Weekly S&P500 ChartStorm - 8 May 2022
This week: tails of the Fed, bond market impact on stockmarket, corporate earning sentiment, stock/bond ratio, bear market rallies, valuation trends
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. Tails of the Fed: Fed-day market put in a relief rally of 3%
...next day: market realizes zero relief will be provided until inflation is under control and "soft landing" acquired, down -3.6%. Two tails of the distribution in one week.
2. Stocks vs Rising Bond Yields: The monetary tides are going out and equities are going to be left high and dry (especially those that traded on priced-for-perfection record high valuations).
3. Bonds to the Slaughter: Bonds are getting murdered.
This is not good for stocks...
4. Rate Hikes: This chart shows the “A/D Line“ for central banks (cumulative sum of net amount of rate cuts minus rate hikes). Basically if it is going up then more central banks are cutting rates, and if it is going down then more central banks are hiking rates. As you might expect, the market echoes its movements, and apparently the market seems to follow with a lag, which makes sense (i.e. in terms of leads/lags of monetary policy transmission).
My take: don't overthink it, you can either swim with the tide or try to swim against the tide... and right now it is a tsunami of rate hikes.
5. Monetary Policy Tightening: Similar type of indicator: same message, but focused on the underlying economic pulse...
Globally there has been a big pivot to monetary policy tightening by central banks, and this should logically lead to an economic slowdown.
6. Corporate Earnings Sentiment: Should be no surprise then to see that corporate sentiment has plunged: EPS at risk.
(tighter financial conditions hits stocks directly in terms of liquidity, but also indirectly in terms of the economic/earnings pulse)
7. Stocks vs Bonds: Seems like the S&P500 has melted up vs bonds.
Chart shows the S&P 500 vs the ultra long bond since 1980: "Not only is the level high, but massively overbought in a relatively short period of time."
8. History Lesson — Bear Market Rallies: Useful piece of reference material in terms of how seducing and stark the bear market rallies can be.
9. Stockmarket Valuations: Smoothed longer-term view of S&P500 valuations
Maybe we ditch that “permanently higher plateau” term and instead go with “Permanently Parabolic ?
10. ETF Strategies Performance post-Launch: According to a study, thematic strategies have a habit of underperforming post-ETF launch (might say they are good at picking the top -- easiest time to raise AUM is when a strategy/style/sector is hot)
Thanks for following, I appreciate your interest!
oh… that’s right, almost forgot!
BONUS CHART >> got to include a goody for the goodies who subscribed.
Investor Sentiment vs Positioning: As noted last week, investor sentiment has crashed to levels last seen in 2008. But this time we compare it to investor *positioning*.
Basically, while investors *say* they are extremely bearish, their portfolio allocations appear to tell otherwise: investor allocations to equities remain near the top end of the range. Hodl has come to the stockmarket?
There have been a few times where sentiment has become quite disconnected from positioning, in some cases it ended up being simply hysteria. But in other cases it ended up basically being early… Or said differently: sentiment reacts immediately, while positioning moves more slowly.
Probably what is needed to move the black line is an actual fall in the PMI below 50, disappointing earnings, and more proof that the Fed means business in terms of taking the punchbowl away and driving toward a soft landing.
The other thing is bonds are still being bludgeoned. That makes portfolio allocations to stocks vs bonds a little muddy. So in that respect, what is likely also needed is a bottom in bonds (which would likely come when it is clear that the economy is turning down and perhaps when the Fed is a bit more progressed).
Finally though, it should be said, one potential implication of this chart is that there could still be a lot of selling yet to come.
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