Weekly S&P 500 ChartStorm - Context, Optimism, And Doom

by: Topdown Charts


Context is a keyword this week - a surprisingly valuable but often in-actionable, individually low insight thing.

Optimism is clearly on the rise, and retail investors are displaying a clear and evident surge in bullishness.

Extreme optimism adds to the growing list of bearish signals, of which there are a few more in this edition of the weekly ChartStorm.

Those who follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically, I'll pick a couple of themes and hammer them home with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether it's bearish, bullish, or something else!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.

So here's another S&P 500 #ChartStorm write-up!

1. Market drawdowns: The first chart in this edition is from Tiho Brkan and shows the drawdown % for the S&P 500. The key takeaway or observation for this one is that there has been very little in the way of drawdowns for quite some time. Again, with these sort of charts, it's not so much a prediction as an observation - important context, and certainly something to keep in mind as we go through the rest of the charts.

Bottom line: The S&P 500 has had a relatively smooth run.

SPX drawdowns

2. Seasonal cycles: This chart shows an interesting take on seasonality (the more traditional approach is seen in the following chart) from Ned Davis; it is a composite of the annual seasonal cycle, the presidential cycle, and the decennial cycle. Many things in life move with a cycle, from the circadian rhythm to the seasons of the year, and markets and economies are no exception; being constructs of humans - which in turn are beings of nature. Having said that, cycles tend to be messier and less consistent/reliable in the markets. And while this chart may prove prophetic with a deep correction in the coming months, there's no guarantee. Worth pondering though.

Bottom line: The composite cycle pattern points to an impending correction.


3. S&P 500 seasonal trend: This chart shows one component of that composite cycle; i.e., the annual seasonal pattern across 1990-2016. I've also shown the seasonal pattern if you exclude the impact of the financial crisis - interestingly, the difference is negligible. Anyway, the main point on this chart is that the S&P 500 has been dancing to a familiar tune this year, and for now has been defying the negative seasonal tendency typical of this time of the year. Seasonality doesn't always work, but it is worth noting. Also - the reason I have used two axes (there's always comments on that) is because I am interested in the trend, not the level. The other reason is that any given year will see a much wider range than the longer term average due to the inherent dampening effects of calculating an average.

Bottom line: Seasonality is negative and the S&P 500 is defying this tendency.

4. The economic noise index: The economic noise index is a combination of the signals produced from the Citi economic surprise index, and the economic policy uncertainty index. It is designed to capture the background economic noise and reflect how it will be impacting sentiment. From a market timing point of view, it works basically as a contrarian indicator. That is, extreme levels of negative noise are typically encountered around a market bottom, and vice versa. At present, the indicator has turned down from positive levels - this tends to produce a low-conviction bearish signal.

Bottom line: Economic noise is turning down, which is a bearish signal.

5. TD Investor Movement Index: The TD Investor Movement Index is an interesting data series produced by TD Ameritrade and is based on the real activity of their brokerage clients. Basically, the higher the indicator goes, the more individual investors are net-buying equities. You can see increasing enthusiasm demonstrated by this group as the market marches higher. This is a key signal that investors are increasingly bullish and are taking action on this sentiment - a real life measure of sentiment. The signal will come from this indicator rolling over, but the fact that it is at an extreme level is informative.

Bottom line: The TD IMX shows extreme optimism by retail investors.

6. Stock vs. Cash Allocation Ratio: This indicator from Lance Roberts shows the ratio of stock vs. cash allocations in the AAII portfolio allocations survey. Clearly, this indicator goes up when investors are more and more invested in equities and run down their cash allocations. It will move higher by virtue of the stock market simply taking the allocations higher (assuming no rebalancing) or by investors actively rotating out of cash into stocks. It does ignore the bond element; however, it is still an interesting concept and provides further context on sentiment and retail involvement in the market.

Bottom line: The AAII stock vs. cash allocation ratio is getting stretched.

7. Market cap vs cash: This graph provides another angle and unique take on the previous chart. Instead of surveyed allocations, it takes actual stock market capitalization and compares that to the amount of assets under management in money market mutual funds. While there are many ways to hold cash, it is one objective and readily available data series and it provides an objective real life view of basically the same metric/signal as the previous chart. The conclusion is the same.

Bottom line: The ratio of S&P 500 market cap to cash funds is stretched.

8. Relative performance indicator: This indicator is from the Leuthold Group and it shows a measure of relative performance: the percentage of S&P 1500 stocks outperforming the S&P 500. It is basically a market breadth indicator and has in the past provided some early warnings when it turns down, e.g., prior the financial crisis. However, as they note in the tweet, it is not a red flag as such. Still, the bearishly hued signals start to add up.

Bottom line: The % of S&P 1500 stocks outperforming the S&P 500 is falling.

9. Buybacks back-off: This chart shows the path of corporate buybacks with the context of the S&P 500. My first thoughts on this chart is that it would be interesting to see people's reaction... Not long ago there seemed to be a vocal crowd lamenting the impact of buybacks on lifting corporate debt, goosing the market higher, and distorting the earnings per share figures. My suspicion is that these people will now encounter great angst that it is falling and hence an omen of doom given that it fell in the lead-up to the financial crisis. I'm ambivalent on this one. It is interesting and potentially an important signal, but you know, buybacks are one way of deploying cash - M&A and Capex are two other ways, which are inherently bullish. So maybe it's not all doom and gloom as some might have you believe...

Bottom line: Corporate buybacks are tailing off.

10. The current market in context: The final chart provides another piece of context (that seems to be a keyword this week!). It shows the current market vs. a selection of previous bull runs. I won't comment on the technicalities of whether you should measure from 2009 or 2011, but it is notable how it looks fairly normal when compared to the 80's and 90's. I won't comment either on how it might still have room to run given the experience of the 90's. That's all on this one.

Bottom line: The current market has run further than some but not others.

So where does all this leave us?

This week there's probably 3 categories of interest:

1. Context
Context seemed to be a keyword this week, it's often a word used when a chart is interesting and notable but has no real actionable or immediately meaningful signal or implication for investors. The first and last chart fall into this category, and while they don't provide meaningful signals as such, context can be very valuable and important perspective to have. In other words, there is value in context.

2. Happy times
A number of charts showed the extreme optimism that seems to be progressively moving into the markets: the surveyed and implied actual measures of stock vs. cash allocations, the voracious net-buying of equities by TD's clients, and possibly also the fall in buybacks (if it reflects cash being deployed to other means). Extreme optimism can be well placed and justified, but it can also be a...

2. Bearish signals
Bearish signal when optimism gets extreme - it's the other way of interpreting bullishness and confidence. Eventually, the crowd will typically be wrong at extremes. The other bearish signals come from negative seasonality and negative signals from the composite cycle measure, the turn down in economic noise and 1500 stock vs. 500 relative performance also adds to the growing list of bearish indicators and signals.


This week we were reminded of the importance of context in keeping things in perspective. And it is important and valuable. Aside from that, we saw how optimism and bullishness is rising in the market as retail participation appears to be on the move. This can be well placed and well justified optimism - people aren't stupid after all - but it often eventually ends up that the crowd is wrong at extremes. So the conclusion tilts once again to that of a rising weight of bearish signals. What else can I say when the charts say it for me...

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.