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Yield Curve breakout bullish for Financials

March 10, 2017

S&P MARCH FUTURES (SPh7)
Contact: info@newtonadvisor.com

2355-6, 2349-51, 2344-5                Support
2369-71, 2375-6, 2390-2, 2400-2   Resistance

 

 


S&P Futures: (2-3 Days)- Bullish- Little to no weakness by end of day yesterday as markets recaptured early weakness again, while momentum has begun to strengthen with the yield curve breakout.  Movement up above 2370 should help drive a rally back to 2401 and above.  Look to buy weakness if given the chance Friday.

SX5E- EuroSTOXX 50- Bullish- Breakout of recent range occurred on Thursday with prices stretching back above 3400 which should help indices advance over 3500. 

HSCEI- Bearish near-term, with Thursday's close likely leading down to 10k and then 9910. 


Longs/Shorts for a 3-5 day period:  NO Change from Thursday

Technical Longs: XLF, EUFN, CELG, HOLX, PCLN, BAX, AAPL, FAST, COL, HUM, CI
Technical Shorts: FLR, FLS, MNK, GILD, SPLS, FOSL,  AES, AN, HTZ,



TECHNICAL THOUGHTS


Equities tried their best to pull back Thursday but yet again, rallied all the way to positive by the close, with the S&P closing over the highs of the last two days, while the NASDAQ 100 made the highest close of the week.  Breadth remained mildly negative with slightly more volume going into Declining vs Advancing issues, and Crude managed to pare its losses on the day, while Gold accelerated down to 1200, having fallen for four straight sessions and seven out of the last Nine.    Overall, with only 30% of SPX stocks trading above their 10-day moving average, one would think the market would be far lower than it is currently.  SPX has failed to even breach prior week's lows, and this entire selloff has largely occurred inside the range of last Wednesday's big surge, back on March 1.   It's thought that the indices have managed to absorb this correction attempt, and that higher prices are a good likelihood into next week's FOMC meeting.

Treasury yields rallying has been the biggest story in recent days, which has happened not just in the US, but globally, as seen in huge bond selling in German Bunds, Swiss 10s nearly turning positive.  The 2s/10s curve steepened meaningfully enough to break out of the downtrend that's kept they yield curve in flattening mode for the last few months, which bodes well for further steepening heading into the FOMC.  Given that ADP data came in very strong this week, the Jobs data very well might also be on the high side, which should result in further selling in the Treasury market, and help the Financials turn back up more swiftly.  For now, this a key factor as to why equities likely don't experience any type of material weakness into FOMC.


Crude oil's decline accelerated further Thursday following the quick selloff into Wednesday's close.  The trend here is short-term bearish, despite Crude's ability to lift a bit from earlier lows.  Commodities as a whole have suffered in recent days, led by Energy, Precious metals, and Softs like Sugar, Coffee, with the grains also beginning to look "toppy"  Overall, it's thought that the Dollar rally could result in further selling in the space, as we've talked about in recent reports.  The gains in Dollar vs Yen in particular was quite important and positive, and the Yen decline looks ripe for additional downside volatility in the days ahead, and could move lower much quicker than Euro, or Pound Sterling vs USD.  Stay tuned.


Additional thoughts and charts found below

 


S&P's snapback rally managed to recapture the early day's weakness, yet again, holding up near the key 2365 level and very close to the level of downtrend line resistance which has held for the last few days.  Thursday's close managed to surpass the highs of the last few days, and should make a rally likely on Friday, setting up for further upside into next week.   Momentum has begun to strengthen on hourly charts, and as we've discussed, despite the underlying weakness in many stocks, we're just not seeing that in the indices themselves.  S&P has barely given back 25% of the rally from end of year 2016, while NASDAQ has barely budged in recent days, and seems to be setting up for a move back higher.

 


2's/10's curve has steepened back up above an area of resistance  which should bode well for further rallies in the curve into next week and beyond.  This is the first meaningful sign of steepening since the curve peaked out in December, and is thought to be a notable positive for Banks, and in turn, a tailwind for Market bulls in the next 1-2 weeks. 
 

 

The Financials complex has not yet participated on this latest rally in yields, but has proven resilient and not shown any signs of real weakness in recent days that would suggest a pullback is upon us.  Given that Financials outperformed and held up above key support at 24.65 Thursday, they set up well for a bounce in the days ahead given the yield curve steepening.  Financials should perform well in this environment, which in turn should help provide a tailwind for stocks given their size within the SPX.

 

 

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