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
One Of The Original Quants Has Still Not Lost His Touch With A 121% Return In 2020: In-Depth Profile Of Robert Zuccaro
Robert Zuccaro has been using quantitative investing strategies since before quant funds existed. In fact, he started one of the earliest quant funds at Axe-Houghton in 1978, 10 years before Morgan Stanley introduced its first quant fund. Q4 2020 hedge fund letters, conferences and more Zuccaro has been researching the correlation between earnings growth and Read More
1. 50dma breadth: First one is market breadth (% members above 50 day moving average), but also a minor chart pattern (a symmetrical triangle). I highlight this chart because it illustrates how the market seems poised for a move (either way), and those lines will be crucial in setting the direction for the next move. Market breadth has made a series of higher lows, suggesting underlying strength, but given a symmetrical triangle can break either way it will likely pay to watch for a break (either way) and go with it).
Bottom line: The market is coiled and ready for a move either way.
2. Twitter sentiment: This chart shows an innovative way of looking at market sentiment – by running an algorithm to analyse tweets. What’s interesting about this chart is that the twitter sentiment momentum line for SPY has broken its downtrend, again suggesting underlying bullishness.
Bottom line: Twitter sentiment is bullish on the S&P500
3. Active manager positioning: This chart shows the NAAIM exposure index against the S&P500 – there’s two things to note, first of all the indicator is best used in market timing for picking bottoms… i.e. when it gets “too bearish”, vs tops. When the indicator gets “too bullish” it often occurs when there is a strong trend and underlying momentum in the market, and thus using it top pick a top can easily wrong foot you in the short term. That said there has been times when it works to pick a top, and these are usually when it lines up with other indicators for confirmation, something to keep in mind…
Bottom line: The NAAIM index is quite bullish at the moment.
4. CAPE: This chart comes from an article that discusses whether there is some sort of QE premium. The basic conclusion is that valuations have been pushed to extreme highs, and out of line with fundamentals by central bank policy. Either way, the CAPE (Cyclically Adjusted PE – or price to 10 year average earnings) is fairly high vs history and historically correlates to lower longer term expected returns, but then again central bank policy and ultra low yields are a form of fundamental that could be used to justify these levels…
Bottom line: Valuations, specifically the CAPE, are high – arguably as a result of central bank policy.
5. Another view of valuations: This one from Leuthold shows price to 5 year (as opposed to 10 year) normalized earnings, and comes to a similar conclusion – valuations are high. It’s worth noting that valuations have gone to higher levels in the past – which is not necessarily a justification or rationale to chase it, but it’s cautionary that valuation arguments for the topside can take a while to play out.
Bottom line: Another view of valuations (price to 5 year normalized EPS) also shows high/expensive valuations.
6. Tobin’s Q: This chart appeared in an article taking a different position on the impact of central bank jawboning and extraordinary monetary policy aka QE. The main conclusion is that the Fed does influence the markets, just like it has done for decades, and now really isn’t that different (valuations are high but not materially stretched from 2006-07 when the Fed was actually hiking).
Bottom line: Valuations are high and central banks influence the markets, but perhaps not more than usual.
7. S&P500 fundamentals: This chart from a BCA blog post highlights how fundamentals are not wildly supportive for equities in the longer term (S&P500 market cap % of GDP seems to have reached the upper end of the range, corporate profits % of GDP have rolled over, and earnings have contracted). However they conclude that a gradualist Fed, the pause in the US dollar bull market, and no imminent recession mean US stocks could be supported in the short-medium run.
Bottom line: The fundamentals don’t look too hot for the S&P500 longer term, but short term the market could still go higher.
8. Seasonality: Time to talk about seasonality again, the reason is, while we’re still not quite out of the woods on negative seasonality… we’re getting closer to the part of the year that sees positive seasonality for the S&P500. The old saying , “sell in May”, in its long form actually says *come back* in late October/November – a nod to the fact that historically the average pattern has been poor performance May-Oct and good performance Nov-Apr. So if you can get through the next week or so things might start looking up – but keep in mind the caveat – seasonality is just one factor and there are always exceptions, and those exceptions can come at the worst possible time.
Bottom line: We are getting closer to the time of the year where stock market seasonality becomes positive.
9. Leading indicator model: This interesting looking “leading indicator model” from Ned Davis Research shows that the indicator put in a buy signal earlier this year and has remained in the buy-zone since. There’s not much else to say on this one except that it appears to have given some useful signals in the past, so another one for the bulls.
Bottom line: The NDR leading indicator diffusion index remains in the buy zone for the &P500.
10. Earnings leading indicator: The ECRI Weekly Leading Index has jumped in recent months, while they don’t disclose the components, and I won’t actually spend time speculating on why it’s gone up, what I will point out is that in 1992, 2002, and 2009 a spike in this indicator previously picked a recovery in forward earnings growth. So will this time be different? The coming weeks will provide an insight as earnings reporting season kicks off for Q3, but for now it’s fair to say that this is certainly an interesting chart.
Bottom line: The rise in the ECRI WLI points to an earnings recovery for the S&P 500.
So where does all this leave us?
There’s probably 3 main themes that came out of this week’s charts:
1. Positive technical set up
There is an interesting combination of a market that looks coiled and ready to move (chart 1), that has strong underlying momentum (charts 1-3), and while we’re still not quite out of the negative patch – positive seasonality is on the horizon (chart 8). Taken together this would make me think the technical setup would make you hold a bullish technical bias.
2. Positive fundamentals?
While the fundamentals have been a bit shaky e.g. falling profit margins and earnings (chart 7), the leading indicator diffusion index buy signal (chart 9) along with the seemingly impending recovery or acceleration of earnings (chart 10) would provide some cause for considering potential upside on the fundamentals.
3. High valuations
Finally, while the previous two points could carry the market higher, the valuation aspect keeps coming back. Charts through 6 (and there are many, many other charts I could show that present the same picture) show a market that is approaching the upper range of historical valuations. We can debate whether this is justified, whether it might be some structurally higher bound, what’s driving it, and what it means for investment decisions, but either way valuations are high. Valuations can always get higher, but it certainly does warrant consideration, particularly for longer term investors.
This week’s ChartStorm highlighted a number of charts that arguably presented fodder for holding a bullish bias on technicals and fundamentals. At the same time it’s clear that absolute valuations are high versus history. The previous factors can carry the market and push valuations even higher, so it’s important to take a balanced and multi-factor approach to markets that’s relevant to the time frame in which you’re operating. Either way, it appears the market can go higher short-medium term before necessarily unraveling due to high valuations.
See also: Weekly S&P500 #ChartStorm – 25 Sep 2016