Weekly S&P500 ChartStorm - 22 October 2023

This week: technical check, risk triggers, real yields, WACC, cash vs equities, ERP, bullish signal, valuations ex-M7, small and mid value, seasonality, gold miners (and geopolitics)...

Welcome to the latest Weekly S&P500 #ChartStorm!

Learnings and conclusions from this week’s charts:

• The S&P500 has broken back below a key support level (+closed below its 200-day moving average), and breadth has also broken down.

• Yet, with 4200 still holding, there is some hope for “buy the invasion”.

• The surge in bond yields has significantly squeezed the Equity Risk Premium, pushed up the Weighted Average Cost of Capital, and is a key reason for the downdrafts in equities since July.

• Margin debt data is putting in a bullish medium-term signal.

• Small and Mid cap stocks are cheap vs Large caps and vs history.

Overall, there is clearly a negative impact playing out in the stockmarket from rising yields and tighter financial conditions, but on top of that is the collective bracing against what is coming next in the Middle East with known unknowns by themselves (invasion, response, spillovers) enough to rattle confidence and raise risk pricing. This week’s set of charts helps put things into context, but also bringing some balance to the bearishness.

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1. Risky Replay: A couple of points come to mind on this chart, the first is the sort of “risk-replay” underway — where the market made an initial breakdown vs support, rebounded back above, and then subsequently broke back down …just like it did in early 2022 (when thematically there was also a major geopolitical shock (with equally a very well-telegraphed invasion) and the initial transition away from monetary easing to tightening). The other concern is the breakdown in breadth, and overall orderly and consistent move lower since July as financial conditions tightened. The constructive take is that 4200 is still holding, and if geopolitics don’t spiral out of control, you could get a “buy the invasion” situation going on.

Source:  Market Charts

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2. Volatility Rising — Technical Triggers:  Against that though, and there are several other key charts/conditions to consider which we’ll get into in a minute, there is the fact that after a multi-month period of contracting volatility — we’re now in a rising volatility regime. And looking at the chart below, there are some very clear technical triggers if things deteriorate on the geopolitical/monetary/macro front…