To The Moon

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

• The stockmarket is rebounding off oversold conditions.

• Surveyed sentiment has reset from bullish to bearish.

• Yet retail flows have transitioned from doubt to hype.

• There are 3 very different historical stat steers for this year.

• Defensives’ earnings share has reached a decade+ low.

Overall, I would say mixed signals is a good summary of the themes from this week’s set of charts. On the upside is the market rebounding off oversold levels and conditions consistent with a larger rally. On the downside is bearish divergences, excess hype, longer-term cycles and macro risks. Meanwhile the historical statistics provide 3 very different guides on the outlook this year. I think that’s a recipe for ranging, risk, and volatility (and ample room for debate and disagreement!).

1. 50-50 Rebound:  Last week saw a promising rebound off the lows, with the S&P 500 closing back above its 50-day moving average, and 50-day moving average breadth rebounding notably off oversold levels. This leaves the market well-positioned to rally further, but it is a pivotal point, and it will need to clear that 6000-level.

2. Surveyed Sentiment Reset:  Also of interest on this front is how significantly surveyed sentiment has reset. I wouldn’t call it panic levels, and it could easily go much lower, but at this point this represents a major reset from previous blind optimism to now predominant pessimism. This echoes the theme from the previous chart; it’s the kind of conditions you can stage a rally from, but it also shows a shift in sentiment that can spiral given the right excuse/catalyst.

3. Sell-Side Sentiment Slipping:  Another sentiment angle, this one summarizes the mood from reports and recommendations of brokerage house analysts and independent advisory services. It shows this group the least bullish they’ve been since the late-2023 correction. It’s also putting in a bearish divergence (lower high vs higher high in the index) — which can be an early warning of shifting market regimes.

4. Retail Hype:  And to round it out, we’ve got retail fund flows kicking into hype mode. The pattern here is market rallies rise in doubt and often stall-out and run into trouble when the mood shifts to hype.

5. The Year-3 Curse:  And as I’ve previously highlighted, the 3rd year of the bull market (which we are now in) tends to be troublesome. This excellent chart maps out the average path of bull markets during the 3rd year. I suspect there’s probably a bit of variation around it, but it does go to show that we’re likely in for a fair amount of range-trading and volatility this year. So embrace the chop?

6. The Year-5 Blessing:  On the other hand, thinking statistics and averages, there is a weird and significant tendency for years ending in 5 (e.g. 2025) to see really good stockmarket returns. That’s weird, but promising?

7. Year of the Snake: And just to confuse thing further, Chinese Lunar New Year (29th of January this time) ushers in the Year of the Snake — which has historically been one of the worst years in markets.

So let's see now, we have: 3rd year of bull market is mediocre, years ending in 5 are good, but years of the snake are bad… probably reinforces the 3rd-year bull remark (cross currents, ranging, risk, and volatility).

8. Unequal Return:  This chart traces the path of the post-Nifty 50 bear market. It presents a cautionary for current times as the Nifty 50 era was basically a growth stock bubblet — growth stock booms tend to be characterized by outperformance of the cap-weighted vs equal-weighted indexes (sounds familiar?). They also set the scene for a reversal, and in this situation it took much longer for the cap-weighted index to recover its losses — this is illustrated well on the next chart.

9. Equal-Weight vs Market Cap-Weight:  As you can see, equal-weight had a very strong run against cap-weight from 1973-1983. Here we can also see the post-dot-com bubble run; which also began from a point well below trend (and then more recently we can see how stretched the relative performance line is from trend once again; this will eventually turn the corner).

10. Global Revenue: Lastly, I thought this one was interesting as it shows the percentage of S&P500 revenues coming from outside of the USA. Observations: at an average ~40% it’s material, it’s also apparently cyclical (clear updrafts during the commodities + EM boom, downdrafts during commodity bear market). In terms of implications, a higher share of global sales will mean greater sensitivity to trends in the US dollar (e.g. strong dollar = bad), and global growth (e.g. weak global economy = bad).