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Weekly S&P500 ChartStorm - 9 October 2022
This week: market technicals, investor sentiment, margin debt, flows and positioning, REIT relative performance, QE to QT, gold vs stocks, perils of stockpicking...
These charts focus on the S&P500 (US equities); and the various forces and factors that influence the outlook - with the aim of bringing insight and perspective.
Hope you enjoy!
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1. S&P Status Check: The past week was basically a wash, market is still meandering around that major line in the sand...
Bulls will say: this is bullish, no breakdown, there’s still a chance!
Bears will say: this is bearish, market couldn't rally off support!
But pausing to think for a second, the reason we pay any attention to “arbitrary lines“ like this is that it provides a useful framework for thinking about the next steps, and a trigger point for action/inaction. Clearly there are other people also looking at this or similar charts, so there is also important market psychology information in it too.
In terms of the next steps, it probably does need some sort of catalyst/excuse to break down (and down is probably the path of least resistance given the bearish market + macro momentum). Meantime probably more meandering until then.
2. Investor Dysphoria: The "Euphoriameter" is doing like it did in 08.
The good news is that the previous market froth and ebullience has been deleted. The open question is whether it is enough of a reset to be contrarian yet… (I would say probably not, and technically speaking the indicator probably needs to actually tick up first to trigger a buy signal as such, judging by previous episodes).
3. Bullish at the Margin? Puns aside, BofA analysis suggests the shift in margin debt rate of change is a contrarian bullish signal…
(albeit, n.b. this was early in the early-00’s bear and 08 crash — again, be patient on the bull side until the evidence says so)
4. Flowmo: ETF flows show investors are still net-buyers.
No capitulation here... and in general I would say my overall sense of the flows/positioning situation is somewhat of a wishful complacency.
5. Passive Flows: Investors are putting the blinders on and just buying the index. DCA
6. Long and Hating it: Consumers are extremely glum, but individual investors are still running (unusually) high allocations to equities.
7. Real Trouble in Real Estate.
(it's always real estate!!)
But then again, Fed Chair Powell did specifically and clearly tell us that the housing market needs to undergo a “difficult correction“. Guess we should listen for once.
8. Record QE to Record QT. You didn't think you could escape unscathed from this monetary maelstrom did you? Again — if you think that QE was helpful on the way up, you have to believe that QT will be unhelpful on the way down.
9. Gold vs Stocks: Intriguing chart — gold market cap relative to US equity market cap. Gold has had a tough year in absolute terms (falling ~6% YTD), but still holding some ground vs stocks this year in relative terms. Much like bonds, gold has not really performed its usual diversification role this time around given the monetary exodus. Maybe 2023 will be a better year for gold and bonds.
10. The Perils of Stock Picking: Many go to zero. Few shoot the lights out.
(the worst 80% of stocks had a combined 0% total return, while the best 20% accounted for all gains during the 1989-2015 period)
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This chart offers clues on the reasons why and shows the extreme risk that investors in standard 60/40 portfolios were perhaps unwittingly taking on late last year.
First, what even are we looking at? The chart shows a portfolio weighted average valuation indicator (i.e. 60% x Equity valuation indicator + 40% x Bond valuation indicator (using my (Topdown Charts) own proprietary indicators)).
The messed up thing is that both treasuries and equities were trading more than 1 S.D. expensive last year. That is not a recipe for success when you are hoping for one of those things to diversify the other…
Usually what happens with a portfolio like this is that when you get an equity market downturn, bonds tend to outperform, and help offset some of the losses on the equity side. This is Asset Allocation 101.
The problem is that while equities were facing extreme risk at the turn of the year (expensive valuations, crowded bullish sentiment/positioning, pivot in monetary policy to tightening)… bonds were equally facing significant risk (overvalued and overexposed to inflation risk, changes in monetary policy tides).
As a minimum this should be a prompt to ponder about your own approach to asset allocation. 60/40 worked for a while, but such a simple approach is arguably too simple: missing other important assets and missing an active process to control risk.
Indeed, the only things that have really “worked“ this year on the asset allocation front have been basically cash and commodities (and for what it’s worth, I was recommending precisely that in our asset allocation tilts earlier in the year… sometimes we get it right!)
But going back to the chart, December 2021 was actually *the* record high in the 60/40 valuation indicator. In hindsight, 60/40 never stood a chance.
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