To The Moon

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

• The index is being driven higher by mega-cap tech stocks.

• Breadth is weakening (bearish divergence).

• Tech sector credit risk pricing is calming as recession risks recede.

• Implied correlations are at warning levels.

• Foreign allocations to US stocks reached a record high.

1. Surface-Level

The S&P500 index is looking as strong as ever, it’s broken through multiple overhead resistance levels, and is comfortably above its upward-sloping 50 and 200 day moving averages. The *index* is the epitome of a bull market uptrend. Yet, over half of the 500 companies that make up the index are tracking *below* their 100-day moving averages. It’s a case study in narrow leadership and bearish breadth divergence.

2. Tech Too

Tech stocks are likewise going from strength to strength on the surface, but meanwhile the breadth of tech sector components shows a picture of relative weakness under the surface, even in tech. Or to put it differently, this is increasingly a market driven higher only by the largest of the largest in Tech.

3. Only the Biggest

Another sign of narrow leadership is the extent to which individual stocks in the S&P 500 are underperforming vs the index (~2 thirds to May) — this is reaching similar levels as the later more-frenzied stages of the dot com bubble in 1998/99. It makes it harder for stock pickers to beat the index (other than just buying and market timing in the biggest stocks), but it also shows a vulnerability as any weakness in the biggest stocks could unwind all their hard work in dragging the index higher.

4. Tech Credit Calm

On the other hand, we are in a calming cycle in credit risk pricing. The bearish take would be that CDS pricing is too low and complacent… but historically, falling credit risk pricing has been a bullish sign — the time to be concerned is when it reaches rock bottom and then starts ticking higher. Indeed, it’s quite rare outside of shocks and crashes that credit spreads or CDS just go and spike without warning — they usually give you advance warning by slowly but surely turning first. So arguably this is a sign of bullish momentum for tech.

5. Receding Recession Risk

On a similar note, the market has completely climbed over the wall of worry on recession risk. If anything the greater risk now seems to be “reacceleration risk”. That said, at a certain point, much like the previous chart, the lack of chatter on recession will become a contrarian indicator.

6. Implications of Record-Low Implied Correlations

This chart is a great echo of all of the themes we just looked at — it is at once yet another sign of how concentrated the market is and how narrow leadership has been (stock correlations go down when leadership is narrow, a small number of stocks driving it higher — often reflects bubbly conditions in a single sector). It is also a sign of complacency and I would say already at contrarian bearish levels. A warning sign not to be disrespected.

7. Foreign Flows

Just updated with the latest data, this indicator has reached a new all-time high. Foreigners are much more inclined to hold US equities vs other holdings of US financial assets. And well, it probably makes sense that they would prefer to hold US Big Tech vs US Big Debt. Probably also a contrarian indicator too though (compare and contrast 2000 peak vs 2009 trough).

8. Value vs Growth

Looks like a new paradigm — unprecedented underperformance of value vs growth.

9. Expectation Cycles

This chart shows Wall Street analysts consensus long-term earnings growth (LTG) forecasts (over a 3-to-5-year horizon) in the red, stock index in the green. The authors of this study found that extremes in expectations were a contrarian indicator, but upticks in LTG flagged upticks in the business/investment cycle. But overall it just confirms the notion that stock prices both reflect the info that analysts are looking at *and* influences their thinking through sentiment effects.

10. Sector Shifts

Interesting historical perspective on sector weightings — financials completely dominated in the first part of the 1800’s only to be later edged aside by transports, then to a lesser degree of dominance: energy, and now increasingly tech.

https://www.chartstorm.info/p/weekly-s-and-p500-chartstorm-16-june-7ec