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Weekly S&P 500 #ChartStorm - 12 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. Nevermind that #GoldenCross -- the real thing to watch is that 3200 glass ceiling. Last week was choppy, but ended in the bulls’ favor with late session buying on Friday. The S&P 500 is back to the early June highs after a pair of rocky stretches over the last month. The bulls have been resilient, but can the stubborn 3200 level be climbed above? Notice how this technical level was also important in late 2019 and early 2020. It seems like ages ago. A move above 3200 would allow the S&P to look squarely above to the all-time high made in February. Technicians will also monitor the RSI for negative divergence from the peak a month ago.

The golden cross, when the 50-day moving average crosses above the 200-day moving average, makes for good headlines, but we’ve already come a long was from the ‘death cross’ in late March. We don’t try to down-play the relevance of the golden cross, but it is more for long-term investors rather than traders. Another interesting feature of the stock market over the last two months is the transition from small cap value outperformance to large cap growth dominating.

Bottom line: The S&P 500 is back to the scene of the crime as we technicians like to say. 3200 was important to move above last December, and the index went into a tailspin upon breaking below 3200 in late February. Long-term investors can take solace in the golden cross that took place last week, but traders should look to more near-term clues.

chart of key S&P500 resistance level

2. Especially in the context of this hot mess... With a transition to large cap growth from small cap value, it usually means breadth has deteriorated. @Not_Jim_Cramer bring us this chart of the NASDAQ Composite price chart (RHS) and the percent of its constituents above their respective 50-day moving average (LHS). The index is higher while fewer stocks are above their moving average – breadth is rather terrible.

The biggest of the big market caps are up substantially in the last several weeks – Apple, Microsoft, Amazon, Google, Facebook. You know the drill. Notice what happened the last time the NASDAQ had similar price action and breadth – things got ugly quite quickly earlier this year.

Bottom line: While the S&P 500 is grappling with resistance, the NASDAQ is waving a red flag of its own with exceptionally poor breadth. Price-action is always important, but what’s going on under the hood can give us clues as to the sustainability of the rally. Proceed with caution could be the signal here.

nasdaq breadth divergence chart

3. And that old market jinx we have become accustomed to! Never a dull moment on the Twittersphere. The Donald has been back at it – tweeting up a storm regarding his beloved stock market. Beloved at least when prices are shooting higher, of course. @sentimenttrader brings us this chart of the Dow Industrials and the number of Trump tweets about the stock market below the price (positive tweets are plotted above zero, negative below zero).

It is a rolling 5-day count of Donny’s tweets. Objectively, you’ll notice that it’s not exactly a contrarian indicator in terms of positive (or pumping) tweets correlating to market peaks and negative tweets aligning with market bottoms. It seems the POTUS waits for stocks to have risen for some time before tuning up his thumbs for stock market tweet. Although, in general, Trump’s highest volume of positive tweets occurs closer to market tops than bottoms.

We have seen a spike in the last several days as the market kicks off the second half of the year – the election is less than 4 months away, so maybe we should expect more tweets as we get closer to November 3. Also, the negative tweet count could pop on down days when Trump reminds us of what could happen if his opponent is elected.

Bottom line: The stock market has rallied about 50% off the lows, and Trump is starting to get people to take note of the improvement in our 401(k)s perhaps. Regardless of the politics involved, higher volume of positive stock market tweets from the President usually corresponds to market peaks, but it’s not a perfect coincident indicator.

chart of trump tweets vs the market

4. Equity supply = Up. Nothing like a good market sell-off to get companies to stop buying back their stock and begin raising equity. It’s corporate finance 101, right? Buy high, sell low? @KennethLFisher posted this chart noting that the second quarter had the biggest jump of secondary stock issuance since way back in Q3 2009. Many firms found themselves in a pinch for capital following the major equity market selloff in Q1. Selling debt was not a very attractive move given the concern around rising debt to equity ratios and resulting solvency concerns. What’s the solution? Raise more equity – right after stock prices had fallen, naturally.

But also think about what was going on back in Q3 2009. The world was emerging from the Global Financial Crisis with a supportive Fed (among other Central Banks providing liquidity). The US Dollar was easing from its highs, stocks were rallying, volatility was falling – sound familiar? Funny how history rhymes. The late 90s equity supply-o-rama may have been a different animal – more a of a historic late-cycle boom and euphoria taking hold.

Bottom line: Corporate financial managers are often swayed by near-term events. Their incentives are aligned with sustaining the business through hard times and maxing out EPS during the good times. We are coming off one of the most dire short-term stretches ever, and firms feel the need to shore up capital by selling stock.

equity issuance chart

5. "The market is not the economy" ...well it's certainly less exposed to cyclicals than ever before. Thanks to @MichaelKanto for this chart. The Chief Investment Strategist at Cornerstone Macro breaks out the market into two groups. The first, in orange, is Growth, Stability, and Defense made up seven of the 11 market sectors. The green line represents Cyclicals comprised of the remaining four sectors. The last 10 years have seen tech stocks surge, as most of us know. Other growth sectors like health care and discretionary have done very well. On the flip side, value sectors like financials and energy have performed poorly. Now more than ever, growth dominates. The relative move has gone parabolic this year alone. The market may not be the economy, but our lives are dominated by information technology – just like the S&P 500.

Bottom line: Low rates, the surge of FANG (plus Microsoft!), commodity selloffs, COVID-19 – all have contributed to Growth, Stability and Defense charging higher while Cyclicals (financials , industrials, materials, and energy) have lost their share of total market cap. The top 5 market cap stocks in the S&P 500 (Apple, Microsoft, Amazon, Google, Facebook – all tech/communications/consumer stocks) are individually worth more than the entire energy sector.

S&P500 index composition chart cyclicals vs stables

6. Speaking of market weightings, here's a snapshot of weights by stock (box size). @Chigirl tweeted out a great visual of the composition of the S&P 500 last week. The dominance of AAPL, MSFT, AMZN, GOOGL, and FB is breathtaking. The four smallest sectors take some effort to find on the heat map – but you’ll find them in the lower right (much like their stock charts over the last year – down and to the right). Utilities, energy, materials and real estate are each worth less than the single biggest companies in the USA. It’s interesting that the powers that be who construct the indexes and sectors place the big 5 stocks listed above in a few different sectors, but all the companies are the same general play. They are all tech/consumer/communications growth stocks for the most part.

Perhaps FAAMG have Steve Jobs to thank as the iPhone was released right about 13 years ago. All of us have so much information literally at our fingertips and things to buy with a single swipe of a screen. Or maybe these companies should show appreciation to good old Research in Motion, maker of the relic Blackberry. Blast from the past.

Bottom line: A good chartist loves her/his heat maps. This one not only displays the dominance of the big 5 tech names, but it also represents the market over the last 10 years – green for mega cap tech/consumer names and blood red for cyclicals like banks and energy stocks.

heat map of stocks by size

7. Finance vs Tech... a microcosm of value vs growth. @allstarcharts always tells it like it is. JC likes to build puzzles, and this is a simple one. Simplicity is great. All-time highs have been notched in Technology vs. Financials and Growth vs. Value. The two go hand-in-hand, particularly in the current market environment. This is another visual into the composition of the market. A good technician loves both heat maps and, in this case, ratio charts. The two ratios charted have climbed above their March 2000 peak – who would thought we’d be witness to the same tech-dominated market today as we traded back in the late 90s? Well yours truly was just in grammar school then, but you grizzled old market veterans know what I’m talking about.

Every time has its nuance, of course. Today’s market likely doesn’t have quite the same euphoria as the late 90s, leading to the mid-March 2000 bubble bursting, but other themes are similar. The narrative doesn’t matter, only the charts do (as JC might be apt to say).

Bottom line: Are valuations stretched for mega cap tech growth stocks? Sure. Do technicians care, probably not considering the tech vs. financials ratio chart is surging to new all-time highs, confirming the trend. We at Topdown Charts do pay attention to valuations for longer-term asset allocation stances, but we also embrace and respect market trends.

chart finance vs tech and value vs growth

8. US Forward earnings starting to tick up.. Transitioning from technicals to earnings, @matthew_miskin at John Hancock brings us this chart of forward earnings forecasts of the S&P 500, the EAFE index, and Emerging Markets. Those three markets cover virtually the entire large cap universe of stocks. The chart is indexed to 100 starting in Q3 2016. It’s been a tough road for ex-US markets – forward earnings estimates peaked in the second quarter of 2018, right after those stock markets peaked in January. International stocks are still in a drawdown from two-and-a-half years ago. For the S&P 500, everything was humming along nicely until COVID-19 struck. Analysts slashed their earnings expectations for the next twelve months in March and April.

But take a look at what’s happening now. Forward earnings for the US market have turned higher – though barely off the lows. Meanwhile, EPS expectations abroad have not bounced quite yet despite Asia and Europe doing a better job with COVID-19. Maybe the next refresh of foreign earnings forecasts will show at least a bottoming out – the bulls hope.

Bottom line: Pundits may argue that the US has done among the poorest jobs at dealing with COVID-19, but Wall Street market analysts are most optimistic about US company earnings relative to international developed and emerging markets. It’s remarkable that EPS expectations for Ex-US indexes are about unchanged from four years ago.

chart of earnings estimates

9. Similar to the massive snap-back in the ESI, the S&P500 earnings revisions ratio has flipped back into the positives. Wouldn’t you know it, economic data has been coming in better than analysts thought. And now corporate earnings are following suit. I’m sure it’s the Fed’s handy-work (just kidding), but perhaps the economic recovery is beginning to take shape in the USA.... certainly at least not as deeply dire as expected.

While COVID-19 cases are hitting all-time highs, with southern and western states seeing startling surges, the market has moved on from the February and March panic. Dire health-related headlines have done little to shake the S&P 500’s advance in the last few weeks (that sentence could wind up not aging well – we’ll see!). Aside from price-action and back to the data, did the expert analysts get too pessimistic last quarter? Is the Fed’s backstop to thank for the positive data surprises? Is the fact that Americans generally downplay health risks a good thing for the economy? Tough questions.

Take a look at 2017 and 2018. Stocks surged in 2017 and THEN both the ESI and S&P 500 ERR jumped. How often do we see it – prices move BEFORE the economic data improves. And price action often causes analysts to turn more optimistic on earnings – funny how that works.

Bottom line: The data is not as bad as Wall Street analysts have been expecting. Earnings season is underway, and so far so good, but the bulk of reporting activity is still on the way later this month.

chart of earnings revisions ratio vs economic surprise index

10. Last but not least, a long-term look at the evolution of forward earnings (and the market). Can just see that slight uptick in consensus earnings. Let’s catch our breath and take a step back. The final chart is a look at the S&P 500 since 1985 along with 12-month forward earnings estimates. The forecast for the next year’s earnings has ticked higher, as discussed, but we need to see confirmation that the bottom is in. It’s not unusual to see a short-lived positive turn in the slope, and then a little secondary downtick – it happened in 2001-2003 and 2014-2015. So it could still be a rocky road ahead rather than a primrose path.

It’s interesting that price action was also choppy during those rough patches. The S&P 500 bounced around the lows three times during the early 2000s recession and the 2014-2015 commodity collapse had a retest of the lows. We couldn’t go a whole weekly chartstorm without uttering “retest of the lows”, could we??

Bottom line: There’s been a change in tone for forward earnings. Analysts have turned less pessimistic, but it’ll be a tough slog ahead most likely. Even if earning revisions continue to be positive, that forward PE ratio chart (which we are not big fans of) is still going to be hugely elevated for quite some time (unless stocks collapse or earnings surge!). We also talked about the global earnings pulse in last week’s chart of the week.

S&P 500 long term forward earnings chart

So where does all this leave us?

1. Short-term red flags.

Breadth is not looking good. The market has jolted higher in the last weeks care of FAAMG gaining more market cap share. Large cap growth stole the reins from small cap value since early June. What’s also of concern is the goings on with the NASDAQ Composite and the paltry number of its components in near-term uptrends. The Nazzy is higher while fewer stocks are participating. Bulls want to see more stocks getting in on the bullish action. And then there’s President Trump’s tweeting – some find it entertaining; some find them annoying and offensive, but they make for an interesting market indicator. The POTUS is pumping the market again – which usually happens closer to market peaks than bottoms. Meanwhile, companies are looking to the equity markets to increase capital – what happened to buybacks?

2. Context on long-term composition.

Mega cap tech, communications, consumer growth stocks keep winning. I sound like a broken record. What’s different this time though is that the ratio of growth to value (and tech to financials) has finally broken out to new all-time highs, rising above the March 2000 peak. The S&P 500 heat map was a great visual at times last week – the intraday snapshot was indicative of the last 10 years.

3. A change in tone in the earnings outlook.

Price action is kind of more of the same while we have seen a change in tone from Wall Street analysts in earnings expectations. Following a 20% drop in next-twelve-months earnings expectations for the S&P 500, there has been a recent tick higher just as earnings season gets underway. We’ll obviously know a lot more a month from now. The vast majority of companies will have reported by August 8. Still, the small increase in expected EPS has done little to make forward-looking valuations turn attractive. The S&P 500 remains quite expensive versus other markets.


H2 brings phase 2 of the market recovery cycle where more and more attention goes to earnings and macro as the cheapest valuations of the deepest depths of March are just a memory now. With massive stimulus in the system, vs still dire data on many fronts, investors are left having to take a leap of faith. One element of support to that will be the green shoots in forward earnings, less disastrous data than expected, and the ongoing flow of stimulus. But in the immediate term, there remains a long list of risks looming in the shadows, and a few key technical obstacles to clear.

Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.

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