively bigger than just about all of the largest developed Europe indices. In the vein of concentration, fewer stocks are now beating the S&P 500 than at almost any other time. Only 1973 and early 2000 featured breadth so poor over a 1-year interval as that of today. Is it finally time for mid caps and small caps to start winning?
3. Buybacks, rubber futures, fund managers and oh yeah.. the election.
One of the themes of 2020 is the sharp decline in stock buybacks. What used to be seen as a buttress to the stock market’s ascent is now rarely discussed. The priority among corporate executives and fund managers is to shore up balance sheets to stay solvent rather than use cash to reduce the share count to boost EPS. It could be years before buybacks boom again. As the appetite for buybacks has changed, other themes have stayed the same. It’s been a tough 10 years in the mutual fund space with 40% of US equity funds ceasing. Perhaps investors are better served by doing their own analysis and becoming futures traders…the chart of rubber futures could portend strength in commodities in the years ahead. Finally, more near-term, the election is (finally) on our doorstep. A Democratic win could be a bullish outcome according to the historical trend.
Summary
It’s been a somewhat quiet couple of weeks for stocks ahead of the November 3 election, with stalemate being the operative word. The S&P is about unchanged in the last 10 trading days with last week featuring just a 0.5% decline. It’s given us a chance to step back and dive deeper into other macro themes. For those seeking levels to watch, the 3550-3600 all-time high range is a few percent to the upside while 3400 and 3200 may be levels of support. A VIX near 30 suggests more day to day volatility. Institutional positioning and the initial macro/market moves point to a potentially very interesting few weeks ahead...
See also: Weekly S&P500 #ChartStorm - 18 Oct 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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