To The Moon

Learnings and conclusions from this week’s charts: $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ(.IXIC)$ $Invesco QQQ(QQQ)$ $NASDAQ 100(NDX)$ $DJIA(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$

• The recovery from correction still faces two important hurdles/tests.

• Emerging market equities meanwhile are breaking out.

• Large cap profit margins are more than twice that of Small caps.

• Hedge fund starts are down, but active ETFs are surging.

• Trailing effective interest rates are up notably.

1. Mixed Signals

So we got a resolution to that bearish divergence (i.e. the previous higher highs on the index vs lower highs on the breadth indicator) in the form of a >5% correction. So far we have seen little damage done to the trend (by contrast over 70% of stocks are tracking above their 200-day average, and the index itself is above the upward-sloping 200dma), but in the short-term the market is still dealing with the double resistances of the 50-day moving average and the ~5150-level. Whether or not we break back above those hurdles is going to be key in setting the tone for the next phase of the correction process (recovery vs risk).

2. Emerging Breakout

Elsewhere, things are looking decidedly risk-on for emerging markets, where the index has just undergone a key breakout. It’s a helpful signal to the S&P500 for other risk assets to be rallying like this, but I wonder if this one is more of a case of rotation opportunity vs a bullish intermarket signal for the US as such.

3. Old News? 

And another thing on Emerging Markets, they actually already broke out a few weeks ago in local currency terms, with an upward sloping 200-day moving average, and with expanding 200-day moving average breadth. From a technicals standpoint this is a pretty clear picture of emerging strength.

4. EM vs US

But before you get too excited about a possible rotation for EM vs US, take heed of this chart — yes it shows we are at the bottom end of the long-term range, and hence it’s as good a time as any to turn the corner… But it also serves up a cautionary in the 50’s and 60’s that the turning process for things like this can be a multi-year work in progress.

5. Large Margins

Speaking of relative performance, and following on from the charts and comments on Small Cap Stocks from last week, this chart adds some important context. Small Caps almost consistently have lower profit margins than large caps — maybe good evidence of economies of scale and monopolistic earnings advantages. But also note there does appear to be some cyclicality, and if we were to track the spread it seems like it would be at an extreme/nadir for small vs large.

6. Something Happened in 2009

European equities used to be good — more or less as good as US stocks. But something(s) changed in 2009. One issue was that Europe had to deal with the hangover from the credit boom, with rolling sovereign debt crises and structurally lower growth as it digested malinvestment and deleveraging. The USA on the other hand saw years of easy policy, and in some ways benefited from the European crisis (fund + talent flows, and excuses to run easier policy persisted). Not to mention the striking of tech-stock-oil (the emergence of a stable of semi-monopoly big tech companies). Quite interesting to reflect, but also a prompt to consider how the next period might unfold.

7. The Stockmarket is not the Economy

They always rattle off that line, but here’s one area where it is clearly true — Despite the total US market cap being over 180% of GDP, S&P 500 companies only account for 18% of total US employment.

8. Hedge Fund Hell

The hedge fund industry continued its decline through 2023, with the year marking the lowest number of fund launches since the late-1990’s. The headwinds of fee pressures and cheap beta and the push to private markets by asset allocators have made it difficult for aspiring hedge fund managers.

9. Active ETFs Activate

On the other hand, active ETFs have taken off. Goes to show, you can either bemoan and suffer from a new dynamic such as the rise of passive investing and ETFs, or ride that trend.

10. Buffetology

Got to include an oldie but a goodie since it’s Berkshire weekend — Warren Buffet’s net worth. The thing that this always reminds me or stands out to me is how he didn’t reach billions until his 50’s, and things only really accelerated in his 60’s. Power of compounding and a counter to the get-rich-quick-young crowd.

https://www.chartstorm.info/p/weekly-s-and-p500-chartstorm-5-may-8ac