Weekly S&P 500 #ChartStorm - 26 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. 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.

chart of the S&P500 RSI bearish divergence

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.

chart of S&P 500 bearish breadth divergence

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.

chart shows returns of the S&P 500 vs the S&P 5