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3 Charts Screaming Caution About the SPDR S&P 500 ETF Trust

To pour money into this bull market is to suspend disbelief. With the novel coronavirus imposing a gut check on our economy and taking the lives of more than 300,000 Americans in less than a year, every fiber in our body screams sell. And yet buying into the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has been among the smartest investments to make for risk-averse individuals. Can SPY stock continue its gravity-defying run?

yellow tape with the words caution on it
Source: Shutterstock

Though I tend to look at the practical indicators of why this bull may be a façade – a still worrying eviction crisis and the implosion of small businesses come readily to mind – I can understand why people are dazzled with the equities market.

Primarily, with millions of Americans working from home, trading platforms like Robinhood have attracted newcomers to the sport. Therefore, an exchange-traded fund like SPY stock offers comprehensive and relatively safe exposure.

And then there’s Jeremy Siegel. As the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a senior investment strategy advisor to Wisdom Tree Funds, Siegel is no stranger to market fluctuations. To the delight of optimists, he’s predicting a continuation of the bull market in 2021, claiming that “stocks are not overpriced.”

So, that’s a clear signal to buy SPY stock, right? Before you dive in too heavily on the long side, you’re going to want to consider the other side of the argument. While I’m not attempting to play Debbie Downer on this rally, it seems awfully antithetical to every fundamental indicator available, most important in my opinion being common sense.

Ultimately, I will let you decide what the best course for your money is. But in the meantime, here are three charts suggesting you should avoid SPY stock.

SPY Stock Is Charting a Broadening Wedge Formation

Broadening wedge pattern in SPY stock
Source: Chart by Josh Enomoto

Despite many criticisms against the methodology, I’m a big fan of technical analysis. Sure, you can make the argument that fundamental analysis is the soundest approach given that you’re dealing with hard numbers such as revenue and earnings. But it doesn’t tell you anything about real-time market sentiment.

And what does the chart tell us about SPY stock? From my interpretation, I believe we’re seeing a broadening wedge formation, which has bearish implications. Basically, the trading action between bulls and bears become more frenetic over time, with increasing magnitude of swings to either end of the spectrum. Eventually, the wildness concludes to the downside as the bulls are unable to move the price forward.

To critics, this sounds like tealeaf reading BS. While I concede that elements of technical analysis involve subjectivity, many others are coming to the same conclusion. For instance, strategist Sven Henrich called the pattern on CNBC a few months before the novel coronavirus pandemic temporarily busted the markets.

Unfortunately, this pattern is still very much in play, which augurs poorly for SPY stock.

Declining Money Velocity Is a Bad Harbinger

S&P 500 vs. Money velocity
Source: Chart by Josh Enomoto

In a rare moment of bipartisanship, both Democrats and Republicans came together to directly inject cash into the hands of American people hard hit by the pandemic. For once, I had faith that the U.S. could live up to its promise of being a beacon to the rest of the world. Instead, the optimism was ephemeral.

Now, I get that Congress just recently reached a deal on a $900 billion coronavirus relief package. Part of the plan includes $600 payments to most adults and a $300 federal unemployment supplement. As great as this is, it’s far too little, too late. That’s because the government doesn’t just need to inject money into the economy but rather confidence.

Because while the S&P 500 index is running higher to new plateaus, money velocity (specifically the velocity of M2 money stock) has dropped to all-time lows in recorded history. Essentially, this wonky statistic means that the circulation rate of money (how much each unit of currency circulates across the economy) is declining.

Covid-19 didn’t cause this crisis, merely accelerated it. Even worse, as the circulation rate gets closer and closer to zero, the effectiveness of monetary injection diminishes exponentially. Just do the simple math. At the extreme, if the circulation rate goes to zero, it won’t matter how much money you inject into the economy: anything multiplied by zero will always be zero.

Rich People Are Apparently Killing Themselves

Suicide rising despite bull market
Source: Chart by Josh Enomoto

I’m not a psychologist. But in my view – which I think most people will share – those who have something to look forward to don’t have ideations of harming themselves. Of course, you never know what’s going on in people’s heads. However, there’s a good chance that if you’re making money, you’re not going to off yourself arbitrarily.

Sure enough, between 1950 to 2000, the S&P 500 index jumped from a lowly 18 points to a searing 1,420 points. Over the same period, the suicide rate per 100,000 people declined from 13.2 to 10.4. That’s a negative correlation coefficient of 94%.

But from 2000 to 2017, the suicide rate jumped alarmingly from 10.4 to 14. What’s surprising is that the S&P 500 also saw a sizable gain, from 1,420 points to 2,460. But during this period, the correlation coefficient between the two metrics was a positive 82%.

Logically, the mental health crisis is even worse today, even though investments like SPY stock are at or above their all-time highs. It’s nonsensical that as so much prosperity is flowing out, people are becoming increasingly desperate.

But then, you realize that demand deposits have skyrocketed to an unbelievable level, indicating that we have a culture of fear and deflation. Major economic metrics indicate that less money is circulating, which means SPY stock is not sustainable unless we get the aforementioned injection of confidence.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2020/12/3-charts-screaming-caution-about-spy-stock/.

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