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. Starting off this week with some interesting perspective: this new bull market is slightly outpacing the rest (but not by that much...) @RyanDetrick kicks us off by putting this bull market into perspective. Since WWII, there has been no better bull market/recovery than that of 2020. The COVID flash bear market from February 19 to March 23 was a sharp 34% decline, but the 55%+ rally that has ensued since the bottom has already brought about fresh all-time highs on large cap US stocks.
History suggests there is more room to run, too. Buyers-beware though as corrections along the way are commonplace. 2020’s rally is pacing alongside the 2009 recovery quite well, but recall that it took the S&P 500 until early 2013 before making a new all-time high, eclipsing the October 2007 peak. Like 2009, there has been immense stimulus giving support to this great bull market, but the actions taken by the Federal Reserve and Congress are at a whole new level versus the Great Recession.
Bottom line: The S&P is up 57% from its March 23 closing low. The Nasdaq Composite is 70% higher. So far, this bull market beats any other rally since the 1940s according to LPL Research. Looking broadly at past advances, there appears to be room ahead for further gains.
2. Of course, some holdouts will say this is still just a bear market rally... (we'll find out one way or the other sooner or later) @edclissold counters with this chart showing the greatest bear market rallies on the Dow Jones Industrial Average – in 1929 and 2001. The Dow is often used as a proxy for the S&P 500 when we analyze market moves before 1950, so this will do. If we set the chart to align the bottoms at the same time, then 2020’s rally turns into one scary chart! Take a look at the other two periods – 1929-1930 and 2001-2002.
Both of the latter timeframes feature markets that peaked between five and six months after the low; 2020 is fast-approaching that key timing. What’s interesting is that six months after the March 23, 2020 low brings us to mid-late September – a rather notorious and ominous period of the year for stocks. Also consider there is heightened election risk this time around. Another interesting feature that we have talked about in prior ChartStorms is the contango in the CBOE S&P 500 VIX futures term structure. VIX futures show there is higher implied volatility from late September through mid-October.
Are the stars aligning for higher volatility and lower equity prices in the next few months? Perhaps we will just find out soon enough. It’s now easy to suggest that the bottom is in for stocks given the 57% rally on SPX, but that was a bold call in the days and weeks following March 23. History suggests it might be dangerous to make that proclamation – even today.
Bottom line: The 2020 bull market could be reaching a climax – if we follow the analogs of 1929 and 2001. While N= just 2, it’s something to mindful of as seasonality turns somewhat bearish. It’s fascinating to compare the COVID flash bear market and astounding recovery with others throughout history – it teaches us that each market has its own quirks, and focusing myopically on just one or two analogs may not be the right approach (so we looked at the bullish case from Ryan Detrick and the bearish case from Ed Clissold).
3. And there are plenty of spooky charts out there that make it less than a foregone conclusion either way... e.g. lending standards: We can look to charts besides price-action to garner clues into the state of the market – taking an ‘under-the-hood’ approach. The tightness of lending standards is one such indicator. You have to go back to late 2008 to find a period during which banks were stingier with their money.
While interest rates are near record lows (or maybe partly because interest rates are so low), banks are hesitant to dish out the cheap funds to would-be borrowers. Only the most credit-worthy individuals can easily obtain financing. What’s ironic is that while banks are very tight, the S&P 500 is at all-time highs; back in 2008, extremely high lending standards corresponded with very low equity prices. So which is right today? Banks or the S&P 500?
Bottom line: Americans are clamoring to buy houses it appears (given the recent strength in housing data and lumber futures), but banks are not so eager to lend. They scoff at lending to questionable borrowers at the moment, actually. The Fed wants to spur some inflation, and banks need to allow the multiplier effect to take hold by dolling out some loans. Equity prices versus credit standards (as measured by the Fed Load Officer Survey) is one of the more stark divergences in the economy (versus the stock market) today.
We talk more about this chart in last week's video: https://www.youtube.com/watch?v=gMPyTcM6l8k
4. Yet optimism is the increasingly dominant mood as the prospect of more stimulus and eventual normalization (or maybe just FOMO) ramps up. @SentimentTrader delivers us this chart of the S&P 500 ETF (SPY) Optimism Index (Optix). The 100-day moving average on Optix is near 65 – a 27-year high. Investors have never felt better about what the future may hold. Is it more stimulus hopes or a return to ‘the old normal’ now that COVID-19 is easing across the States? Who knows, but the giddiness among the Robinhood traders appears to be bleeding into the state of the average investor.
What’s interesting about the Optimism Index chart is that the February-March bear market was so fast that the 100-day moving average of Optix barely indicates that anything scary happened. Notice the Christmas 2018 correction-low on the S&P 500 notched a lower Optix 100dma reading since that equity drop occurred over the course of a few months (not just a few weeks like in 2020). Talk about a red flag for bulls – everyday investors are extremely optimistic with the current reading of 65. That said, optimism can actually be rewarded sometimes if it is well placed...
Bottom line: The SPY Optimism Index’s 100-day moving average has historically peaked near 60, but we are in unchartered territory now (it is 2020, after all). After a nearly 60% rally from the March bottom, maybe the fear of missing out trade (and sentiment) has taken root.
5. Despite the growing (retail) optimism, State Street's data shows institutional investors still skeptical: North America Investor Confidence index still below 100. Checking in on one of our favorite charts that we feature often, the State Street Investor Confidence Index, the big guys & gals are not so excited about the state of the stock market. While Optix measures retail sentiment well, State Street’s indicator focuses on the institutional crowd’s positioning of funds (actual buying and selling patterns).
North American institutional investors are still quite bearish, and they have been so since late 2018. The chart tells us that big money is positioned defensively, perhaps a higher allocation to bonds and cash than normal.
Bottom line: Big investors are positioned very cautiously compared to the average since 2009. A reading of near 80 on State Street’s Investor Confidence Index tells us that the group is more bearish than usual. This is a caution flag for investors since it contrasts retail optimism. Note that institutional money was already guarded heading into 2020, then they put some funds to work in equities following the big drop. Recently, there has been apparent recent shifting from stocks to safe assets this summer with the index falling from 85 to 80.
6. On the other hand, call buyers still storming along, pushing the put/call ratio further to the extremes. Thanks to @ThinkTankCharts for an update on another of our favorite charts – the equity put-call ratio. We have been tracking this contrarian indicator throughout the year, and it is now at fresh lows. A very low equity put-call reading tells us that traders are gobbling-up calls at a much bigger rate than puts. What it means is caution is being thrown to the wind – a warning sign for bulls.
ThinkTankCharts annotates the chart to highlight stock market bottoms that occurred with spikes higher on the equity put-call indicator. A top on the S&P 500 was made earlier this year while the equity put-call ratio was extremely low.
Today, investors should be on the lookout for a breakout on the chart of not the S&P 500, but the put-call. There appears to be a descending triangle pattern evolving. If the equity put-call ratio chart indeed breaks out, then trends higher, it would almost certainly mean a downward move on the S&P 500. “How low can it go (and stay)?” may be an appropriate mantra.
Bottom line: Another sign of over-optimism among the retail crowd, the equity put-call ratio has made new lows in recent days. It being a contrarian indicator should garner concern from those who are bullish.
7. Back on the big boys, Dark Pool buying activity has dried up. Correction risk flag waving?
@CapitalComped shifts us back from retail to institutional traders with a chart of net buying activity among dark pools. The standard S&P 500 chart is above in blue. For starters, shake-off the cobwebs – a dark pool is just a trading arena for big investors, outside of the major exchanges.
Often large hedge funds will use to dark pool trading to conceal what they are buying and from whom they are buying. As an indicator, the net buying activity can tell us if hedge funds are bullish or bearish. CapitalComped shows us that they are bearish (or at least less bullish). How has the track record been? Not too bad – prior instances of readings between 0% and 10% of net buying activity in dark pools have corresponded to tops on the S&P 500. And here are again – near 10% with SPX at all-time highs.
Bottom line: The situation is getting clearer – retail investors are excited and hopeful about where stocks are headed in the near-term while the big money – institutional and hedge funds are very skeptical. The divergence is a major theme. History suggests that the latter are usually victorious. Will it take a significant stock market correction to get a return to buying in dark pools?
8. Sales growth snapshot: @CharlieBilello brings us back to the market fundamentals. With 95% of companies having reported second quarter sales and earnings figures, we have a picture of the damage that was done during the COVID crash. S&P 500 sales growth dropped 10.6% for the quarter on a year-on-year basis. It was the worst sales decline since Q3 2009’s 11.5% drop.
For perspective, the median annual advance on the top line is a fraction above 5%. Compare that drop in sales to a 34% fall in earnings, the worst since Q1 of 2009. Digging a little deeper, wouldn’t you know it – the Information Technology sector had a revenue gain during the worst quarterly GDP loss ever. Health Care was the only other of the 11 sectors to have a net increase in sales from 2019. Energy company revenue fell 54% from the same quarter a year ago as oil prices plummeted and E&P companies went bust.
Also, a feature of the Q2 2020 earnings season is the astounding beat rate. FactSet notes that 84% of firms reported actual EPS above the average analyst estimate. As a whole, the S&P 500 reported earnings 23% above expectations.
Bottom line: It was a horrendous quarter for S&P 500 companies, at least most of them. Well-capitalized technology and health care firms were able to weather the storm well and some actually came out as big winners from a fundamental perspective. The shift from brick & mortar to online retail helped said businesses. Also, the acceleration in work-from-home and virtual learning led to changes in spending.
9. A record high proportion of the S&P500 boast dividend yields that exceed the US 10-year treasury yield. (as long as dividends aren't slashed) @thedogchart grabbed a great chart from Bank of America/Merrill Lynch Investment Research showcasing how low treasury yields are. A whopping 79% of S&P 500 equities have dividend yields above the 10-year’s current yield. With the 10yr near 75 basis points, it’s not a hard hurdle to jump. Of course, the dividend yield on a stock is very different than the current yield on a treasury, but it’s interesting nonetheless to analyze the past.
There have been other spikes in the percent of SPX stocks with dividend yields greater than the 10yr treasury. Each of the prior 3 occurrences corresponded to stressful periods – the Great Financial Crisis, the 2011 European debt crisis, and the 2014-2015 shock when oil prices went from above $100 to under $40 (along with a global bear market).
But apparently, a pandemic in 2020 is bullish as stocks are at highs while the yield on treasuries are barely off all-time lows. It’s a ‘buy everything’ market with stocks and bonds bid. What’s more, we highlighted last week that buybacks have been shunned in the wake of the terrible optics of airline companies requesting bailouts while having repurchased their stocks in recent years. Perhaps US large cap companies will take a page from their international counterparts and choose the dividend route versus buybacks in the years ahead.
For income-oriented investors, this chart is yet another that highlights there aren’t many alternatives. Even in the corporate bond world, yields are essentially at all-time lows. High yield rates are below savings account yields from 2006-2007. The environment is very difficult for fixed income managers looking to find a good, safe yield. Maybe they will have to venture into the equity space, but certainly at least will be forced further out the risk and duration curves in their quest for yield.
Bottom line: 2020 has brought about more of the “TINA” investing narrative. The Fed’s actions have played a big role in supporting financial markets – which has allowed stocks to rally and bond yields to plummet. US yields have moved closer to the 0% line as a major chunk of foreign sovereign debt carries a negative yield. Investors and fund managers must enter the equity arena to find decent yields nowadays.
10. Low Energy. Energy stocks now the smallest sector in the S&P. Pour out a drink for the energy sector. @NatBullard has this chart of the sector weights within the S&P 500 since 2008. Information Technology, led by Apple & Microsoft, has gone from a 20% weight to nearly 30% - just in the last two years. You may ask, “what about the other FAAMG names like Amazon, Google, and Facebook?” – AMZN is in the Consumer Discretionary sector while Google and Facebook are in the Communications Services sector. Big cap tech is so big & broad they have to be positioned in different areas! Turning to the dark side, what has fallen as tech has gained? Energy.
The energy sector was once the darling of the market. During the middle of 2008, WTI was near $150 at the peak, and Exxon Mobil was the biggest company in the world. Flash-forward to 2020, and oil prices are steady around $40 per barrel and XOM was booted from the Dow 30. Each of the FAAMG stocks alone is worth more than the entire energy sector. Remarkably, energy is now the smallest sector in the S&P 500 – a moniker that is usually reserved for lowly sectors like utilities, materials, or real estate.
Bottom line: The 2010s through today has been a major transition to big-cap technology growth stocks. We all know it. But it’s an important lesson for investors – what was once the golden child of the stock market (energy equities from 2002 through mid-2008) can become the worst performer in the next cycle. That begs the question – what does the future hold? How long can tech stocks keep going? We believe future investment returns will be better away from big cap US tech stocks that have come to dominate the S&P 500.
So where does all this leave us?
1. A new bull market. Or bear market rally?
It’s been more than five months since the flash bear market bottom. The S&P 500 has rallied 57% while the Nasdaq is up more than 70%. Small caps and value stocks have had periods of strength, but have largely underperformed. Apple & Tesla stocks are splitting and energy is as weak as ever. There have been interesting narratives at play, but the big question remains – is this the start of a new bull market or is it still a bear market rally? Ryan Detrick gives us the bullish perspective that shows the 2020 recovery is strongest since WWII. Ed Clissold takes us further back to the bearish case of 1930 and more recently to 2001 which suggest this could just be a near-term pop with a bigger drop to come.
2. Retail versus institutional data in conflict.
We can debate the bull vs. bear market theme until the cows come home, but let’s examine some additional indicators to get a better grasp of the situation. Individual investors are very optimistic about where the stock might be headed, but the big money – mutual funds and hedge funds - are not so excited. The State Street Institutional Investor Confidence reading is solidly below the 100-line while net buying activity in dark pools is very low. It’s a warning signal to investors when there is such a contrast between ma & pa investors (who are now also options traders!) and professional money manager positioning.
3. Fundamental perspectives.
Sector narrative trends continue with big cap Information Technology companies executing very well through the pandemic – the IT and Health Care sectors sported revenue gains during Q2 while Discretionary and Energy companies struggled mightily to operate during lockdowns. Tech stocks are nearly 1/3 of the S&P 500 while the energy space is at fresh relative-lows. The Financials sector remains very tight with lending standards as American flock to buy homes despite many not having a job. Finally, a broader take shows that Treasuries are no place to hide for income-driven managers. Nearly 4 out of 5 S&P 500 stocks have a yield greater than the 10yr rate.
Summary
The term ‘melt-up’ has been tossed around recently. After already large gains from late March through July, the S&P has rallied more than 7% during August so far. The Nasdaq 100 is up more than 10% in the last few weeks. Higher stock prices have gotten retail investors excited to check their account balances, but big funds are positioned defensively. A seasonally bearish period of the year is ahead of us with a general election about 2 months away. The ‘most crowded trade’ is within the big cap tech space, but it just keeps working for now. At the same time, valuations on large cap US stocks are into nose-bleed levels on some metrics while foreign equities offer some value. With a VIX curve in the mid-high 20s through year-end, more volatility & excitement is sure to follow. It's hard to see how we can get to the end of the year without a correction, but equally easy to see how the market can keep charging higher. Not an easy outlook to navigate, but no one ever said it was going to be easy...
See also: Weekly S&P500 #ChartStorm - 23 Aug 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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