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.

S&P500 rebound rally - key levels

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.

chart of earnings revisions ratio for the S&P500

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