Those that follow my personal account on Twitter and StockTwits 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 and hammer them home 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 beyond the 140 characters of Twitter. 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.
So here’s the another S&P 500 #ChartStorm write-up
1. 50 day moving average breadth: For the third time in a row, this chart features as number 1. Previously it was the “lines in the sand“, but now these lines have been crossed, to the downside. Odds are that when a breakout happens it keeps going. Using the small triangle formation on the price you might say it will be a 100 point move. So there could be some downside still to go on this move. The counter point would be that 50 dma breadth is already down to levels consistent with an “oversold” market.
Bottom line: The lines in the sand have been crossed.
2. “Macro factors”: One chart that popped up quite a bit early this year and last year – “the macro factors”. Each of the black lines (emerging market equities, commodities, and high yield credit) were trending down into the previous two major corrections – initially diverging from the S&P500 and then confirming the weakness. This time around there is no real alarm bell to speak of with these macro factors. Of course the market could easily get hammered down for some other reason, or by some other macro factor, but for now these ones are behaving.
Bottom line: The macro factors that sunk markets early this year are not showing any warning signs.
3. Dastardly dollar: In a way the previous chart – the macro factors, were kind of the flipside of the extreme negative effects of the surge in the US dollar. While the US dollar bull market has switched to a range-trade, it’s still relatively high in level terms (vs rate of change). From the talk in the earnings calls in Q3 so far, the strong US dollar is a leading excuse for sluggish earnings. This is why the Fed can’t go too fast – if it hikes rates too fast while the rest of the global economy is only muddling along it risks choking off the US economy from a shock tightening of financial conditions that another surge in the US dollar would deliver.
Bottom line: The strong dollar remains a headwind to earnings.
4. Tax turn: This chart from Meridian Macro Research shows US corporate tax receipts turning down and putting in bearish divergence against the S&P500. There’s not really much else to say on this one except that it looks kind of bad.
Bottom line: The trend in corporate tax receipts is not the market’s friend.
5. Bearish BCA: BCA are becoming increasingly bearish on global equities in the short term. Perhaps the key standout chart on their 3 strike panel is the middle one that shows the “profit margin adjusted CAPE” for the S&P500. I would provide a few caveats on that one, first there is a case to be made that profit margins are structurally higher – the composition of the market has changed. Second is it’s kind of irrelevant because “it is what it is”. Having said that, it is an interesting piece of analysis, so take this one whichever way you want (and with a grain of salt).
Bottom line: Adjusting for high profit margins the CAPE would be close to all time highs.
6. Margin debt dinger: This chart from Ned Davis Research which was featured in Market Watch points to possible bear market (as defined by total margin debt falling below its 12 month average (it’s also still down from the peak). The problem is it’s only a one dimensional view; margin debt value can rise and fall with the market because it’s backed by and almost pegged to the value of stocks – where this ceases to be true is when you have massive liquidations (a bear market) or panic buying (a euphoric bull market). For now I would file this one in the interesting folder and move on to the next one.
Bottom line: One definition of a bear market was met by US margin debt recently.
7. Labor’s share of corporate profits: Clearly this one moves in cycles, but there also appears to be what is either a structural shift or an enduring wound of the financial crisis. Either way, when this indicator rises it basically means pressure is coming on corporate profit margins. Historically this has only been a real issue if it moves by a considerable degree e.g. prior to 1987, the dot com peak, and pre-GFC. At present it’s a long way off those levels…
Bottom line: Labor’s share of corporate profits is rising but it could still go a long way before causing issues.
8. The sweet spot for wages and rates: What this indicator tells you is whether wage growth is higher or lower than the current fed funds rate. Why would it matter? An environment of wage growth and low interest rates is basically the sweet spot – that’s the conditions where the economy should be improving and markets should be going up. When the Fed funds rate rises above wage growth, that’s when the market is on borrowed time. At present this indicator is firmly in the sweet spot – i.e. don’t get bearish on stocks just because wage growth is picking up.
Bottom line: Wage growth is comfortably higher than the Fed funds