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Dollar breakout should result in growth v Value outperformance; Commodity weakness

July 20, 2016

S&P SEPT FUTURES (SPm6)
Contact: info@newtonadvisor.com

2147-8, 2137-9, 2109-10, 2085-7    Support
2162-3, 2167-8, 2176-7, 2180-3      Resistance


S&P Futures: (2-3 Days) Bullish into end of week, with upside targets 2180-5 with movement back UNDER 2143 needed for a bearish case.  While risk/reward looks somewhat poor on a 2-3 week basis, for now, there remain no meaningful signs of turning lower which likely means attempts to fade this rally remain premature - Upside targets lie at 2180-5 while a move back down under 2143 is a necessity before turning too negative.  (2155-SPX cash)

SX5E-  Pullback yesterday represented the most in two weeks, but has key support at 2895 that will define this current move up from late June.  Under 2895, it can be called an ABC type bounce which calls for new low territory.  The ability to hold 2895 and turn back higher should allow this to push up in a 5-wave impulsive move from late June which would be encouraging for the intermediate-term picture.


Technical Long Ideas: EUO, UUP, A, CME, TJX, CSCO, (IVWv IVE)
Technical Sell ideas:  URBN, RL, PEP, KSS, ATVI, SIG



TECHNICAL THOUGHTS


Not much excitement for Wednesday's trading and hardly any of the volatility that any of us are accustomed to.   Wednesday's range proved to be just 0.26%, the lowest since Thanksgiving 2014 ( Ryan Detrick)  The US pullback attempt failed to do much damage and by end of day the DJIA was positive while NDX and SPX just had fractional losses, a far cry from what happened in Europe. 

A few things stood out and are worth mentioning, not just for Wednesday, but over the last few weeks

1)    S&P largely ignoring the weakness seen in most of the world.   Even Wednesday's selloff attempt proved VERY benign and not nearly as damaging as the -0.75% in Europe-  Europe’s STOXX 50 is down more than 23% from last year’s April peaks. A far cry from “NEW ALL TIME HIGHS” which has been widely proclaimed by the Media to such an extent that many have begun to climb back aboard the equity rally.  Bottom line, the US has been far more robust of late than most of the Developed and Emerging market equity world, and this doesn't seem to be changing.

 

2)    Sentiment polls continue to reflect a sharp rise back to bullish territory, as the underweighting of Equities over the last few months has given way to a "Throw caution to the wind and participate, lest one underperforms"  Indeed, this rise to bullishness is a necessary part of the process that creates market tops which was largely absent over the last few months. 

 

3)    US Dollar index has started to turn back higher. Wednesday's minor breakout (largely vs Euro) but also Aussie, Kiwi weakness vs USD,  and Pound, Yen.. should let US Dollar extend further.  While this could prove problematic with Earnings growth at a time when a rebound is essential to restoring confidence, it should help Growth stocks begin to turn back higher vs Value.   Commodities also should be negatively effected given that they're priced in US Dollars, but this largely has not occurred with most.

 

4)    Homebuilders have started to make a comeback-   Lumber broke out over the last few months and has been very good overall for Builders to follow suit.  Wednesday's bullish Housing Start and Building Permit data looks to support this technical case.  For now, ITB, the homebuilders ETF, lies at/near former highs from last year and has shown little to no real damage given recent uptick in Treasury yields.

 

5)    The Citigroup Economic Surprise index moved last week to the highest levels since early last year, the first time over 0 in more than a year, showing economic data finally starting to BEAT expectations.  This supports the case for Treasury yields to start to move back higher, along with Financials, a necessary piece of the puzzle for markets.. given their 15% weighting in SPX.  In the near-term anyway, both Yields and Financials look to have moved a bit too far, too quickly.

 

6)    Sector wise, Tech, Healthcare and financials have begun to strengthen of late.  All good signs for sector rotation out of groups that have largely been laggards all year.  Wednesday's trading showed just fractional movement, but we still witnessed Financials leading the charge while Industrials and Tech also participated.


Over the final two days of the week, it remains tough to have a strong opinion on direction given rampant overbought conditions which have merely consolidated, not pulled back.  Treasury yields, USDJPY look to be at/near resistance, while from a time perspective, one could make the case for a couple more trading days higher.   Until we see the weakness unfold, meaning S&P futures undercutting 2Despite the urge to sell, S&P very well could reach 2180 before any peak while NEEDING to undercut 2155(cash) 2143(futures)  on the downside for proof of a bearish pullback.  As stated in prior days, not the best risk/reward and this will have to continue to be monitored in the days ahead.

Charts and additional analysis below.

 

 

S&P still is well above where both Europe and the Bloomberg World index are trading.  This spread between the indices has continued to widen out over the last six months, and eventually will have to correct and give way to some mean reversion.

 

 

The bullishness of the US Dollar breakout was highlighted by Wednesday's advance to four month highs, back over April, taking this to the highest level since early Spring.  This largely reflects the EURUSD weakness, but the Dollar also rose vs Yen, vs Pound Sterling along with several other currencies such as Aussie, and New Zealand Dollar (Kiwi) Wednesday by more than 1%.  This rise likely continues in the short run given the pick up in momentum along with bullish technical structure and should eventually serve as a headwind to the commodity rally.

 

 

Growth vs Value - this ratio of SGX vs SVX, the S&P Growth vs Value index has been trending down for most of the year , but is gradually starting to stabilize and should begin to turn higher, which should favor Growth over Value.  When early July highs are exceeded, it warrants being long ETF's such as IVW, (Ishares S&P 500 Growth, vs the IVE or S&P Value) and this ratio should increasingly start to favor Growth yet again with the Dollar rallying.

 

 

 

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