Weekly S&P 500 #ChartStorm - 8 June 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. S&P 500. The index jolted higher after a period of consolidation from call it mid-April through late May. Last week’s jump ended on a strong note on Friday with the US jobs report being the catalyst. Stocks finished just off the highs of the day, but it was great week for the bulls – even more so away from US large cap equities. Technically speaking, the 200-day moving average is flat in its slope, about 6% below the price. The shorter-term 50-day moving average has turned decidedly positive – the index cleared that technical line in late April, then never looked back. The only mini-fake out you can find is perhaps on May 14 when SPX hit 3-week lows – aside from that it has been higher highs and higher lows. The S&P 500 is now 46% above the intraday low from March 23, a full 1,000-point recovery.
Could there be a re-test .. of the highs? 3393.52 is the intraday peak from February 19. 3200 and 3400 are psychological resistance levels on the way up. On the downside, support should be found at the flat 200dma and then 2960, the April-May range peak.
Bottom line: Those who have missed out on the rally have had a tough time getting back in with the S&P 500 up big since May 14 – 15% in about three weeks. COVID-19, social unrest, and an upcoming Presidential election have all added to the wall of worry that stocks have been climbing like a pro.
2. S&P 500 earnings revisions ratio [=(up-down)/(up+down)]. Analysts revised their earnings estimate sharply lower in the wake of COVID-19, not surprisingly. Nearly 100% of companies saw drops in their projected EPS. The negative revisions coincided with stocks dropping during Q1, but it also occurred while stocks were initially rebounding following the March 23 low. That is often the case among Wall Street analysts due to conservatism bias – analysts can be slow to update their opinions to new information.
The good news for equity investors is that when the consensus opinion turns more pessimistic, the easier it becomes for companies to beat expectations. It’s a lower hurdle to overcome. The forward P/E ratio (which we have critiqued) may be a broken indicator and it has surged due to a reduced S&P 500 EPS outlook and higher prices. Looking ahead, if Friday’s jobs report was any kind of barometer, perhaps the recovery will be a little faster than people expect, and the Earning Revision Ratio could continue to climb off the low from earlier this year. 2008-2009 saw a similar sharp drop due to the Great Financial Crisis only to be followed by a late 2009 and 2010 with positive revisions.
Bottom line: A key piece of a good wall of worry to climb is sour expectations. We may have just that among Wall Street analysts and their S&P 500 earnings projections considering most stocks have had their EPS forecast reduced in the last few months. Fundamentally, you can’t argue that the massive GDP hit will of course negatively impact EPS. Earnings season is a game though – it’s all about beating what people think you will produce.
3. Oh yeah, the election! With all that has been going on between COVID-19 and social unrest in the US, the upcoming presidential election has been given unusually low attention versus prior cycles. @RyanDetrick brings us the stats though, as always!
Year 4 of the election cycle is always an oddball. Historically, it is dependent on whether or not the incumbent is running for a second term or if we have a ‘lame duck’ POTUS about to exit office. The former is when returns have been quite strong since 1950. For a good narrative, you can say the incumbent wants to really juice the economy in order to gain momentum for his campaign while a lame duck is not as enthusiastic about propping up the economy for political gain.
Nevertheless, year 4 of the cycle with an incumbent running for re-election boasts an average historical advance of nearly 12% and has never featured a negative performance. So this is a positive cyclical data point the bulls can point to with less than 5 months to go before voters head to the ballet box.
Bottom line: Seasonality and cycles are thought of as a secondary tool for technicians, with price and a few other key technical readings being more important. Still, history suggests year 4 of the election cycle with a POTUS running for a second term has worked out well for the bulls. Looking ahead though, year 1 and 2 of the cycle are not so great. But let’s take things one a time.
4. Put-call ratio moves from one extreme to another. The put-call ratio reached extreme levels around the March 23 stock market low. And now it’s at another extreme with the index 46% above the 2192 nadir. @ThinkTankCharts delivers this chart that explains S&P 500 trading action alongside the equity put-call ratio.
Quick background – the put-call ratio is simply the number of put options bought on a day divided by the number of call options purchased. It can be used as a measure of sentiment. The ratio has dipped into ‘bubble’ territory, meaning relatively few puts are being bought by traders, so sell-off/correction risk may be elevated at these price levels. The key question is, for how long can the put-call ratio stay this low and how long can the S&P keep advancing? You might say the put-call ratio can stay irrational longer than you can stay rational.
Bottom line: It has been a swift move from panic to bubble, at least if you look at the put-call ratio as your sentiment barometer. The only other time in the last few years when the figure was at a lower level was for a short time in the good ole days of early 2020.. when life was simple! Bulls need to beware of market sentiment growing over-optimistic.
5. S&P 500 futures speculative positioning. Not everyone is on board with the bullish narrative though. At least if you look at another market stat – non-commercial (speculative) S&P 500 futures net longs (as a percent of open interest). @macro_daily delivers this chart of spec index trader positioning. Taking a step back to review the chart, it’s always interesting to compare where we are today versus historical market peaks and troughs.
Notice how the indicator bottomed in the past – middle 2008 (before the March 2009 SPX bottom), late 2011 (near the Oct 4, 2011 S&P low), late 2015-early 2016 around another equity market bottom, and finally early 2019 (shortly after the Christmas 2018 low). And now here we are at an interesting point when stocks have shot higher while spec traders are heavily short. It doesn’t exactly line-up with the past (but then not much about 2020 has, I suppose). So while the equity put-call ratio is flashing warning signs of a higher than usual risk of a market sell-off, here’s a chart to counter that point.
Bottom line: All of the evidence must be weighed when determining an allocation strategy. There are countering viewpoints on where stocks go from here – retest the highs or gut-check the bulls with a summer-time correction ahead of the election. It’s never easy and there is never certainty.
6. Capital raisings on the increase in May. @JulianKlymochko provides data on corporate actions by month with the S&P 500 line overlaid in black. May was the first month in quite some time when there was a higher volume of equity offerings versus buybacks. Recall that the S&P 500 advanced nicely last month though. So this flies in the face of the narrative that the market cannot rally without corporate buybacks (but perhaps Chairman Powell would have something to say about that!). Buybacks usually get a rather bad rap in the press and on Main Street. With an election on the horizon, it will be interesting to see how quickly corporations will return to the usual capital structure game of issuing debt and buying back stock to adjust their overall cost of capital and to bring value to shareholders.
Bottom line: Was May’s net equity issuance the new normal? Buybacks took a big political hit during the COVID-19 episode as airlines and energy companies were taken to the wood-shed in the papers regarding their capital allocation decisions. Requesting government assistance while not saving for at least a rainy day does not play well with consumers.
7. Fed balance sheet vs. the forward PE. @Schuldensuehner compared the Fed’s balance sheet to the S&P 500 forward PE ratio. The recent move has been stunning, and the past appears to show some correlation. The S&P 500 trades at about 25x next year’s expected earnings, the highest in nearly 20 years. Meanwhile, the Fed’s balance sheet is $7.2 trillion – the highest since .. well ever.
Could the Fed’s support of financial markets make the PE less relevant than in the past? Could be the case. Regardless, valuations on large cap US equities could be described as being at nose-bleed levels. How much more will the Fed & Treasury do to support the economy? How will stocks respond to further stimulus measures? Will there be a sharp second COVID-19 wave and how would that affect the PE? This chart just draws so many interesting questions that market participants are forced to ponder. Or we could all just ignore said questions and enjoy the ride (may not be the wisest strategy even though it has worked well in the last 10 weeks).
Bottom line: “The Fed is out of bullets” – never the case, as 2020 has demonstrated. As the Fed balance sheet has skyrocketed to new highs, the most popular valuation method for US stocks has jumped demonstrably. So the liquidity is there. Will companies respond with impressive earnings as a result? That may be key question and risk over the next 12-months.
8. A better valuation indicator? Tom McClellan @McClellanOsc makes us ponder a new valuation indicator: the S&P 500 dividend by M2 (the money supply). As the Fed delivers more liquidity, there is potentially more money chasing the same amount of assets. So wouldn’t it make sense to compare price to liquidity?
Just for grins, if we were to do that, we have this chart. Of course, as the Fed’s balance sheet has grown, M2 has surged. So the ratio of the S&P 500 to M2 has taken a hit despite the equity index moving higher lately. If we look historically, the range is dramatic – from about 0.06x to 0.3x. So the current level of 0.18x does not seem so elevated. Rather, it is nearly in-line with historical norms. I’m sure many value analysts may find that logic and analysis downright laughable, but at the same time most investors would acknowledge the extraordinary market and economic environment we’re all in.
Bottom line: Don’t fight the Fed? Maybe. But certainly don’t ignore the Fed. This valuation tool is at the very least something to consider. It’s easy to doubt this Tom’s indicator here, but at the same time it’s hard to defend the forward PE, too.
9. Factor check. Thanks to @NateGeraci for providing this view of YTD factor returns. The general response to this was “thank you, FAANG” as large cap growth has led the way so far in 2020. The usual suspects are also found at the bottom of the chart – value stocks have performed very poorly. While value has made a comeback in the last few weeks, the style’s major drop during February and March will take a long time to recover from.
Value stocks have rarely been ‘cheaper’ than where they are today. The cheaper parts of the market are cheaper than usual versus the expensive parts. Sometimes bull markets are driven by a select few key leaders while other times market rotation is the narrative. Of course the last several years have been driving by the big getting bigger.
Bottom line: Don’t call it a comeback for value stocks. It’s been a rather short period since mid-May as mega cap growth tech stocks have eased off the gas pedal versus other groups of stocks.
10. Peak ESG? @FactSet noticed an interesting change in tone among S&P 500 companies on the latest batch of earnings calls – fewer mentions of “ESG”. Environmental, Social and corporate Governance was all the rage to end 2019 and kickoff 2020, but then COVID-19 struck. The pandemic’s economic consequences brought about more immediate and pressing issues for corporations to weather, so ESG took a backseat.
Was late 2019/early 2020 ‘peak ESG’? We will see how companies prioritize initiatives when life begins to normalize. Much has been noted and documented regarding firms with high ESG scores also exhibiting strong equity returns, so it’s hard to see this trend dissolving, but maybe we just hear less about it in the next year or two.
Bottom line: COVID-19 shook up the entire economy, stock market and the priorities of US corporations. The more immediate social unrest in the USA will likely play a role in the social piece of ESG – I don’t know about you, but I have already received several emails from companies voicing their support of social justice. ESG could take on a slightly new meaning going forward.
So where does all this leave us?
1. Stocks up, earnings weak.
The S&P 500 has done what few thought was possible two months ago – come within 5% percent of all-time highs. The question may not be ‘will there be a re-test of the lows?’, but rather ‘will there be a re-test of the highs?’ It sounds like a cocky notion, but just look at where the index stands today. We blew through the 50dma and 200dma with higher highs and higher lows. Bears had their chance to take stocks below the range that we talked about in April and May, but it wasn’t too be. Meanwhile, earnings revisions have been negative, leading to a sharply higher forward PE ratio. Looking ahead, there is a presidential election on the way in early November. Stocks tend to do well when the incumbent is up for re-election, but 2020 has been far from predictable versus historical norms.
2. Sentiment is mixed.
Some measures indicate that trader sentiment is quite bullish while other tools suggest a more dour outlook on the S&P 500. Cash on the sidelines remains high, but is well below levels from 2008-2009. So it’s hard to gauge where we are in the market behavioral cycle. The scary & volatile times of March have obviously come and gone – the VIX is now in the mid-20s if you can believe it. Looking deeper at how stocks are moving, FAANG outperformed for much of 2020 so far, but small cap value & foreign stocks began to participate more recently. Also recall the brief stretch when consumer staple stocks crushed it, and now those have pulled back. So breadth is on the incline it appears as the sector rotation ensues. All of these items contribute to how investors feel about stocks – and we all know fear & greed can dominate price action in the near-term.
3. Corporate response.
May was an unusual month of net share issuance while ESG mentions have dried up. The pandemic has changed the priorities and decisions of corporate America. But will that change the make-up and trends of the stock market? The new normal (as it pertains to a post-COVID-19 world) will naturally feature its changes. Will companies become more thrifty? Will consumers follow suit? Toss a big election into the mix, and the next few months could be a holding pattern on capital allocation projects – after all, we are all trying to be safe in this world.
Tying it all together, many investors are left stunned by the swift stock market recovery in the face of the sharpest recession in history. Despite the wildly volatile macro data (which by the way is less important in a market like this: technicals, sentiment, and monetary policy are key), price action has voiced a strong opinion. In the face of all the terrible headlines, equities have advanced. Stocks often end up climbing the walls of worry we construct in front of them. Longer term, stretched valuations make it hard to get too excited about US equities. But in the short-term though, once a market gets going like this it can go further than you expect. To quote Keynes, the caution for the bears is "the market can stay irrational longer than you can stay solvent."
See also: Weekly S&P500 #ChartStorm - 1 June 2020
Thanks to Mike Zaccardi, CFA, CMT, for his help in putting this together.
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