Weekly S&P500 ChartStorm - 1 October 2023

This week: monthly chart, market technicals update, financial conditions, seasonality, bull market signals, rates vs valuations, global vs US, 1800's railway stock chart, Fed hiking and the market...

Welcome to the latest Weekly S&P500 #ChartStorm!

Learnings and conclusions from this week’s charts:

• The S&P 500 closed down -4.9% in September (second monthly decline in a row).

• Financial conditions have tightened significantly (surge in bond yields, USD, energy prices), but we have seen an initial climax in these moves.

• Medium-term bull market signals from margin debt + sentiment remain intact.

• The equity risk premium (using CAPE earnings yield and TBill rates) points to cash outperforming equities over the next 3-years.

• UK railway stocks price action in the 1800’s serve as a reminder that technological revolutions aren’t always kind to investors.

Overall, I would say technically the market looks primed for a rebound, and seasonal headwinds will soon be passing. But the sharp and substantial tightening of financial conditions and bigger picture technical deterioration would suggest skepticism on the sustainability of any short-term bounce.

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1. Happy New Month!  The S&P500 closed September down -4.9% on the month — its second monthly decline in a row. YTD the market is still up 11.4% (12.3% including dividends). It’s also still tracking above its 10-month moving average (just), but it does now mark a clear and inarguable lower high.

Source: 

Topdown Charts

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2. Basing Breadth:  As of late last week the S&P500 did edge below the 4300 level, albeit some might say not convincingly so (see next chart) — if we do chalk that up as a breakdown though, the next line of support… and probably a strong one at that, will be 4200 and the 200-day moving average. But speaking of the 200-day moving average (which is probably the most widely followed simple tracker of up vs down trend), the 200dma breadth indicator looks to be attempting a base at 40%. Holding that line will be critical in terms of the underlying strength (or lack thereof) of the market.

Source: Callum Thomas using MarketCharts

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3. Correction Drivers:  Updating this now regular feature, all 3 facets of the correction drivers chart have made an initial base (bond yields [bond price], US dollar [inverted], and oil price [represented here as tech vs energy]). The market also managed a rebound off of its now clearly apparent short-term downtrend line. So this would be a logical point for the market to perhaps bounce back to test the (now downward sloping) 50-day moving average, and that gap around 4400.

Source:  @Callum_Thomas using StockCharts 

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4. Financial Conditions:  But I do think it is worth emphasizing, as previously detailed with the stronger dollar, bond yield surge, and oil price breakout — that this all does represent a significant tightening of financial conditions. And that is going to reinforce the bearish tone and likely cap upside in the immediate term.

Source: @RealAlpineMacro via

Daily Chartbook

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5. Seasonal Shifts:  Another interesting point to note is that the seasonal headwinds are close to passing. Does this mean a Q4/year-end rally is a sure thing? Of course not — there are no sure things in markets, and many exceptions to the seasonal rules. But it is a well known phenomenon, and could at least underpin sentiment/hope as the market mood takes a sudden shift to the bearish side as many minds begin to change.

Source: 

Topdown Charts

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6. Bull Market Signals (1/2):  Interestingly, the latest margin debt data shows the longer-term bullish signal is still intact (which is when margin debt contracts by a sharp/significant degree, and then turns back up).

Source: 

Topdown Charts Professional

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7. Bull Market Signals (2/2):  Similarly, the “Euphoriameter” (tracks sentiment based on surveys, risk pricing, valuations) is still back on the bullish side, and as previously noted has not failed in recent history as a medium-term bull signal when it drops deeply pessimistic and then turns up. But then again, many things are different now vs the past couple of decades.

Source:  Euphoriameter

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8. Rates & Valuations: As noted a couple of weeks ago, the equity risk premium has been evaporating — it’s a toxic combination of higher rates and lower earnings yield. This means the odds are in favor of cash vs stocks (the chart below implies that cash is set to outperform equities over the next 3 years).

Source:  @MebFaber

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9. Global vs US Equities:  Despite (or because of) high valuations in the USA, the rest of the world by comparison looks cheap — historically cheap. You have to go back to 1965 to find a similar valuation discount. Valuation often doesn’t matter in the short-term, but it definitely sets the tone for longer-term outcomes.

Source:  Daily Shot

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10. Winning Tech =/= Winning Investors?  This chart is an interesting and timely reminder that some new and disruptive technologies do indeed transform the world, the way we do things, and the prospects of companies that are not even directly involved in the tech… But these new technologies can end up being a poor investment themselves, with investors facing difficulty in terms of picking the winners, capturing the gains, and navigating the treacherous cycles of bubbles, hype, and excessive valuations.

The chart below shows the path of British railway stocks in the 1800’s, and a clear example of the bubble/hype-cycle (which actually burst in the 1840’s as interest rates surged!).