Weekly S&P 500 ChartStorm – 9 Oct 2016
October 9, 2016
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. 50dma breadth: This is the same first chart as last week and for good reason. The market is doing the same thing as it was doing last week – treading within fine lines in the sand. Breadth looks ready to break to the upside but is moving closer to the uptrend line. Likewise price is in a small symmetrical triangle and is about to hit the triangle apex – funny things tend to happen at the apex, so get ready either way. Bottom line: The market continues to coil and will likely break one way or the other soon.

2. Double inside weeks: What is a double inside week you might ask, and why does it matter? A double inside week is when the market puts in a lower high and a higher low than the previous week. In only a relatively small period of time (20 years) the last couple of times it happened was near a major market top. I wouldn’t get too carried away by this data mining exercise, but certainly something to think about. Bottom line: The last couple of times the market put in a double inside week was around the last two major market tops.

3. Earnings estimates: The FactSet database of consensus estimates shows that analysts expect earnings to contact -2.1% for the market in Q3. The weak spots remain energy and industrials, the former still suffering from the oil crash. The (relatively) strong spots are utilities, consumer discretionary + staples, health care, and the materials sector.  With the oil price continuing to make a gradual recovery and the US dollar bull market pausing it’s likely that earnings will recover in the coming quarters. Bottom line: Earnings are still expected to decline in Q3, lead primarily by energy.

4. VIX in October: BCA Research shows a series of chats of the VIX during October of a presidential election year (yes, just like now). The main point is that the seasonal pattern for volatility is that it usually goes higher in October, and especially around the election – and this year you could expect even more volatility in the lead-up to this very contentious election. Thus the message from BCA is to buy the VIX. Bottom line: Expect volatility to increase in October and in the lead-up to the election.

5. Q4 seasonals: Schaeffer’s Research points out the seasonal pattern for Q4 is that the market generally goes higher (but usually after October). This is the same in an election year, albeit it is more muted and with a potential double dip likely. Thus the main message from them is to be ready to buy the dip as the odds will likely be in your favor on this variable alone. Bottom line: The seasonalities are strong in Q4 and suggest buying the dip may be a good strategy.

6. The WSJ CAPE: Have you heard of the Shiller PE? what about the WSJ CAPE? The Wall Street Journal made a revised version of the popular CAPE (Cyclically Adjusted Price to Earnings ratio) that keeps earnings accounting treatment constant (it actually changes a bit through time under the original version). The result is that the market looks much less expensive, and not really overvalued at all. So this will be food for thought for those bearish for valuation reasons. Bottom line: The m

7. S&P500 – the growth of sectors: This one might take some by surprise, only as far back as 1957 the S&P500 had just 3 sectors (Industrials, Utilities, and Rails).  Through time it made additions, subtractions, and reorganizations of the sectors, and the long story short is that today’s S&P500 looks vastly different from that of 1957. So what? Just be careful of analyzing an index where the makeup through time has changed materially would be my key takeaway. Bottom line: The S&P500 by sectors is a very different beast in 2016 vs 1957.

8. Sector representation through time: A time series of sectors shows how dramatically the market makeup can shift. In 1995 the market had a fairly broad and diversified representation with the bottom sector at 5% and the top about 15%. Now the market is much more skewed – the top now over 20% and three down the bottom in the 3% club.  Again it’s worth monitoring these stats to be aware of market changes, and concentrations. It’s also revealing in that it shows bubbles e.g. the 2000 IT bubble, the 2007 financials bubble, and more recently the energy bubble. Any guesses for the next bubble? IT? Healthcare? Bottom line: Tracking changes in sector representation is important for detecting changes and rises in concentration.

9. Sectors –

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