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Charting the Market: Looking Under the Rally’s Hood
• The last week of April delivered big reversals, including growth underperforming value across the cap spectrum
• Further analysis indicates we just witnessed a short-cover rally—not a promising sign for a broader turnaround
In April, the S&P 500® Index posted its best monthly return since 1987, but it wasn’t without sizeable volatility. Over the past three weeks, there were five days when the index registered a gain or loss of more than 3%, raising the total number of such days in 2020 to 241 —more days than in the last nine years combined.
Admittedly, even though the Federal Reserve unleashed a bazooka of stimulus, it’s hard to reconcile the sizeable April gains with weak economic and corporate profit data. The future becomes even more uncertain when considering the deeply sad humanitarian aspect of this crisis.
Providing context for market moves in a time like this requires looking under the hood—that means going beyond the usual views on market styles or sectors. Here we examine three charts that help me frame recent market movements, some of which are featured in our full May Chart Pack.
Style reversals
In a market devoid of growth, investors continue to seek it out, as reflected in our recent flows analysis. Valuations for growth strategies are now elevated, with multiple key metrics that we track all landing in the highest percentile relative to their fifteen year history. In an environment with scarce growth, investors have clearly not been too concerned about the price they pay for it.
In the last week of April, however, we saw a noticeable reversal: Growth underperformed value across the cap spectrum. This wasn’t the only reversal we saw, as shown below. In the last week of the month, low volatility underperformed high volatility while large-cap value underperformed small-cap value—the latter indicating strong performance for one of the most beaten down segments in 2020. Excluding the final week in April, small-cap value had declined by 46% during 2020 and underperformed large-cap value by 8%.2
Source: Bloomberg Finance, L.P. as of April 30, 2020. Past performance is not a guarantee of future results. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Large Cap Growth: S&P 500 Pure Growth Index, Large Cap Value: S&P 500 Pure Value Index, Mid Cap Growth: S&P 400 Pure Growth Index, Mid Cap Value: S&P 400 Pure Value Index, Small Cap Growth: S&P 600 Pure Growth Index, Small Cap Value : S&P 600 Pure Value Index, Low Volatility: S&P 500 Low Volatility Index, High Volatility: S&P 500 High Beta Index
Key takeaway: This turnaround staged by the biggest laggards points to a major reversal—a potential, promising sign for a broader turnaround. There is more to it, though, as we see in the next two charts.
Shorts weather?
The market performance noted above could be considered a good sign, if it didn’t also coincide with a rally in heavily shorted stocks. To quantify this trend, firms within the S&P 1500 Composite Index were analyzed, sorting companies by number of shares sold short as a percentage of total shares outstanding (float adjusted). Quintiles were created, where firms with a high percentage of shares sold short (heavily shorted) were placed into quintile 5 and low short interest percentage firms were placed into quintile 1.
As shown below, all quintiles leading up to the final week in April had negative performance, but quintile 5 had the worst—benefiting investors who had taken short bets on those stocks. Suddenly, after April 24, the performance trends diverted and quintile 5 had the best performance. This trend, combined with rally in beleaguered styles described above, indicates that the strong market performance in the last week of April was potentially just a short cover rally.
Source: Bloomberg Finance, L.P. as of April 30, 2020. Past performance is not a guarantee of future results. Short interest based on stocks within the S&P 1500 Composite Index
Perhaps, however, the strong performance of quintile 5 was due to sector effects. To answer this question, stocks were first sorted into their respective sectors then broken up into short interest quintiles. We then analyzed the net return differential of quintile 5 (high short interest) and quintile 1 (low short interest), as shown below.
Source: Bloomberg Finance, L.P. as of April 30, 2020. Past performance is not a guarantee of future results. Short interest based on stocks within the S&P 1500 Composite Index
Key takeaway: In each instance, quintile 5 had underperformed quintile 1 year-to-date through April 24, with the exception of Utilities and Consumer Staples. After April 24, the more heavily shorted stocks within each sector outperformed the least shorted stocks—with heavily shorted Energy firms posting the largest net spread over quintile 1. Taken together, this feels like we just witnessed short-cover rally.
Where to from here?
The fact that we are still witnessing frequent anomalous market activity, alongside a noticeable short covering rally, makes us feel some trepidation that the recent strong performance will continue roaring at its current pace throughout Q2. The moves described above are not signs of a well-functioning market.
In addition, there will be more data released in Q2 that could catalyze extreme market moves:
- Across the globe, communities will start to re-open, providing more real-time health and consumer data. Any issues here, such as a potential second wave of infections, and life will be disrupted all over again.
- Economic data covering the full lock-down period for a majority of states and countries will be released, illustrating how far the pain has gone and how hard it might be to get back to normal.
- The same goes with fundamental data, which will likely bring more downgrades in the credit markets and reveal which companies are able to handle the stress of sluggish cash flows.
Don’t get me wrong: The strong stock market performance is a welcome sight to see; however, the rally is not on the strongest of legs. As such, we continue to be constructive on quality exposures and sectors. Reading too much into the recent rally might teeter into “rose-ish colored glasses” territory.
Continue following SPDR® Blog to keep up with my Charting the Market series and other market insights. You can also download our full monthly Chart Pack.
1Bloomberg Finance L.P. as of 05/05/2020, calculations by SPDR Americas Research.
2Bloomberg Finance L.P. as of 04/30/2020.
S&P 500 Index
A popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.
S&P 500 Low Volatility Index
The S&P 500 Low Volatility Index measures performance of the 100 least volatile stocks in the S&P 500. The index benchmarks low volatility or low variance strategies for the US stock market. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights.
S&P 400 Pure Growth Index
Focused on mid-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.
S&P 400 Pure Value Index
Focused on mid-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score.
S&P 500 High Beta Index
Focused on large-caps, includes only those components of the parent index that have high beta metrics
S&P 500 Pure Growth Index
Focused on large-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.
S&P 500 Pure Value Index
Focused on large-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score.
S&P 600 Pure Growth Index
Focused on small-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.
S&P 600 Pure Value Index
Focused on small-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score.
S&P 1500 Composite Index
The Standard & Poor's 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600.
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