June 1, 2016
S&P JUNE FUTURES (SPm6)
2072-6, 2065, 2053-5 Support
2105-7, 2112-3, 2125-7 Resistance
S&P Futures: Mildly bullish this week but expecting upside limited and gains more likely to stall out and reverse course by end of week before the larger move to new highs occurs. Tuesday's selloff attempt wasn't all that convincing, so the key will be 2105 and ability to exceed would let trend extend a bit further to 2112-3. However, the combination of near-term overbought conditions along with Short-term cycles and the failure of bond yields to follow stocks of late suggests some "Backing and Filling" could be necessary before a larger move to new highs occurs. Area to buy lies at 2067, 2053-5, down to 2041 maximum, before trend turns back higher. Similar to last week's message, use extreme selectivity on longs the rest of the week
EuroSTOXX 50- Gains possible to 3150, but don't expect a move above April highs at 3157 and more apt to sell into any gains in the next 1-2 days. Trend since March remains choppy, as part of an overall downtrend. SX5E remains weaker than SPX
Hang Seng China Enterprise index- Mildly bullish for a move to 9000, but skeptical HSCEI can exceed 9200 and make an attempt at April highs. So, similar to Europe, this remains in weaker shape than US right now, and near-term rallies could be used to sell.
Equities- Attractive Technical Risk/reward Longs
EA, IGT, WBMD, HAS, AYI, MXL, THO, CRL, SWHC, INTU, WOOF, CRM, MKTX, DY, CETA, LAMR, OLED, LGCY, ORIG, AMZA, FET, TMO, RTN, KAR, CB, HEI, IT, FIVE, CRL, GPN, DG, TXRH, UNH, GD, MLM, VSAT, AVGO, CVS, NOC, CL,TSN, NXPI, TXN, CVC, WB, LGND, SBUX, SAFM, BCR, BSX, CCRN, FRPT, DVA, AMZN
Bullish, but extended- Buy Pullbacks- BSFT, MDT, TAP, TWC, AVY, MO, CB, FISV, NOC, LLL, JEC, BGS, NSP, LMT, VMC, AMSC, FIS, MBT, AEM,TRXC, EBF, CHD, OC, PM, MCD, SONC, POOL
Attractive Technical Risk/reward Shorts: SIG, RT, TIF, RL, LC, WDAY, BBBY, XRT, ANF, MOH,FL, SPLS,TAN, FOSL, AAP, VSLR, PTEN, GT, GPS, HTZ, CF, SHLD, AWI, CIEN, SQ, ADS,MNK
Bearish but extended- Sell Rallies-, CROX, HOG, EFOI, TSLA, KONA, CSIQ, FSLR, FIT, MYL
Insufficient selling as of yet to suggest a selloff is imminent, but we're beginning to see evidence of some of the stalling out that was discussed last week. Near-term cycles suggest a possible peak in price as of 6/1-3 timeframe, which could should mean this week, from purely a time perspective. As indicated last week, any hesitancy in being max long at this stage has to do with the extent of the move off the lows with indices now up to key levels at April while showing a confluence of time-based sells which could materialize in the next few days. For now, the key level to watch will be 2105 and the ability to exceed would cause a final push likely into Thursday/Friday before a minor peak unfolds.
Bond yields certainly reflected none of the ebullience shown last week with Equities and on Tuesday, the decline in Bund yields resulted in US Treasury yields following suit and dropping towards lows of the day. The 2-year yield has not convincingly broken out just yet above 92 bps, while both 10 and 30-year Yields are hovering near important resistance, but have not yet broken out. Overall, the action in the Bund yields bears noting and could weigh on US fixed income yields in the near-term.
WTI Crude managed to surge straight back over $50 in early trading before reversing course to close well down on the day, but still over last Friday's lows, which keeps the trend relatively unscathed. Until Crude can close under 48.69, which might lead down to $47, any dips should still be used to buy.
Important points regarding Crude technicals
1) Prices have NOT shown sufficient deterioration to adopt a bearish stance, despite 2 of the last 3 days closing down meaningfully off early highs. There is some mild evidence of negative divergence when looking at Daily MACD for momentum, but for now, trends remain intact and Crude remains over last Friday's lows.
2) CFTC Spec longs continue to grow, while commercial shorts have also increased, yet this point alone is insufficient to think one should sell into this move. One needs some evidence of negative price action, and Tuesday's minor reversal wasn't sufficient.
3) Crude and the SPX have begun to trend in unison again, with the latest week showing nearly a Correlation coefficient of R= .71 from 5/24 into 5/31. So the downtick in correlation between Crude and SPX from March into early May appears to be now giving way to higher positive correlation again. That being said, the month of May will show only around a .309, lower than seen in April, March, while February remains this year's highest correlated month, at a positive R= .73.
4) For the five-month period as a whole, the R correlation for WTI Crude vs SPX was a .50, fairly significant and similar to both 2012 and 2013, both which showed readings of between .55-.56. However, both 2014 and 2015 showed hardly any reason to think SPX would track similar to Crude.
While correlation trends can break easily, they should be watched carefully when they begin to line up, and the last week along with Tuesday's trading suggests that Crude should be something on everyone's radar, who cares about the SPX.
Charts and comments below
S&P's stalling out failed to gain much traction on the downside and by end of day, the MSCI rebalance had resulted in month-end imbalances of nearly 1.8 billion to buy, with 20 minutes ahead of the close. Given that prices failed to even close under last Friday's lows, it's difficult yet to say with any conviction that highs are in, and that a big pullback is upon us. Movement back to test 2105 could easily happen Wednesday, and if that is exceeded, there could be a run on 2112 before a peak. For now, upside does appear limited, but still right to have a bullish bias.
German Bund yields turned down sharply after 9 am EST time on Tuesday am in the US, which resulted in US Treasury yields following suit, along with WTI Crude oil and then Equities. Movement down to test last week's lows definitely looks possible for Bund yields, which never officially recorded any sort of significant buy signal last week at the lows, based on counter-trend Demark indicators which might have suggested lows were near. Two-to-Three days more of weakness could happen which might take yields down to 10 bps or 7 bps before any low, but should be used to take profits in Bund longs, should this happen into end of this week.
Crude's minor attempt to get back above $50 was rebuffed again, though not much progress on the downside to suggest any sort of meaningful top, and time cycles for a possible reversal for Crude seem to suggest mid-June along with mid-September. For now, some minor negative divergence in MACD, but prices remain above last Friday's lows. Under 48.60 on a close would lead to 47, but should be a buying opportunity for Crude.
The chart above shows the degree of correlation between Crude and SPX, which started strong in January of this year, became even stronger in February, but has since waned a bit in the last few months. Both April and May's total positive correlation with SPX proved to be less than half of levels seen in February, yet the last week's movement proved to be in line with the movement seen for February as a whole. Thus, in one week's time, R for Crude/SPX improved to .71, which could mean that movements in Crude should be very relevant to what's going on in the SPX in the days and weeks ahead until proven otherwise.
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