Weekly S&P 500 #ChartStorm - 27 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 3200 floor is in place, for now... The S&P 500 fell 0.6% last week as large cap growth made a relative comeback. Small caps and foreign stocks underperformed. 3200 held for now, but the bulls want to see 3300 reclaimed before too long. 3200 is key because it was about the high from early June and was then a battle zone during July before August’s massive melt-up in large caps.
Below the 3298 closing level we’ll find the rising 200 day moving average at 3107 which should provide some long-term support. SPX briefly dipped into correction territory intraday last week, but a relief rally on Friday kept it from happening on a weekly closing basis. The weakest links this month have been technology (XLK) and energy shares (XLE) while Utilities (XLU) are near the flat line.
The momentum indicator on the top of the chart, RSI (14), continues to barely hang in the bullish zone between 40 and 90, but things are getting precarious – watch out for a break above 50 for a possible confirmation of an S&P 500 rally.
Bottom line: Stocks have continued to lose ground during what is notoriously a tough month. The peak near 3600 back on September 2 seems like ages ago as volatility runs high. With a VIX near 30, implied daily moves are on the order of 2% up or down, and we have been seeing that. 3200 may be the line in the sand. Last week’s high just above 3300 is likely a resistance level.
2. The $VIX futures curve indicator went slightly oversold and then turned up. Now looks like bullish divergence... After getting beat up so far in September, the bulls have a few indicators to look towards for a possible turning point in stocks. One such indicator is the bullish divergence found between price action on the S&P 500 and the ratio of 3-month VIX futures to the prompt-month.
We looked at this 1-year chart, and found two recent examples of similar divergences – both represented good long entry points into equities. The first instance occurred during the COVID flash bear market bottom when SPX dipped to near 2200 – the ratio of VXV to VIX did not confirm a new low – hence the bullish reversal indicator. The same pattern took place in June. It’s almost hard to recall how volatile June was; June 11 was a 6% distribution day for SPY while small caps fell even further. The VIX soared almost 50% that day alone ... rising from 28 to 41.
This time around, the VIX futures curve may be telling us the selling is overdone for the moment. We have not seen short-term VIX futures shoot higher during this correction; the CBOE VIX has ranged from about 25 to 40 while 3-month volatility (VXV) has a similar range. The VIX settled not far from multi-week lows on Friday – near 26.
Bottom line: While SPX is 8% off its high, the VIX rests not far from the lowest level since August. The VIX futures curve remains suggestive of a little more volatility during October through early November – the November futures contract is near 33%. The key point for traders is that a bullish divergence may be underway with SPX ticking to recent lows while the VIX futures curve indicator has not confirmed another low.
3. The "HY Bond McClellan Oscillator" is also looking very oversold - but as McClellan himself points out, you ideally want to see a bullish divergence establish for a more robust market bottom. Thanks to @McClellanOsc for providing us this chart of the S&P 500 price in black and junk bonds’ ratio-adjusted McClellan A-D Oscillator in red.
Unfortunately for the bulls, there’s no bullish divergence here. Taking you back to technical analysis 101, the McClellan Oscillator analyzes the breadth of a market – comparing advancing to declining issues using smoothing lines to get a gauge of market trends and momentum. During the September S&P 500 swoon, the high yield corporate bond market has seen money continue to exit, leading to the lowest print on the oscillator since April. This is great news for the bears as it shows momentum in the risky part of the bond market is awful. Bulls want to see an upward turn in the red line before jumping back into equities.
Bottom line: While the VIX futures curve shows a divergence to declining stock prices, the high yield bond market offers no such glimmer of hope. Breadth & price action in the junk bond space continues to be poor this month. They say the smart money (less dumb?) is found in the credit world, so perhaps we should monitor the McClellan Oscillator in the high-yield fixed income space for clues on where SPX is headed.
4. Also, as @thedogchart points out, the 50-day moving average breadth indicator for the S&P500 has dropped down to oversold levels... Let’s revisit a chart we have been eyeing this year – the S&P 500 price versus the percent of components above their respective 50-day moving average. The closing low on Thursday last week brought the percent of stocks in near-term uptrends to near 25%, almost 2% standard deviations below the mean of the last 5 years.
While it may be an oversold level, we have seen many instances of similar poor breadth readings since late 2015 – and it could always go lower. From a risk management perspective, a move from 25% of equities above the 50dma to the 10-15% rage would imply a rather substantial move lower in stocks. Nevertheless, with many stocks having been chopped from their August and early September peaks, perhaps some nibbling around 3200-3300 could make sense. Is this the 10% correction many have been looking for? Or is Mr. Market going to slaughter those last remaining stocks moving higher?
Bottom line: The percentage of S&P 500 members above their respective 50dma has dropped to the lowest level since the spring as a multi-week correction persists. Friday’s rally only brought the percentage back to 33%, significantly below the 5-year mean of 57%. The small cap rally earlier this year took the green line above 90% and the August large cap advance featured 80% of index members in uptrends, but September has been a different story.
5. Making yet another appearance courtesy of @MacroCharts -- the Daily Sentiment Index is beginning to look oversold (albeit it lacks the outright capitulation seen at previous major market bottoms). Let’s check in on another one of our favorite charts – the Daily Sentiment Index that MacroCharts provides. In general, moves above 90% on the DSI are indicative of an overbought market while readings of 10% or lower show a near-term bottom may be forming.
What do we see right now? While the moving average in red is coming off its high, daily readings have moved below 50. There could be still room to move further lower, but it should be noted that there have been several pullbacks in the last few years during which equities dipped, but the DSI only fell to the 40-50 range (almost like the bullish zone in the RSI (14)). The corrections in 2017 and 2018, along with the flash COVID bear market, of course saw readings much lower. In general though, most corrections tend to dip further than 40-50. The question MacroCharts poses is – where do we go from here? Is the 40-50 range going to hold or have we booked a trip back down to the DSI prints of March?
Bottom line: MacroCharts notes that most corrections see the DSI move significantly lower than the 40-50 range, so our current 8% pullback continues to be unusual. It might suggest there is more downside risk to come. Still, the DSI looks like it’s showing signs of becoming oversold.
6. Speculative futures positioning has taken a lurch to the net-short side over the last couple weeks. We feature this view of net speculative positioning from ourselves: @topdowncharts. Price is in black while the aggregated futures position among speculative traders in red has moved to the short side. Interestingly, the latest weekly reading is close to the low from earlier this year during the extreme volatility of March.
Futures traders never really turned all that bullish during the spring and summer rally. While retail options traders are in a speculative mania, the spectrum of the futures market is not so excited. It’s interesting to analyze the past on this indicator. The weekly low in stocks during March 2020 was followed by the peak of bearish speculative positioning. And the same pattern happened during the Q4 2018 19% near-bear market. While the most recent two spikes lower in stocks were followed by lows in spec futures positioning, prior pullbacks from the mid-2000s to the mid-2010s are a mixed bag on the sequencing.
Bottom line: Futures traders, often seen as a smart-money group, have actually lagged the market during the most recent two big S&P 500 declines. And they just recently have become net-short, not far from the position from the spring. Frothiness is not apparent in the futures arena like it is in the retail options space.
7. Traders at IG Markets look to be buying the dip... or at least taking profits on shorts into the dip. H/t to @MBForex for this view of trader positioning on the S& 500. The latest move indicates traders are booking some gains from the short-side recently. The 6-month chart below shows the highest reading net long traders since late March – above levels from June when stocks took a turn lower, but the red indicator line continues to creep higher.
Digging into the broader IG report, we find the most bullish positioning is in the crypto-currency space with Ripple & Litcoin leading the way in positive positioning among specs. The most bearish most short trades right now are on the New Zealand Dollar versus the USD and on the Euro versus the British Pound. For the S&P 500 though, sentiment is inching up from a high net bearish position that was seen during the summer highs to a near-neutral reading – similar to what happened at the June dip.
Bottom line: Analyzing changes in futures positioning is not a simple process – you must weigh the latest readings on net positioning versus market prices and look at the rate of change of positioning. For now, the speculative futures market appears to be moving more favor of a near-term bottom approaching in stocks, but without a bullish divergence at this time.
8. Strictly speaking, this is a "dumb" seasonality model, but the worst of the "Stinky September Seasonality" is almost past us... (next thing you know people will be talking about the Santa Claus rally!) “We’re all in this together” is an all-too-common phrase this year. “This too shall pass” is another. Well, we are almost through the most volatile part of the year for stocks.
September is of course notorious for sharp corrections and bear markets. The September 20 to 29 period particularly rough, on average. So, we just have to make it through Tuesday this week, and the bulls are golden? Not so fast. Seasonality is a secondary indicator at best since it is just a long-term average, and individual years can certainly stray from the average in a big way – see 2020. We feature this seasonality chart with 2020 in red (appropriately) and the 30-year average in black. We like to back-out the 2007-2009 period to get another angle on seasonality, too (gray).
2020 did not follow the script too well to start the year as a rare bear market during Q1 contrasted the long-term average. But then a late spring rally was generally par for the course and an early summer decline with volatility was roughly in-line with historical trends as well. August was an exceptionally bullish month relative to history, but those gains were quickly surrendered as an old-reliable September swoon brings us to today. Looking ahead, stocks have found their footing in late September and early October in advance of a feel-good Q4 recovery. The narrative sounds much better than the uncertainty in which we find the market today.
Bottom line: Volatility is expected to continue to run high for the next 5 weeks or more. The good news for the bulls is that October has been one of the best months for the S&P 500 in the last 30 years. Critics can poke holes in seasonality analysis left and right, but a Q4 rally is a powerful trend across many timeframes for the S&P 500.
9. When you come to a fork in the road, take it. Thanks to @lisaabramowicz1 for this chart from Bespoke Investments which takes a look at just how much the value sectors of energy and financials have lost-out to the technology growth sector. Taking a trip down memory lane, the mid-2000s were high times for oil companies and banks as WTI shot up from $30 per barrel to nearly $150 by July 08 and interest rates were on the rise. A little intermarket analysis 101 tells us that interest rate and commodity prices are often correlated. The 10-year yield climbed from 3% to almost 6% from 2003 to 2007. Energy exploration and production firms could pump out the oil for huge profits while banks could borrow-short and lend-long at impressive net interest margins. Meanwhile, tech shares were doing ok, but they were still left ravished from the 2000 dot-com bubble.
Oh, how the times have changed. Oil can’t get above $45 and interest rates across the curve and around the world are paltry. High-duration growth stocks have been some of the biggest beneficiaries since both the Great Financial Crisis and the COVID-Crash. At the moment, energy plus financials are about 12% of the S&P 500 total market cap while the info tech sector neared 30% at the September 2 peak before pulling back. The spread between the two lines is not far from max we saw in March 2000. It begs the question – could a similar fate be in the cards? Will history repeat or rhyme?
Bottom line: Call it a fork in the road, call it alligator jaws, call it whatever you wish. Growth powers higher versus value. That’s seen in the chart from Bespoke. Declining interest rates help stocks that are perceived as having cash flows in the years ahead versus those paying out dividends today. Many have called for a reversal, but trending markets are tough to break.
10. Implied Equity Duration: Value vs Growth needs higher bond yields (and all the good macro/market stuff that comes with/causes that). @zerohedge brings us home with a look at implied equity duration among growth, value, cyclicals, and defensives. As interest rates have been a snoozer since April (the US 10-year yield has primarily ranged from about 50bps to 75bps for the last 6 months), the topic of equity duration has been brought up quite a bit. FactSet and Goldman Sachs Investment Research analyzed the current duration of the median stock in four equity arenas.
As most market participants are aware, growth firms have the highest duration while the value style has a lower duration. This means that downward moves in interest rates disproportionally help tech and health care names, and hurt energy and financials. If/when interest rates rise again, look for value to beat growth. But know knows when that will happen – an analyst must carefully monitor macro trends and intermarket analysis to get a gauge on clues for a reversal. The cyclicals versus defensive world features a tighter duration spread, but defensives are more sensitive to interest rate changes.
Bottom line: Knowing how niches of the market behave and respond to changes in the broader economy and financial market is imperative to be a successful allocator of capital. For now, growth stocks have a very high duration – so keep an eye on what rates are doing and where they go from here.
So where does all this leave us?
1. September sentiment
September continues to rear its ugly head from the bulls’ perspective. The 0.6% decline in US large cap stocks was not so bad, but small caps, value equities, and foreign stocks fared much worse. Tech shares ironically outperformed despite the FAAMG stocks being in solid corrections. Momentum is mixed right now with the high yield space appearing very weak while volatility suggests a bullish divergence could be in the cards. Other readings are leaning to the bearish side and suggestive that the correction could have a little more room to run – we have not seen a wash-out moment yet, but the balance is shifting.
September is shaping up to be a great month ... from the short side. SPX is off about 6%, ironically with info tech and energy being the worse sectors (usually the two are opposites). The most bearish S&P 500 seasonality wraps up this week, but traders should focus on price and only occasionally glance at seasonal factors. Nevertheless, fighting the historic trend of a bullish Q4 has rarely worked (2018 being a great Q4 for the bears though). Bulls want to see more stocks risk back above their 50dma for breadth to improve – right now relatively few stocks remain in uptrends. Meanwhile, futures traders appear to have booked some profits on the short side.
3. Growth vs. value
As the Treasury market remains awkwardly quiet, debates and discussions regarding how interest rates affect stocks are running high. The most interest rate-sensitive groups have benefitted from declining borrowing rates in the last 10+ years, but particularly during 2020. With bonds in lockdown, tech still rules the world (at least it feels like) as the IT sector is almost 30% of the market while value-oriented sectors wither away.
Q4 begins later this week, and the bulls can’t wait for it to arrive. The US elections on November 3 will be a looming risk and non-stop on financial news programs. Traders are truing-up positions after a material correction in the S&P 500, slightly more than 10% peak to trough from September 2 to last Thursday’s intraday low. But we may not be out of the woods quite yet. The near-term trend is still lower, and volatility will be with us for at least the next few weeks. But the charts this week make it clear that the balance is starting to shift.
See also: Weekly S&P500 #ChartStorm - 20 Sep 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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