Weekly S&P500 ChartStorm - 10 September 2022
The 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...
1. Lining Up: These are the lines that matter most.
There are a few things I would note on this: first, these are indeed the lines in the sand, and once either one of these lines gets broken then that will most likely define the market regime going forward (bear vs bull). The other thing is, aside from a breakout or a breakdown, “something else“ is always an option! (life tends to be messier than the textbook!) In that sense, we could easily see a rally up to the top end before a dip back down to the bottom end, just to add to the suspense.
2. Institutional Intrigue: Institutional investors are scrambling and can't get their hands on enough put options... is this simply backwards looking reaction (falling prey to the same psychological foibles that plague individual investors)? or prescience?
3. Put Premium Profusion: Another angle on the insto put-rush... someone(s) taking out a major bet on a market crash!
(albeit the optimistic take would be that the insto(s) doing this are actually heavily risk-on, maybe even establishing new longs, and just want a safety harness in the form of put protection)
4. SPAK OFF: SPACs were probably the most blatant symbol and symptom of the liquidity tidal wave the swept across markets in the wake of the pandemic. True frenzy.
And now the SPAC ETFs are being delisted.
Bottom or not, it tells you a lot.
5. Wealth Destruction: The central banks giveth. The central banks taketh.
6. Recession Talk: There are more companies talking about recession during earnings calls than during the depths of the pandemic panic.
Interestingly, those most vocal are Financials, Real Estate, Materials, Energy (i.e. the sectors traditionally most exposed to the economic cycle).
7. Fed Market Bottoms: Historically most bear markets needed rate cuts to sustainably bottom (and in at least a few instances needed a lot of rate cuts). Something to be mindful of when you consider that the Fed is still talking up further rate hikes, and is likely still a long way off pausing let alone pivoting to cuts.
8. Interest Rates and Earnings Yields: Interest rates go up = earnings yield go up.
(n.b. earnings yield = inverse of the PE ratio, so rates go up = valuations go down... aka “don't fight the Fed”)
9. Valuations: On a forward PE ratio basis (and again, we do need to be mindful that the forward estimates may fall and may be overestimating things if recession hits), US equities are in line with recent history average (but not cheap/below average). Whereas the rest of the world does look cheap vs its own history (and vs USA).
10. Buybacks vs Issuance: For most of history companies that Bought Back shares consistently beat those that Issued shares. Of course this is probably more of a symptom than a cause (companies that are generating excess cash flow can distribute vs companies that are deficient in funding/cashflow need to raise).
Thanks for reading!
Callum Thomas, founder and head of research at Topdown Charts.
Any feedback, questions, and views are welcome in the comment section below.
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