S&P 500: Week in Charts

Week of July 31 - August 3 

Takeaways:

• SPX does not appear to be over-extended in the longer timeframe.

• Price action this year has oddly close seasonal characteristics to 2019 when compared.

• Short term price action indicates more selling is possible.

The SPX is Not Appearing Overbought

One method to look at whether a equity is overbought or oversold is to look at the long term moving averages. In this case we see peak highs in the SPX and its distance from the 200ma. 

At 15% the current market is hardly showing overbought long term in context with the previous measurements.

Market Breadth is still indicating a bullish bias. With 62% of stock still above their 50MA 

From a seasonal perspective, the 2023 SPX has a very similar cadence to 2019. 

• Strong start to January almost identical to 2019

• Then a 4 month divergence 

• Another almost identical 2 month uptrend to end up nearly 22% starting in June. 

• August looks to be starting very similar as well.

Short term, intra-week, the SPY broke below the previous day's intra-day low. 

• Typically this price action sets up for lower price discovery. 

• Friday was characterized by a strong morning then a sharp high volume selloff second half of the day.

Another interesting technical feature was there have been only two other times since March where the SPX ticked below 1500. In the few occurrences this year, it has been followed by and uptrend. It is a possible signal of capitulation.

Shocking Charts Show Inflation Is Still Red Hot

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CPI is a broad average number that means more to economists and politicians than the average person. There are many items that still more expensive than ever or still have a blistering rate of increase in prices.

Start with the basics: Food and shelter...

Rent +8.5 Y/Y

Increasing at rates not seen since 1980. This rapid rise in pricing has not been seen in 40 years. The pandemic created a massive shortage in housing and unaffordable prices in housing driving more people than ever to rent driving up demand.

Source: BofA Research

BofA chart confirms Fed data showing a massive gap in average inflation of rental prices and prices remaining high.

Electricity  +6% Y/Y

Although the rate of increase as dropped dramatically in the past year, electricity has not been risen at this pace since January 2009.

Groceries, Food at home +5% Y/Y

Prices have dropped considerably over the past year but increase rates are at 2012 levels.

Water, sewage and trash services +5.75% Y/Y

Beginning in 2019, prices to remove trash, provide water and process sewage have been soaring at a rate not seen since 2013

Have a car? 

Thats expensive too:

Auto Insurance Premiums +10.5% Y/Y

Insuring your car is more expensive than it’s ever been.

Gasoline Prices have been surging in July approaching $3. More expensive than a year ago

Discretionary Items. 

Having fun? That's expensive too.

Restaurants, food away from home +8% 

Eating out has not been this expensive since 1982, a massive increase.

Alcohol +4.5% Y/Y

Alcohol has not been this expensive since the early 90’s

Movies, theaters and concert tickets +6% Y/Y have not been this expensive in 20 years.

Source: Stubhub

Want to see Taylor Swift this summer? Good luck. Tickets are going for nearly $800 for nose-bleed seats - behind the stage.

Need vitamin C?

Orange prices are up +176% in 3 years. More expensive than in 30 years.

Sources: FRED (Federal Reserve Economic Database), Trading Economics, Stubhub

SVB Cracks Appeared Long Ago (TA chart analysis)

Silicon Valley Bank's stock ($SIVB) reached a low of $100 Friday as a result of a depositors run on the bank and inability to secure enough cash from bond investments to maintain solvency. After failing to cover deposits the FDIC took the bank over.

A technical view of $SIVB shows cracks in the foundation going back to January of 2022.

1. Bearish Divergence

The stock peaked in Oct of 2021 and attempted to reach another high in Jan 2022 but fell short. A bearish divergence in RSI is when the stock reached a high but the RSI showing a significant weaker reading.

Divergence example:

2. 3 Phase Stock Collapse

Selloff 01 - Occurred in Jan 2022 falling below the 50ma. After failing upon a retest of the 50ma the stock went on a months-long selloff. 

Selloff 02 - In Sep 2023 the stock fell below the 200ma and retested. This resulted in a massive volume 2 week selloff. 

Selloff 03 - Depositors begin to make mass withdrawals. Because of poorly valued treasury investments the bank was unable to secure enough liquidity to cover the withdrawals. The bank's stock completed an 86% fall from its peak before being halted.

Low Short Interest

Short interest according to FINVIZ was actually quite low and reasonable with a ratio of 2.11

Sector Fallout

The ETF that holds the largest banks printed a 9% loss last week as a result.

What's more concerning when you look at $XLF holdings is Charles Schwab ($SCHW) printed a -23% loss for the week. The stock has reverted back to Jan 2021 levels. Clearly affected by the SVB failure but how remains to be seen. 

Brazil's Economy Is Quietly Surging

Brazil's economy is in the midst of an economic surge that too few are paying attention to. 

• Equity markets are breaking out of a multi-month base
• Inflation rates and prices are dropping rapidly across the board
• Fuel prices have plummeted 
• Unemployment rate has dropped to historic low levels since 2016
• Despite a massive increase in interest rates to 14% the economy is bullish

EQUITY MARKETS

Start with Brazil's ETF $EWZ, which reflects the IBOVESPA

Brazil markets are surging upwards 20% gain in the past 24 days just before the round 2 elections. Overall ETF is up +25% YTD.

A look at the US Markets shows the stark difference YTD

INFLATION

Inflation is dropping like a stone. Broad based inflation is down over 500 basis points or 39% since the beginning of 2022. Hovering around 7%.

Food costs peaked in July this year and continue to fall.

With lowering cost of fuels transportation costs have come down quickly as well.

Gasoline prices plummeted 39% since June 2022 which helps reduce price levels for food and transportation.

EMPLOYMENT & WAGES

The unemployment rate continues a year long slide to levels not seen since 2016. Employment has not been this strong in 6 years.

At the same time, monthly incomes showed a sharp increase and fall after the dispensement of a massive aid package, wages in 2022 have shown a rapid rebound back to pre-pandemic levels.

GROWTH

Is Brazil growing? Yes but slowly. Post pandemic GDP spiked then dropped off to more pre pandemic levels then slowed. The most recent measured quarter puts Brazil back to 2012 levels

Aguriculture continues to grow at a blistering pace.

Transportation sector surged back to 2015 levels.

The fly in the ointment is the shrinking manufacturing sector. 

SPX vs Yield Correlations in 6 Charts

Outlook

Yields may have peaked in the short term and stocks are looking oversold and back to prior lows. I'm expecting a short term bounce in the SPX and a pull back in Yields.

Assumptions:

Long treasuries

Long SPX

Short USD

Long Oil

SP 500 vs 10y Treasury Yield

The 10y yield has a negative correlation with the SP 500 in 2022. As yields skyrocketed, stocks tanked. Rates may even have been forecasting the pivot in July's rebound of the SPYs, pivoting almost 2 weeks before the equity markets.

 

Market breadth looks at all the stocks in the SP 500 and determines if they are broadly above or below their 50 period moving avg. Over the past 2 years it has been under 5% only 3 times, briefly. This indicates an oversold environment with a potential volatile snap back.

Mortgage Rates and Yields

30y rates blew past 6% looking to test levels all the way back to 2008. Rates have doubled since the beginning of the year.

Rates are closely correlated to the 10y Treasure yield. Chart below shows the 10Y Yield on massive 46% increase 

Rates have doubled in 2022

TNX has been ripping higher and is looking over extended.

The US Dollar is pushing on the resistance rail of a huge up-trending channel. Short term the dollar is likely to pull back reverting to the mean support trend line roughly on the 50ma.

Market Is Overheating In 5 Charts

 

SP 500 crossed into the zone between the 50-60% on the Fibonacci. This could be a battle zone for stocks. Consider the already 18% run since June lows. How much gas is left in the tank after that move? Might be an area for consolidation before moving higher. Any dip seems buyable. 

Breadth is showing it's significance. The 9 week run up from single digit percentage stocks has not been seen since the pandemic crash recovery. Now clearly running in the red, with over 90% of stocks above their 50ma. This has only happened 2 other times in the past 2 years.

VIX respectively heading lower below 20 given this rip higher in the SPX. We have not seen the VIX linger at low levels.

$UUP USD ETF - US Dollar is still in a clear uptrend. A strong dollar has not been good for stocks.

10y Yield - Yields are staying elevated off mid-June highs. TNX is also influential in mortgage rates. There may be an area of support it's sitting on. A drop in equities could mean a rise in yields.

3 Wednesday Trade Ideas

Three breakouts to watch. Lots of breakouts from bases. Using tight stops as this market will snatch back gains in a hurry. 

$ARLP High beta, high short ratio. This biotech broke out of a high base cup and handle formation. Look for an upside target of $26 or about 15% above current prices.

$URA Uranium woke up from a bottom base formation breaking above $20 on substantial volume. Look for an upside target of $24 or about 13%

$WM Waste Management broke above the 200ma for the first time since June. An upside target of $170 would be a 6% gain approximately.