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. S&P500 Bearish RSI Divergence. (higher high on the index vs lower high on the RSI). Momentum turns before price. Right now, momentum on large cap US stocks is not that great, although it is still within the bullish 40 to 90 zone. The problem is the index made new highs last week, climbing above the June 8 peak, while the traditional RSI (14) momentum indicator put in a lower peak.
Take a look at what happened earlier this year when we had a similar price & momentum event – it wasn’t pretty. What’s more, there was actually bullish RSI divergence at the March 23 low on the SPX. The momentum indicator made a very deep low in late February, then prices finally bottomed about 4 weeks later on slightly less bad RSI.
So this is an important reversal feature to be mindful of. Certainly prices can resolve to the upside and wipe-out bears’ negative divergence hopes, but for now, it’s certainly a risk short-term flag.
Bottom line: The S&P 500 reversed course late last week, and it coincided with a bearish divergence between prices and momentum. The bears may have the upper hand when it comes to the US large cap index, dominated by the big 5 tech/comm names (at least it feels that way sometimes). Nevertheless, the all-time highs are in sight for the bulls, just a few small percentage points above the current 3215 level.
2. S&P500 Bearish Breadth Divergence. (higher high on the index vs lower high in the indicator) (also worth noting: half the market remains below their respective 200dma aka in a downtrend). Once again, a lower high on the indicator and a higher peak on price: aka bearish divergence. The percent of S&P 500 stocks trading above their respective 200-day moving average is only about 50% - the narrative of a handful of huge companies driving prices higher is true for SPX right now as many stocks are still in downtrends or simply trading sideways.
The June 8 spike was interesting in that small companies were almost in melt-up mode, so the participation was quite strong across the broad market, but it may not have been the healthiest of moves given then how stretched many stocks got. Equity indices pulled back during June as large cap growth and small cap value (the two extreme styles of the market right now) took turns leading the total market.
Once again, take a look back to Q1 – a higher high on SPX (all-time highs) and a lower high in the percent of stocks above their 200-day. The market could be rhyming a bit here.
Bottom line: This is another near-term risk flag for large caps. Participation needs to improve if the bulls want to take a trip back up to the all-time highs.
OK, just a quick note on the last 2 charts: Bearish breadth divergences can and do sometimes resolve in a benign fashion. But it's pretty clear cut and plain to see.
Certainly a short-term risk flag to be mindful of.
3. The S&P 500 vs the S&P 5. @SamRo & @jfahmy delivered us this chart from Goldman Sachs Global Investment Research. A picture tells a thousand words here, but I’ll still do my best. For all those clamoring about how absurd it seems that the stock market is doing so well while the economy is in shambles can simply take a look at what is going on just underneath the equity market’s surface.
FAAMG (Facebook, Amazon, Apple, Microsoft, Google) is up 35% YTD while ‘the rest’ is down 5% on a total return basis. Dig into small caps and value stocks this year, and the damage is worse. The narrative actually makes some sense.. less brick & mortar business due to social distancing, lockdowns and work-from-home, so the big tech companies with strong online strategies were able to take advantage. Not to mention these mega cap growth stocks have relatively sound balance sheets.
Back to the chart – FAAMG has easily taken out its February high. Onward and upward? The S&P 495, however, still has about another 10% to go reclaim its glory. While there isn’t technically an “S&P 5” index to buy, I’ve seen commercials actually offering a product like that via ‘stock slices’. Just an interesting sentiment indicator out there.
Bottom line: Participation remains not ideal for a sustained bullish move in equities, it would seem. Then again, the market has been generally creeping higher in the last two years due to the biggest of big stocks.
4. New economy vs old economy... "It's Different This Time". @jeffweniger puts Information Technology into perspective with this chart of the S&P 500 Tech sector as a percent of four other sectors combined – Financials, Industrials, Energy, Materials. Like 1999-2000, IT is bigger than the four ‘old economy’ sectors. Call it the new economy versus the old economy.
Bulls will argue that today’s tech firms are more mature with better balance sheets and strong earnings relative to some of the non-sense witnessed during the late 1990s Dot-Com Bubble. But the charts don’t lie. Here we are back to an ultra-high share of technology sector market cap. It wasn’t all that long ago that the ratio was much lower – near 50-70% during the mid-2010s. Has THAT much changed in just a few short years? Could a rotation be on the way? It’s kind of the age-old question of a new market regime versus mean-reversion.
Bottom line: Technology stocks are dominating just like they were in the late 1990s. That’s not to suggest that a massive bubble is ongoing, but it’s yet another risk flag at the very least. There are plenty of reasonable explanations for tech’s stellar run, but we also acknowledge valuations on mega cap growth names have gotten stretched and could portend weak returns looking forward.
5. The story of big tech vs energy & financials is basically the story of "value" vs "growth". From what I've looked at I can say there is definitely a valuation case in favor of the latter vs the former (but...) Thanks to @chigrl for this chart highlighting FAAMG in more detail. J.P. Morgan crafted this look at “Big Tech” which contains stocks from three sectors (Communications - Google & Facebook; Consumer Discretionary - Amazon).
The chart displays various sectors’ share of total S&P 500 market cap. Big Tech in orange has surged while the old economy sectors of Energy & Financials has fallen off. This data aligns with the growth versus value debate. Notice, once again, how we had similar moves take place in the late 90s with Tech on the rise and Energy+Financials declining. What’s neat about JPM’s chart is that recessions are shown – often occurring shortly after a major run-up in a particular sector or two.
We had our recession (for about a month) earlier this year. Could more trouble be on the way to level the playing field? Is there a case to be made for re-allocating toward the beaten-down value sectors and booking profits in the hot Big Tech stocks?
Bottom line: Big Tech is bigger than ever. We trade in a market where individual companies are valued more than entire sectors. It’s so easy to make the valuation case for value stocks relative to growth right now, but momentum is tough to fight.
6. Back on the "S&P 5" -- very interesting chart... "different this time" ? Hat tip to @sentimentrader. The big 5 stocks not only command a huge market share, but the rate of their advance has been astounding. Not even the Dot-Com Bubble featured a faster climb in terms of market share gains. It’s interesting that the bull market from early 2009 through the 2016 election was marked by a more balanced market – sure the Technology sector did very well even then, but the biggest of the big was still.. not all that big. 2017 was the beginning of the mega cap dominance, and the most recent 12 months have almost been like a melt up for the big 5 relative to the S&P 495.
Bottom line: Another risk flag indicating the biggest stocks in the S&P 500 are perhaps leading all too well. It’s good to have the leaders leading, but at some point, we hope to see broader participation.
7. It is interesting to see ETF flows have been significantly skewed to fixed income, and where it's equities it's sector specific (i.e. tech)... but then again perhaps this is not surprising when you think about the S&P5 vs the S&P500. Stocks have rebounded sharply in the last four months, but fund flows are now in favor of fixed income. @benbreitholtz provides this chart of from Arbor Research & Trading showcasing how money has been moving into assets like precious metals & corporate bonds, and not so much into stocks and treasuries.
In some ways, it’s defensive in nature. Investors aren’t enamored with the paltry yields on treasury bills, notes & bonds right now, yet they don’t want to pour new money into stocks at these levels. Maybe they see US corporate bonds, which also trade with historically low yields, as ‘safe enough’. High yields bonds have also seen a recovery - investors could be stretching for yield a little too much here as the Fed has taken rates to zero once again. We have all seen the move in the precious metal space – flows have been heavy & steady into silver & gold for the last few months, too.
Bottom line: ETF flows have been growing increasingly in favor of the fixed income space versus the broad stock market. Digging deeper, US corporate bonds have gotten the most attention – both for investment grade and for the junk.
8. Today’s normalized P/E ratio of 23x suggests a 10-year forward return of 2%-3% (to be clear, this chart deals with the longer-term outlook, and anything can happen short-term). @mark_ungewitter posted a great look at forward return expectations based on today’s valuation. Using history as a guide, we find that today’s P/E suggests very poor returns looking ahead 10 years.
This aligns with our general capital market return assumption analysis. We are more in favor of international equities and other niche asset classes than US large cap stocks. To put it in perspective, an annualized return of 2-3% is barely above US inflation expectations. And notice the correlation coefficient at negative 0.76 – that is a solid “R”, suggesting there is a decent relationship in long-run returns to starting valuation. The correlation drops hard when projecting returns just a few years though.
Another interesting facet to this chart is how few blue dots there are beyond the 20x PE level. While valuations are very high, there are also few instances from which we can draw historical comparisons.
Bottom line: Longer-term investors and portfolio managers must recognize that US large cap equities have been about the best game in town over the last 10 years. The next 10 years could be a different story when analyzing history.
9. But then again (aside from global), what's the alternative... A record 77% of S&P 500 stocks pay higher dividends vs the yield on Treasuries. Turning to fixed income & the interest rate environment, @lisaabramowicz1 brings us this look from Bank of America Research showcasing how the vast majority of S&P 500 stocks now pay a bigger dividend yield than the rate on the 10-year US Treasury note.
We’ve seen low-rate periods before – during the Great Financial Crisis, around the autumn 2011 European debt crisis, following the oil shock & global recession of 2015-2016, but COVID-19 did those tough times one better. Nearly 80% of SPX stocks now pay more than a 10-year note. Of course, it is not apples-to-apples; a stock’s dividend is not a sure thing while an interest payment from Uncle Sam is as close to sure as we can get in the investment world.
BofA titles the chart with a familiar phrase of the last 10 years – There is no alternative, or TINA. It’s a tough environment for fixed income investors & retirees who are faced with bonds that have negative real yields. Many elect to take on higher risk in the equity space. It’s important to have the best research and portfolio management to navigate an environment like this one.
Something else to consider – stock buybacks could be on the decline in the years ahead - given the scrutiny many companies faced earlier this year as they levered-up, then asked for a bailout. That could mean shareholder accretive activities may shift from buyback programs to paying out dividends. So this chart could go even higher.
Bottom line: The COVID-19 crisis only furthered the trend of lower interest rates on safe-haven assets like Treasuries. The anti-buyback sentiment seen this year may be playing a role as well. While stocks are historically expensive on a normalized P/E basis, Treasuries don’t offer an attractive alternative.
10. "the NYSE High-Low Index reached a 100 this week as no stocks on the index are at their low." Looks like something you see at the start of cyclical bull markets, not the end... @AndrewThrasher identified a rare event – no stocks on the New York Stock Exchange index are at a 52-week low as measured by StockCharts’ NYSE High-Low Index. This indicator rarely hits the 100 mark since there is a smoothing mechanism used in the formula. It goes to show how swift, sharp & vast the recovery has been since March 23. While not all stocks have participated to the tune of the best performers, every component is at least off its low. So the tide is rising – it’s more characteristic of the start of a broad uptrend than a dead-cat bounce.
Take a look at times when the index neared 100 in the past – the early 2000s, early 2010s, late 2016 – all three of these times marked beginnings of strong bull markets for the S&P 500. This time, stocks have already rallied 50% off the low. It’s difficult to say how much of the ‘easy money has been made’, but the washout of March 2020, a time in which the NYHILO neared 0, could have set the stage for a long-term run up. Call it a ray of hope after all of the risk flags we raised earlier!
Bottom line: Many 52-week highs, few 52-week lows over the last 10 trading days per the NYSE High-Low Index. While a significant number of S&P 500 components are below their 200-day moving averages, very few are near their recent lows. All boats have been lifted in the last 4 months.
So where does all this leave us?
1. A check on the markets.
The stock market has been moving & shaking over the last month and a half. An interesting peak was made on June 8 after a small-cap melt-up, then some bouts of volatility appeared in June. Large cap growth, which dominates the S&P 500, had strong runs at times while small cap value also performed well during mega cap tech’s off-weeks. The two styles have tag-teamed while the broad equity market advanced despite some weakness late last week. The VIX settled back into the 20s, still above the long-term average. International stocks have kept pace nicely given a falling US Dollar Index. Along with a weak Greenback, precious metals have surged. For fixed income, the interest rate on the 10-year Treasury note continues to hang near the lows, under 60 basis points. For the S&P 500, beware of the risks…
2. Short-term risk flags.
We laid out a couple of warnings signs for large cap US stocks. The classic bearish momentum divergence has reared its head once again with the RSI not confirming the new high on SPX. We don’t have to look back too far to find the most recent occurrence. Another bearish feature is how few S&P 500 components currently trade above their respective 200-day moving average. Participation needs to improve if the bulls want to eclipse the February peak any time soon. All of this plays into the narrative of just a handful of stocks driving the market higher – how long can that keep up? Big Tech commands a huge market cap relative to ‘the rest’ or the ‘S&P 495’, and the rate of growth just over the last year has been concerningly epic. With all of this going on, ETF flows have been in favor of corporate bonds – maybe investors are growing skeptical already? To that point, current valuations are stretched, and poor returns are usually the result of the ensuing 10 years when that has happened before. So where can we turn? Not to Treasuries given how low the current yield is – an investor is forced to take on credit risk to capture a higher yield.
3. A ray of sunshine to end on.
That’s a lot of red flags to digest! How about some good news? There are no stocks sitting at 52-week lows right now. This rare event suggests a longer-term bull market could be underway if past episodes are anything to go by. More stocks are advancing than at virtually any other time in the last 30 years. The slate may have been cleaned in March. The bulls look ahead to more gains.
Summary
The S&P 500 has been resilient in the face of tough headlines and criticism of FAAMG’s role in the bull market. US economic data and corporate earnings have been a bright spot of late, at least versus expectations. Soon, traders will look for another catalyst if new highs are to be made in the near-term. Many risk flags and caution signals exist. On top of that, seasonality turns tougher in Aug/Sep – not to mention more headline-risk as the US general election nears and geopolitical tensions reach a boiling point on several fronts. After a major equity market advance since March, I am paying particular attention to potential rotation, risk management, and keeping things in perspective with regards to managing the different time frames.
See also: Weekly S&P500 #ChartStorm - 20 July 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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