Weekly S&P500 ChartStorm - 28 May 2023
This week: breakouts and bull traps, bad breadth, tech takeoff, animal spirits, AI bubble, artificial intelligence vs natural stupidity, IG credit, fun with fund flows...
Welcome to the latest Weekly S&P500 #ChartStorm!
Learnings and conclusions from this week’s charts:
While some call it a breakout, others might call it a bull trap.
Behind the scenes of the surge in (some) stocks, breadth remains weak, and the equal-weighted S&P500 shows a very different picture vs the Nasdaq.
A unique barometer of bullish speculation has broken out from the lows.
The breakthroughs in AI are fueling the breakout in tech stocks, and past analogs show how animal spirits can take things further than you might expect.
IG Credit is showing up as cheap vs the S&P500.
Overall, it’s a kind of confusing confluence of bad macro, bad breadth, weak cyclicals vs animal spirits, tech takeoff, and AI ebullience. At this point you either go on faith and follow the hype, or study the knowable data and take a more skeptical slant. In the meantime, there are some clear technical trigger-points on the upside and downside, and that should help reconcile or navigate between the two.
1. Breakout or Bull Trap? As of Friday’s close, the S&P500 edged just above the 4200-level, making its first steps in a possible breakout vs that key overhead resistance zone. But before we get too excited about a breakout, it’s worth highlighting the risk of a bull trap (which is when price breaks out, and then turns back down e.g. as it did in Aug 2022 before diving down into the October low). In other words, while it is an interesting development, it is not an all-clear signal.
2. What Breakout? If you look at the Equal-Weighted S&P500 it’s an entirely different story. Not only is it not breaking out, but it’s carving out what looks like a potential head & shoulders top (blue line is the neckline), it’s also below its 200-day moving average, and it lines up with the weakening breadth picture that I’ve previously noted. Indeed, if you look at the traditional cyclical sectors e.g. financials, real estate, energy, materials — they’re in bad shape, and defensive sectors (staples, utilities, healthcare) are losing ground in relative terms as traders rotate into tech.
3. Bullish Speculation Breakout: Despite all that, seems like people just want to jump back on the horse. After collapsing in 2022, bullish speculation is starting to take hold again. This chart shows the extent to which traders are piling into leveraged long vs short US equity ETFs. Compare and contrast the March 2020 bottom vs the Dec 2022 top — it’s an intriguing indicator, and most recently a sign of perhaps the early stages of a return of animal spirits.
4. Tech Takeoff: It’s all about tech… While tech is not immune from a potential bull trap either, there is a sort of speculative fervor that appears to be taking hold, and when mania comes to markets, fundamentals go out the window.
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