Off the Charts: Chinese Gold Buying; USO Outflows; S&P 500 Positioning Collapse, Sentiment Shift, and Historical Returns

S&P 500 down 3.35% month-to-date 

Each week, buy-side and sell-side analysts produce reams of charts and data visualizations to help contextualize price action across asset classes.

These data can help shape one’s thinking, offering evidence for increased conviction or criticism about currently held beliefs. Likewise, they may offer insight into relative risk/reward opportunities in various markets. These are the five charts that had an impact on my views on markets this week. 

1) Is Chinese gold buying a precursor to a yuan devaluation? 

Takeaways: "The yuan has been steadily falling versus the dollar this year. So far, the decline has been measured, but activity in commodities has prompted conjecture that China is about to orchestrate a significant one-off yuan devaluation" said Simon White, Bloomberg macro strategist. "Futures gold trading in China has moved sharply higher, and the net long position has been rising."

Trade implications: The last time China devalued the yuan, in August 2015, U.S. equity markets responded by trading lower. Of course, the setback was temporary, but it still represented a meaningful obstacle. The S&P 500 fell by more than 5% the week of the last yuan devaluation, and it took 12 weeks to regain the pre-devaluation levels. At a time when market sentiment has eroded sharply, a yuan devaluation could be the next macro risk that provokes a leg lower in risk assets. Meanwhile, the rapid accumulation of gold by both Chinese traders and the People’s Bank of China suggests that gold prices may have a higher floor than previously assumed for the near future. 

2) A crude oil fund experiences a record outflow after Israel-Iran tensions cool 

Takeaways: Alex Longley at Bloomberg says: "U.S. Oil Fund, the biggest oil ETF, posted its largest daily outflow on record as crude prices lose some of the geopolitical premium that was built in from tensions between Iran and Israel. The withdrawal of $376 million was bigger than the previous record of $323 million set in 2009. It followed two days of similarly large inflows in the two prior sessions."

Trade implications: The recent collapse in crude oil volatility may be tied to the fact that traders no longer see Israel-Iran escalating the recent chain of events. That said, this may not mean that oil prices have peaked. The last time USO saw outflows at record levels in early-2009, crude oil prices established lows that were not revised until December 2015. The fact that there hasn’t been a more considerable pullback in oil prices despite record outflows and a drop in volatility suggests that crude oil prices may not be done rallying. 

3) We just saw the most extreme drop in long equity positioning since the October 2023 L\low 

Takeaways: From David Marlin, CEO of Marlin Capital: "Over the past month, we have seen a sharp decrease in positioning across Hedge Funds, Retail, Asset Managers, CTAs, and ETF Flows.  The four-week decrease in positioning reached the most extreme level we have seen since last October."

Trade implications: Were the lows set by stocks last week a low (a pitstop before a swing to fresh yearly lows) or the low (the turning point before a run to yearly highs)? The washout in positioning suggests that a meaningful short-term low has been established now that the weak hands have been shaken out. What was a crowded market on the long side is now thinned out. 

4) The AAII bull-bear spread is now net-negative 

Takeaways: Now at -1.8%, the AAII Investor Sentiment survey bull-bear spread is back in negative territory since the week of Nov. 2, 2023, when it registered -26%, according to The Daily Shot.  

Trade implications: A measure of expectations of six-month forward returns of stocks, the AAII Investor Sentiment survey underscores the rapid deterioration in investor sentiment in recent weeks. Alongside the data shared above, a clearer picture is starting to take shape. The exuberance that defined U.S. equity markets in the first quarter of 2024 is gone. In other words, a lot of the froth has disappeared. With a little more progress on the technical side of the equation, there is growing evidence that bulls may be able to regain control of the S&P 500 narrative soon. 

5) After a setback, the bull market may not be finished

Takeaways: It is likely that April will be a down month for stocks, the first red month after five consecutive green months, according to Wayne Whaley. Even at the end of the best week of the year for stocks, the S&P 500 has a negative return for April (it was -5.46% when the chart above was produced on April 21). Since 1950, in the 30 occurrences when the S&P 500 has gained in five consecutive months only for the sixth month in the chain to be red, the one-month (73% of the time), three-month (83%), six-month (90%), and 12-month (80%) forward returns are uniformly positive. 

Trade implications: Bulls may soon regain the upper hand on a technical basis in the S&P 500 (/ESM4). If so, they have seasonal and historical tailwinds at their back. Stocks tend to rally in the May, June, and July window (which is why we say "sell in May" is misleading but the expression should be "buy through July"). A red month after five green in a row does not portend the end of a bull market but rather a breather to shakeout weak hands before the rally resumes. Dip buyers and vol sellers have been rewarded and may continue to be rewarded. 

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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