Weekly S&P500 ChartStorm - 5 November 2023
This week: technical check, failed breakdowns, green lights, seasonality, sentiment, cash allocations, top heavy markets, long-term cycles, stocks vs bonds, 60/40...
Welcome to the latest Weekly S&P500 #ChartStorm!
Learnings and conclusions from this week’s charts:
Last week the S&P500 rebounded sharply after chalking up a series of failed breakdowns — setting a decidedly bullish technical tone.
The sharp tightening of financial conditions has reached a peak.
Seasonality is turning positive, and sentiment has materially reset.
The S&P500 is still heavily lopsided, with the increasingly big “big tech” taking a disproportionate market cap share vs earnings.
Beware of recency bias as a number of longer-term market cycles are looking long in the tooth (US vs global, tech vs non-tech, stocks vs bonds).
Overall, the price action of the past week struck a decidedly bullish tone. Peak geopolitical fear, possible peak in Fed rates, and short-term peak in financial conditions tightening… along with a reset in sentiment + positive seasonality sure makes it easy to believe in a year-end rally. Will it really be that simple?
1. Green Lights: This chart combines a couple of things I’ve been tracking in recent weeks — first is that downward sloping trendline: we’ve just seen not only a bounce off that line but also a failed breakdown through it (and the 200-day average), and the market even edged back up above its 50-day moving average. Looking at the lower panels, the first shows TLT 0.00%↑ (basically bond yields inverted) which has tentatively broken its downtrend, the second shows UDN 0.00%↑ (basically US Dollar inverted) turning the corner, and then finally XLK 0.00%↑ vs XLE 0.00%↑ shows tech stocks shaking off their bear run and crude oil prices coming off the boil. Overall representing a peak in that previous tightening of financial conditions (where crude oil + bond yields + US$ were all going up), and taken as a whole it’s a fairly bullish looking picture.
2. Failed Breakdowns: On a similar note, and also following-up on a previous running feature, this chart highlights how along with the failed breakdown below its (upward sloping) 200-day moving average the S&P500 also chalked up a failed breakdown below that key support level [n.b. notice how it did the same thing in reverse last year — poked its head above the 4200 level and got shot back down]. But also the breadth of stocks trading above their respective 200-day moving averages has made its own failed breakdown, and is now turning up from basically oversold levels. Again, strictly on technicals and knowing nothing else, this looks good.
3. Et tu, Santa? Along with all that we’ve got positive seasonality coming online, with the increasingly hyped “Year-End Rally” coming into focus. In terms of monthly returns, across all years (from 1964-2022) the S&P500 turned-in positive returns across November and December 68% and 71% of the time respectively… those are good odds.
4. Sentiment Reset: The other interesting piece of context alongside the previous points is how sentiment has reset significantly (albeit not yet to extreme bearish) from previous optimism.
5. Cash/T-bills on the Sidelines: Investor allocations to cash have increased significantly (as you might expect given the relatively decent risk-free returns offered by cash investments). Perhaps another argument for a larger rally into year-end.
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