November 10, 2016
S&P DEC FUTURES (SPz6)
2113-5, 2097-8, 2081-3, 2028-30 Support
2168-70, 2181-2, 2196-7 Resistance
S&P Futures: (2-3 Days) Bullish- Prices made good structural progress, though upside could prove limited over the next 2-3 days, but better to be bullish and look to buy any dips given the chance. Upside likely to 2168-70 and then 2182-3, with dips down to 2130, 2113 being good buying opportunities.
SX5E- EuroSTOXX 50- Bullish- Push higher up to 3100-50 should happen after SX5E made a similar move as S&P- However, as noted previously, the broader pattern remains unconvincing. Under 2039 could result in a larger selloff.
HSCEI- Bearish- Movement down under 9470 will need to be recouped immediately to avoid a larger breakdown and for now, Wednesday's breach looks important, but failed to enjoy the rally seen by either US, nor Europe, so for now, until we see proof of a snapback, the trend here is in worse shape than US or Europe short-term until 9470 can be recouped. Above 9873 would change the picture to more constructive.
Longs/Shorts for a 3-5 day period:
Technical Longs: CLX, KMB, ODFL, GNRC, PLNT, ADI, UNP, FDX, PYPL
Technical Shorts: GDX, ALV, UNG, VNQ, FOSL, PHM, ITB, TRIP
Wednesday's about-face from Midnight on Election night back higher proved to be one of the more volatile snapbacks in history, rivaled only by the price action during the tumultuous 2007-2008 period. The act of getting back over Tuesday's highs proved quite positive allowing for nearly a 10 point late rally that cleared the highs of the consolidation since mid-September. The DJIA and NASDAQ managed similar feats, and by end of day, all indices were in better position than where they started the day, technically speaking.
A key driver for market gains was based on action in the Financials, which rose sharply given the surge in Treasury yields up above 2.05% by the close Wednesday. XLF broke out to the highest levels since 2008 while Financials continued their above-average outperformance and relative charts of XLF/SPX reached the highest levels since last December.
Yields had nearly a big of a range as equities as the 10-year rose from 1.71% over 2.05% just on Wednesday alone. This coincided with a sharp steepening in the yield curve, and the 10 and 30-year yield broke downtrends from late 2013, nearly a three-year downtrend in the process. Wednesday's reversal goes a long way towards thinking a move higher into year-end could be underway. However, given the extent of Wednesday's move, some backing and filling could be necessary.
One thing to mention was the extent that breadth did not follow suit Wednesday, as nearly five sectors were down on the day, so despite the very strong outperformance by Financials, Industrials, and Healthcare, other sectors like Technology, were down on the day. Consumer Discretionary also finished flat, with little gain. So much of this talk about indices closing in on new all-time highs is accurate, but breadth will need to follow suit to have conviction. This "Did" happen earlier in the week, so potentially this could have simply been a "Back and fill" for breadth. But the dispersion was notable given an advance/decline of just 3/2 positive on such a strong day.
Overall, the positives of DJIA and TRAN breakouts of late, combined with Treasury yield breakouts (which should be conducive to Financials doing well, are certainly positive, and technical structure has indeed improved in the short run, both for US indices and for the Bloomberg World index. Breadth remains a concern in the bigger scheme of things as gauged by the Summation index, but we have seen a rapid jump in the Percentage of stocks trading above their 50-day ma to over 50% which had been lacking of late. This is also reflected in the Advance/Decline, which recouped about 50% of what it had lost since mid-September. For now, it looks likely that indices could consolidate Wednesday's gains, or continue up a bit more. But the threat of an immediate larger pullback now seems postponed.
The S&P's huge drop erased about 110 S&P points in about 2 hours on Tuesday evening. Prices went on to trade nearly limit down and have erased 1/3 of the January-August advance officially based on overnight trading. While near-term momentum is oversold, additional selling down to test June lows near 1972-83 near the 50% retracement area is possible before any rally. For now the market seems clearly caught off guard and some sign of stabilization will be necessary before thinking any rally back to the highs can occur. The level of uncertainty in several categories justifies a defensive stance.
Treasury yields completely flip-flopped on their breakdown, very similar to Equities, starting around Midnight on Election night when a Trump win was deemed a high probability. Yields turned higher, along with Equities and skyrocketed up to 2.00% and over by the close, effectively breaking out of a near 3-year downtrend from late 2013 highs. While stretched and additional resistance from highs in the mid-90s stretched across highs targeting 2.35%, while long-term trends from the 1987 highs hits near 3.00% which will be important to cross before weighing in on any larger breakout in yields.
Financials made a decisive move to the upside following the Yield breakout in 10s and 30s, and XLF rose to the highest levels since 2008. Prices are extended near-term, in both the sector and also in Treasury yields, but a constructive move structurally in moving to new highs which should result in higher prices between now and end of year.
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