Weekly S&P500 ChartStorm - 20 November 2022
This week: FOMO flows, market breadth bugle, economic recession and earnings, China speculation, stocks vs bonds, stocks vs fed liquidity model, the many minds...
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. FOMO Flow: Yes, downside risk is scary... But I'd say probably still the greatest fear out there among traders/investors is missing out if the market rips and runs away on you (which is entirely possible when sentiment is very pessimistic and how readily the crowd has jumped on any glimmer of pivot hope, and this sort of thing is likely front of mind for many following what happened in 2020). This chart presents a glimpse of this behavior in action.
2. Breadth Bugle: Is this familiar breadth pattern a rallying cry for bulls?
We do need to pay attention to what price is telling us… but I would note the macro setup was very different in 2015/16 -- China/ECB/BOJ rode in with big stimulus, the Fed did a 1-and-done rate hike pause, and the global economy narrowly avoided recession, and inflation was not an issue (deflation was). Maybe a macro catalyst becomes obvious in hindsight, but as things stand I can’t see an obvious driver for follow-through in this one (yet?).
3. Dollar Dynamics: Weaker US dollar = easier global financial conditions = big bounce in global equity breadth...
US Dollar = 🗝️
4. Have a hmm...
hmm 1: "historically stocks never dropped during the 3rd year of the Presidential Cycle (i.e. next year, 2023)"
hmm 2: "there has never been a recession in the 3rd year (yet)"
5. Earnings (bearish)Momentum: (recession = EPS 📉=stocks 📉)
As noted the other day, there are numerous signs pointing to global recession, and so far arguably this year’s bear has been more about geopolitics and rates shocks rather than declining earnings as such.
6. Earnings Macro (pt2): Another angle, aka why bother looking at the PMI — S&P 500 earnings revisions trace a very similar path to the new orders component of the ISM PMI.
7. Calling on China: While many commentators have been running with the "China is uninvestable" assertion, traders have been furiously buying up call options on Chinese equities (most likely betting on the prospect of a policy pivot away from covid-zero by China at some point in the near future).
8. Stocks Expensive: Despite the fall, stocks are showing up expensive vs bonds on a number of models, e.g. such as the one below. That means the odds are in favor of bonds outperforming stocks going forward...
9. Correlation Reorientation: I agree with this, an eventual transition in focus/macro narrative by the markets from inflation risk to growth risk will reactivate the more traditional negative correlation between stocks vs bonds (which following on from the previous chart, most likely expresses as bonds up, stocks down).
10. "Fed liquidity-implied fair value"
Current level of the S&P 500: 3965
Current model suggested Fair Value: 3600
Fair Value of model by the end of the year: 3400
(i.e. stocks are still overvalued going off this indicator)
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Long-Term Investor Sentiment: investor bullishness went from among the most bullish readings in 2021 to now *the* least bullish on record.
This smoothing helps visualize the trends in investor sentiment from euphoria during bull markets to deep pessimism in times of crises and bear markets, and everything in between!
I always say when it comes to sentiment it basically carries 2 key forms of information:
Momentum information through the range as the crowd slowly figures out the narrative, chases past performance, gets carried along by the news/noise, and jumps on board the bandwagon.
And then contrarian information at extremes where everyone is on one side of the boat, and all it takes is a little rocking to throw everyone off. Or in other words, when there are a lot of minds that could be changed.
Usually contrarian signals are most potent when a sentiment indicator reaches an extreme and then pulls back, or e.g. around market bottoms when sentiment craters and then begins to turn up.
As things stand, sentiment is increasingly less bullish, and increasingly more bearish. Is it at contrarian levels yet? Probably close. Going by that previous comment; on both counts we’ve yet to see a turn in the indicators, so it probably still is a case of momentum information.
But it must be said either way that right now there are a lot of minds that could be changed if the right reasons came along…
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