Weekly S&P 500 #ChartStorm - 6 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. Happy New Month! The S&P 500 climbed a modest 1.8% to build on gains from April and May. The index remains above the 10-month moving average after falling sharply beneath it following March’s major decline. Every consolidation is different, and the current choppiness on the monthly chart is more hectic than what was seen in 2014-2016 when the stock market held below its highs for many months (at least on a monthly closing basis). The current sideways trade has featured fresh all-time highs, only to leave the bulls disappointed with harsh setbacks (i.e. Q4 2018 and Q1 2020). Nevertheless, US large caps have beaten just about anything in the last two and a half years. Mega cap tech, the hallmark of the US stock market, has been the leading style.

Bottom line: The bulls should feel pretty happy with how June turned out. The first few days of the month felt very much like a melt-up – and then a 6% loss on June 11 looked like it could be the start of something very bearish. Maybe it will prove to be, but that huge distribution day was actually the low of the month. You can attempt to draw a bullish or bearish narrative, but the S&P 500 traded flat from the June 11 close to finish the first half with a small loss.

monthly S&P500 chart

2. S&P500 (US Large Caps) about middle of the table in June as some of the previous laggards gained ground. Don’t call it a comeback, but foreign stocks performed well on an absolute and relative basis with the US dollar showing signs of fragility. Small caps also beat the big guys. So for once a little diversification across the equity spectrum wasn’t a bad thing. Any technician will tell you that it takes more than one period to make a trend, however. At the bottom of the month-on-month column you will find energy and infrastructure plays which had done well from the start of the rally in late March, so it too reversed-course despite oil and other commodities performing well. US crude oil approached $40 per barrel, then pulled back to the mid-high $30s. Spot oil and energy equities don’t always move in lock-step.

Like the S&P 500, bonds were ho-hum in their total return for June as interest rates were stable. Some interesting market action was the 10-year yield rising above resistance early in the month only to fake-out the bond bears. Credit-risky fixed income was a mixed bag with junk debt down modestly and emerging market debt (in dollars) up 3%.

Bottom line: The bulls will accept a little consolidation and modest intra-market reversals of the trends set in place from the March 23 low. If anything, better participation from the US extended market as well as overseas equities helps to broaden the move.

chart of asset class performance in June

3. Quarterly picture... Thanks to @ceteraIM for this quarterly view of S&P 500 returns dating back to Q1 2017. As mentioned earlier, the nature of this consolidation in the last couple of years is that of whippy-ness (that term may or may not be in the CMT curriculum). We spoke of a near-term ‘crab market’ during April and early May when the S&P consolidated, and the quarterly moves have been similar in that we are making ground in some instances, only to give it back in a rather hard and fast manner. Call it three or four baby steps up, then a big ole step down. The weak bulls get shaken out, the bears get excited (as in late 2018 and February-March 2020), and then the market comes rip-roaring back. And here we are at the start of Q3 2020 having come off the best quarter since 1998.

As you might imagine, the VIX has turned elevated. Sure it has settled back into the mid-20s from the high 80s, but the long-term average is just below the 20% level. It seems like ages ago when it was in the low teens – simpler times!

Bottom line: Technicians call a topping pattern in a stock or market in which prices make new lows and then new highs a ‘broadening top’ – indicative of rather ‘out of control’ price action. It happened on the Dow during the late 90s and early 2000s. The current S&P move is not exactly a broadening formation, but the US large cap index is getting quite whippy of late.

quarterly returns chart

4. Clearly Q2 was a strong quarter. Interestingly as @RyanDetrick shows: strong quarters tend to be followed by strong quarters... Just how good was Q2 2020? It was the best since Q4 1998. Take a look at what tends to happen AFTER a great quarter for US stocks – more green. As Ryan often shows us with clarity, historical data can be rather definitive sometimes. When the S&P 500 gains 15% or more (since 1950), the usual move during the following quarter is to the upside in a massive way. Q2 2020 returned an even 20.0%. Returns are then abnormally strong looking ahead another quarter and through the entire next four quarters. Only one year, 1987, featured negative returns in the ensuing 12 months after a major quarterly advance.

Bottom line: Strong quarters beget strong quarters. When the bulls dominate, they tend to keep winning. It’s easy to call for a consolidation or a pullback after a huge quarterly gain, but you would be fighting history. Call it ‘climbing the wall of worry’ or the en vogue ‘most hated bull market in history’ .. call it whatever you want. Price history & performance statistics are often a better guide than media narrative.

chart of quarterly performance - what happens next after a strong quarter

5. Speaking of performance stats, here's how it looks if you somehow missed the 5 best days (and only those days) @Schuldensuehners provides this exercise in staying in the game. Missing the best days costs you dearly – so timing the market on your ‘gut instinct’ can be a dangerous venture. Financial advisors, with their hearts in the right place, often roll out a similar chart to this to encourage clients not to try to time the market. Of course, you never know, you might also be successful, and miss the 5 worst days too, right?

2020 has thrown some silly days at us – to the upside and downside. 5%+ daily changes were standard fare during March. A VIX above 80% will do that. Had an investor been caught on the wrong side of a few market timing wagers, returns year-to-date would be ugly. To the tune of -30% versus -4% for the S&P Total Return Index through June 30.

Bottom line: It’s easy to get shaken out when times get rough if you don’t have a plan of attack. It’s also easy to get greedy (when you think you are being prudent), and sell after a big accumulation day during which stocks climb 3%, 4%, 5% or more. Once you’re out, it can be hard to get back in. I’m sure very few investors actually missed the 5 best days while participating during the entirety of the February-June period, but this chart shows us how just a few days can make or break a couple quarters.

chart of missing the best days in the market