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Small-cap, Healthcare breakouts are constructive

June 2, 2016

S&P JUNE FUTURES (SPm6)
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2084-7, 2075-7, 2065, 2053-5       Support
2104-6, 2110-3, 2125-7                 Resistance


S&P Futures:  Mildly bullish this week but indices still face monumental resistance that held in April and also in November/December that will be important to get above before making too much more progress.  Wednesday's resilience in rallying back likely allows for some upward follow-through to test Tuesday's highs and potentially get above into end of week.  The key will be S&P FUTURES- 2105,and ability to exceed would let trend extend a bit further to 2112-3. (SPX cash 2111, extending to 2130-5)  Lows from Wednesday near 2082 will be important, but should hold as firm support and doubtful these are broken into end of week.

EuroSTOXX 50- A minor rollover in Wednesday's trading, but pullbacks likely don't violate 3000 before turning up for gains to 3150.  Trend since March remains choppy, as part of an overall downtrend.  SX5E remains weaker than SPX.  Movement back above 3300 is necessary to help Europe begin outperforming US stocks.

Hang Seng China Enterprise index- No change-   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
WAT, AMZN, TWTR, EA, IGT, WBMD, HAS, AYI, MXL, THO, CRL, SWHC, INTU, WOOF, CRM, MKTX, DY, CETA, LAMR, 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

Bearish but extended- Sell Rallies-, CROX, HOG, EFOI, TSLA, KONA, CSIQ, FSLR, FIT, MYL



TECHNICAL THOUGHTS

Wednesday's resilience, yet again, suggests that immediate drawdowns remain a bit premature.  The success in clawing back above 2095 for S&P futures and cash is encouraging, and should lead to a stab at testing and/or exceeding former highs between 2103-5.  Given that the Russell 2000 broke out in trading on Wednesday, both absolute and relatively speaking, while Semiconductors and Healthcare have begun to strengthen materially, this rotation is certainly more bullish than bearish at a time when prices are wrestling with former highs.  Given the degree ofuncertainty about the Fed and upcoming economic rebound, the most likely course of price action remains to the upside for the next couple months

For Thursday's trading, use any pullbacks down to 2087-8 to buy and underneath that 2077-82 could have importance.  However, unless 2082 is broken on a close, the trend remains bullish even in the near-term and should be used to buy dips for a move above 2105.


Key Developments for Wednesday

1) The Russell 2000 managed to exceed April highs at 1156 while definitively breaking out above the downtrend line from last Summer, both on an absolute and relative basis.  Small-caps have strengthened since the February lows vs the broader market and have outperformed.  However, this recent advance in the last has now exceeded the entire downtrend in RELATIVE terms vs the market since last June, which is a much bigger and more bullish development.  Smallcaps should outperform for a bigger bounce and show outperformance between now and August.

2) Healthcare has strengthened in a manner that should also allow this sector to play catchup after a fairly lackluster five months.  In data through 6/1/16, Healthcare was the worst performing sector of any of the major 10 SPX GICS Level 1 sectors with returns of -0.93% in YTD terms, only one of two negative sectors for the year, with Financials also "in the Red", but not as negative, at -0.47%.  Technically speaking, the breakout in Biotechs and near-breakout in relative terms of XLV to SPX should allow for further strength out of XLV vs SPX and be used to overweight this group for a solid bounce into the end of Q2.

3) SOX showed further strength in closing materially above last December highs, and closed at the highest levels since June of last year, when the group was plummeting towards its lows in August.  Additional strength and outperformance looks likely for Semis and this is yet another reason to be optimistic on stocks for the next 4-6 weeks.

4) Long-term US Treasury yields thus far have failed to follow-through on the rally in US Stocks despite bottoming in February and rising to peak in mid-April, similar to the SPX.  Bund yields also have fallen down to test make-or-break levels of the consolidation over the next few months.  Neither of these is outright bearish, but just unusual given the extent of the lift and the Fed's willingness to hike, while the yield curve continues to flatten.   2-Year yield continued to churn around the level of its own breakout of triangle resistance, and should eventually move up above .93 to test 1% in the next month.  Whether or not the FOMC decides to hike, while potentially to some extent based on some further improvement in the economy (and Jobs Number this Friday is important) rests more so seemingly on the lack of stock market volatility, and their ability to "get away" with a hike given their recent rhetoric in the face of largely no real economic change.  


Charts and additional comments below

 

 

The key chart tonight to focus on will not be the S&P, but rather the Russell Composite, and the IWM is the ETF of choice shown above.   Getting above April highs helps this to breakout to not only the highest level of the year, but also exceeding the entire trendline from last Summer.  Overall, a bullish development that suggests Small-caps have furthered their comeback after a lengthy decline into early this year.

 

Russell 2k vs the SPX, shown in ratio form above, has also broken out, which suggests Small-cap outperformance is likely in the weeks ahead, as this trend has been bearish since peaking almost exactly a year ago (the latest peak anyway, as part of the larger decline from mid-2014)   For now, additional Small-cap strength is likely vs the SPX and should outperform.

 

 

Biotechs are the next group to focus on for outperformance within Healthcare, and similar to the Russell 2k chart, this breakout of Spring highs along with its long-term trendline looks constructive for further rallies. Both XBI and DRG made meaningful movement in the last few days, and Healthcare looks to be making a comeback after underperforming every other sector this year.

 

 

XLV has closed in as well on an area of resistance that looks meaningful in the days ahead, which lines up near April highs just above $72 in the SPDR ETF, XLV, the Healthcare ETF.   Relative charts show a similar area of importance, but given that XBI and DRG are both making progress, it should just be a matter of time before XLV breaks out and leads healthcare higher.   Given that this group has shown the worst performance of any major S&P sector this year, some mean reversion now looks to be taking place, which is important given Healthcare's representation in the S&P.

 

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