To The Moon

Learnings and conclusions from this week’s charts: $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$

• Sentiment has undergone a partial reset.

• Short-term technicals remain tenuous (chart 3).

• ex-Mag 7 Earnings are set to outpace Mag 7 later this year.

• Small cap stocks are extreme cheap vs large

• Inheritances are on the rise, and margin debt is on the decline

1. Sentiment Sniffles

The latest surveys finally showed some reset in investor sentiment, with the combined bulls vs bears reading from the AAII + II surveys dropping down to neutral. This would be consistent with a bull market correction (shaking out of excess optimism).

2. Fund Flows

Following on, it’s interesting to note how the market correction comes at a time just as investors in ETFs and mutual funds had started to get back into equities.

3. Health Check

In terms of the healthiness or otherwise of the correction, one thing to keep tabs on is what triggered this... Arguably rising bond yields is a key factor (falling TLT), along with rising oil prices + tech toppiness (XLK vs XLE ratio falling) — so far these lines in the lower panels have not markedly turned around, so it does raise questions on the sustainability of the bounce. Meanwhile on the technicals, the S&P500 is still contending with overhead resistance of 5100 and the 50-day moving average. So I would be looking at the bounce with some healthy skepticism.

4. Earnings — Growth vs Value

Investors have been crowding into growth stocks, lured by tales of superior earnings growth. But over the long-run, despite a massive valuation premium for growth vs value, the two groups have not really been worlds apart on earnings growth (5.9% for growth stocks vs 5.4% for value stocks). Are investors overpaying for growth?

5. Earnings Growth — Mag 7 and the Rest

OK, in the short-term, Mag 7 have indeed been on a dream run when it comes to earnings growth. But here’s an interesting development… later this year the rest of the market is expected to start outperforming Mag 7 on earnings growth. Trees never grow to the sky, night never lasts forever. Stay alert for narrative changes!

6. Small Things

Speaking of changing stories, here lies the long-term tale of small vs large. While the cycles vary in magnitude and duration, there does appear to be a distinct tendency for small vs large relative performance to undergo cycles, and on a number of fronts the current one seems overdue for a turn.

7. Small vs Large — a Big Valuation Gap

One key clue for shifts in the cycle in the chart above is relative valuations. And as things currently stand, small caps are about as cheap as they get vs large caps. All those stories and narratives about Large Growth are already in the price, and then some. Longer-term contrarian minded investors should take note.

8. Small Small

On a similar note, small caps are much smaller than usual as a percentage of all US equities. This should also be seen as a contrarian signal, and a clue to pay attention to.

9. Entitled

Millennials and GenXers are set to receive some of the largest inheritances in history. Can’t help but wonder how this might affect macro and markets (leaves lots of open questions e.g. timing, amount per capita, propensity to spend, impact on housing market, whether the funds net-exit or stay or even net-inflow into markets, and which ones…)

10. Hyper-Age

If there’s one thing that defines the Zoomer generation it’s overstimulation, and with more and more young people taking part in markets, what better way to grab their goldfish-like attention than to open markets 24/7?

For the record, I think this is a bad idea for investors (albeit good for brokers and exchanges, and maybe for day traders ..and all those who prey on retail). If anything I think you could make a case for fewer trading days and shorter trading hours. But clearly there is a trend here, and who am I to stand in the way of progress (especially as the world has already effectively drifted to more or less this outcome anyway).

https://www.chartstorm.info/p/weekly-s-and-p500-chartstorm-28-april-587