Weekly S&P 500 #ChartStorm - 6 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. Happy New Month! The S&P 500 surged 7% in August and climbed to a 10% advance on the year. For the quarter, SPX is up 13% as of August 31. Growth stocks led the rally, particularly in the final three weeks of the month while value stocks underperformed. The same story of FAAMG, representing more than a quarter of the S&P 500, drew headlines left and right. You can even include Nvidia and Netflix in that handful of glamor stocks to create the FANGMAN short-hand.

The S&P 500 Volatility Index (VIX) also increased during August, an ominous sign for bulls ahead of the often volatile September-early October period (we’ll talk more on this coming up). Sector-wise, Information Technology boasted the best gain of 12% followed by Consumer Discretionary and Communication Services (of course, Apple, Microsoft, Amazon, Google & Facebook) are found in those sectors). Three of the smallest S&P 500 sectors were the worst performers – Real Estate, Energy and Utilities.

The S&P 500 had its best August since 1986, surging above the 10-month moving average to a fresh all-time high. FactSet notes that the trailing 12-month P/E ratio on SPX is near 28, above the 5-year average of 20.2 and 10-year average of 17.9. The forward P/E is similarly stretched.

Bottom line: The wall of worry continued to be climbed in August. Large cap growth tech stocks continued their dominance, but risks loom ahead.

monthly chart of S&P500

2. Not so happy start to the month... S&P500 in selloff mode after reaching overbought levels. While August ended on with a flourish, it was a tumultuous start to September. Optimism reigned on Wall Street on Tuesday and Wednesday, but then heavy selling pressure took place Thursday and into Friday morning. SPX rallied from 3500 to 3588, a new intraday all-time high, but then a global selloff on Wednesday sent the index to near 3450.

Support was found on Friday at 3350 and the bulls brought stocks to close more than 2% off the low of the day, still good for a 0.8% decline ahead of the Labor Day weekend in the States. The RSI (14) reached extremely overbought levels in late August and during the first two days of September, so perhaps the pullback was overdue. Bulls want to see the RSI hold the 40-50 level as that is often seen as the bottom of the ‘bullish’ range of that momentum index.

Where is price support? We are eyeing the 3400 level on a closing basis. It held so far, but there is a long way to go before the end of ‘volatility season’. Is this just another dip to be bought, or are we finally encountering a sustained correction after a heck of a springtime and summer rally on Wall Street? We’ll explore that question later on.

Bottom line: The August rally seems like a distant memory after the price-action on Thursday and Friday. Momentum was clearly extended, and the S&P 500 had ventured quite a ways above its 50 day moving average and 200dma. A pullback was in the cards. Was Friday’s impressive intraday comeback a sign of the dip being bought or was it a head-fake ahead of more selling this week? We’ll know soon.

daily chart of the S&P 500

3. Seasonality - Tis the season for volatility. We hinted at it earlier, but this time of year can be perilous for the bulls. Seasonality runs weak during the latter half of Q3 and into the first few days of the fourth quarter. We are finally seeing it play out. Ironically, volatility was already rising in advance of this small pullback (so far). The twist this year is that it is presidential election season in the US, so a slight variation on the usual seasonality can be at play.

Still, there’s no doubt that September and October are known to feature some of the wildest market moves of the year. 2020 has been its own animal though, with stocks collapsing during February and March – usually a somewhat bullish time of year, then rallying during July and August which can be choppy months on the calendar. It’s hard to argue against a strong run from mid-October through year-end. Since 1990, the average advance on the S&P 500 is about 5% during that stretch – but we have to get their first. It could be a volatile ride, so fasten your seatbelts.

Bottom line: Seasonality is a friend to the bears for the next four weeks. September is the worst-performing month for the S&P 500 across most lookbacks. Volatility tends to increase when stocks decline, and we are certainly seeing that already in the market. Technology stocks in particular are featuring higher volatility than what we were seeing earlier this season.

chart of S&P500 seasonality