Weekly S&P500 ChartStorm - 10 September 2023

This week: technical check, financial conditions, investor sentiment, yield curve inversion, energy sector, interest expense, revenue exposure, the sour spot...

Welcome to the latest Weekly S&P500 #ChartStorm!

Learnings and conclusions from this week’s charts:

• The surge in bond yields + USD + crude oil amount to a notable tightening of financial conditions (headwind to stocks).

• Yield curve inversion may still come back to bite stocks (based on history).

• Investor sentiment has been trending higher: which coming out of a period of pessimism is a medium/longer-term cyclical bull signal.

• Energy stocks are in a decadal long-cycle upturn (starting from 2020).

• Corporate interest expense is trending higher.

Overall, it’s going to be hard for the market to sustainably rally in the short-term in the face of that notable tightening of financial conditions, even as the overall mood of investors remains optimistic with an apparent ongoing bias to buy the dip. Meanwhile the Fed is still a week or so away, so any assurances or otherwise remain in the air on that front. In the immediate term, I think rates/oil/US$ are going to set the script for stocks.

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1. Financial Conditions:  The inconvenient truth for the stock market is that Bond Yields have moved up almost 100bps off the May/Apr lows (TLT in the chart below), the US dollar has rallied over 5% (UDN in the chart below), and WTI crude oil has rallied over 30% off the lows (using relative performance of tech [XLK] vs energy [XLE] in this chart as proxy) — all of this amounts to a material tightening of financial conditions, and this headwind is the reason why stocks have stalled.

Source:  @Callum_Thomas using StockCharts

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2. Liquidity/Speculation Conditions: Tightening of financial conditions along with ongoing monetary policy tightening (higher rates, QT) and credit tightening has meant an overall curtailing of liquidity conditions and speculative mood — we see this clearly in the path of the Nasdaq and Bitcoin (what I argue are good barometers of speculative mood and liquidity conditions). Interesting also to note how the floor in Bitcoin is being defended, and possible sentiment ramifications it would trigger if the (very artificial looking) floor gets taken out.

Source:

Topdown Charts

(entry-level)

Topdown Charts Professional

(institutional)

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3. Investor Movement Index:  Despite the recent tightening of financial conditions, investor sentiment has turned up off the lows and continues to incrementally become more bullish and optimistic (hence why there has been that upward momentum and relative resilience despite the headwinds and walls of worries).

Source:  Investor Movement Index

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4. Euphoriameter:  Similarly, the “Euphoriameter” (tracks smoothed surveyed sentiment, implied volatility, and valuations — to present a holistic view of investor confidence) also turned up after extreme pessimism, which is normally a medium/long-term cyclical bull signal. Albeit, the latest reading did tick down slightly.

Source:  Topdown Charts Euphoriameter

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5. The Curse of the Yield Curve:  Interesting study noting that "in nearly seven decades, there has never been a post-inversion equity market rally that has not been more than fully reversed going into subsequent downturn or bear market…" Premature jubilation in 2023?