May 18, 2018
S&P JUNE FUTURES (SPm8)
2698-2700, 2682-3, 2666-7, 2649-52 Support
2730-2, 2741-4, 2747-9 Resistance
LINK TO TECHNICAL WEBINAR from yesterday 051718- https://stme.in/MpyuOSOZca
SPX - (1-2 Days)- Mildly Bearish -Tough call here on a 2-3 day basis as US equities have been sideways for five days, but bond yields are breaking out around the globe and Technology continues to underperform- Many cycles pinpoint mid-June as being important, which i believe should be a low. S&P should have strong resistance near 2730-41, and under 2700 would give conviction for the bear case
SX5E- EuroSTOXX 50- Mildly bullish for a move up to 3600 into end of week where prices likely reverse. Europe had led the rally higher, and should now be expected to fade and underperform in the weeks and months ahead. Upside minimal, but still tough to bet on immediate declines just yet.
HSCEI- More bullish than bearish after downtrend break and recovery attempt over the last 6 of 7 trading days. Areas to sell lie at 12800-20 while pullbacks down to 12150-12300 would offer an attractive area to buy dips.
Trading Longs: TBT, TYO, TMV, EUO, SYK, MOMO, EQT, EOG, TJX, ERI, SRS, DRV, ETFC, TROW, SCHW, AMTD
Trading Shorts: LL, VNQ, XLU, AVB, ESS, UDR, SMH, VNO, AIV, D, ATVI, EXC, SRE, ITW, BLL, MAS, ABC, CAH
Short SPY at 272.98, looking to add to shorts at 273.50-274 with targets at 262-4
Short QQQ at 171.50-172.50, or on daily close under 167 targeting 162
Short SMH 106.23, with target 100
Long OIH 27.33 with target 29.50
Long TBT 38.10 with target 41.25
Short XLU 50.19 with target 47.37
Short VNQ 77.42 with targets initially near 72
Many don't seem to be taking the bond move all that seriously, but we've seen a fairly major breakout in yields across most timeframes, not just in the US, but also abroad. Bunds, Gilts have turned sharply higher coinciding with US yields spiking, and yesterday's move in the 30-year looks meaningful and has the potential to extend sharply in the short run. So near-term, its not the stock market bringing excitement, but the bond market. Whether or not this will bring about a selloff in stocks is difficult to say, but much likely depends on how sharply rates move in the days ahead. Credit spreads haven't really budged lately, which is encouraging, but yet might start to widen out if/when implied volatility turns higher meaningfully which could be right around the corner. Sentiment doesn't make the case for much of a lengthy selloff by any stretch, as CFTC data shows Speculators being more short in Treasuries than we've seen in at least the last 10 years. Therefore, this likely equates to just a near-term sharp bond selloff that proves short-lived and should be buyable come early June (yields rise initially but then could pullback from June-September) The technical make-up of most charts however, shows this to be a meaningful move, not just in 5 and 10-year yields, but a very bullish Cup and Handle style base in the 30year (yes, still very much relevant) that has been exceeded as of yesterday. So my expectations are for sharply higher yields over the next 5-7 days. Whether or not this serves as a trigger or not, is difficult to say, but chart breakouts of some of the bearish Treasury ETFs like TBT suggest this can still likely gain ground in the week(s) ahead.
Sector-wise, we did see attempts by the large-cap weighted Industrials ETF, XLI to break out of its downtrend from late January. But yet again, Financials underperformed and were down on the day while the late day selloff in NASDAQ also looked to be a concern and largely offset the bullish moves in Small-caps or Industrials. Given that Healthcare, industrials, Financials have been in downtrends, it just doesn't give much confidence to trust this tape right now, particularly given the low Equity Put/call ratios which have been hovering in the 50's. (roughly 2 calls bought for every put) It seems like investors are concentrating on the index breakouts, while ignoring some of the key sectors to this market which certainly have not been participating in a way that's all that inspiring. The next couple weeks should shed some light as to whether large caps can rally to join the party we've seen lately with Small-caps, and for the bullish case, ideally XLF needs to get over $29 while seeing XLV eclipse 84.50 and XLK exceed $71.34. That seems like a tall order between now and late May.
Additional charts and thoughts below.
Patterns in Technology are looking increasingly more wobbly by the day, and the reversal in Technology Thursday with the NASDAQ closing down 0.50% could very well be the beginning of a more prolonged selloff in Technology. For the S&P 500 Info Tech index, getting down under 1192 should prove problematic for Technology, resulting in further near-term weakness. For the bullish case, this minor pullback needs to hold right away and turn up higher back to new highs. This would entail a move back above 1234, which for now, might take some time.
The breakout yesterday in the 30-Year US Treasury Bond looks quite important for the back end of the curve, and could result in a rapid move up to 3.40% in yields given this technical structure. This appears like a very bullish intermediate-term Cup and Handle pattern going back since 2015, and while many have thought that the 10yr being above 3% shouldn't be too big of a deal given Bullard's comments yesterday, the bond market looks to be doing the Fed's job for them. A rapid move in yields into late May early June very well could have the effect of spooking the market if it happens quickly. While this might prove short-lived given the bearish Sentiment in Treasuries, it looks wise to bet against Treasuries over the next couple weeks before reversing course, largely based on overbought conditions for yields and sentiment. Breakouts in TBT as of yesterday, look to extend.
The LIBOR-OIS spread, or the spread between 3 month LIBOR and 3 mth Swap spreads, thought to be a good indicator of funding stress, broke out into early February before pulling back. Technically however, this area near 43 bps appears to be very good technical support, and Daily charts show this spread to be within 2-3 days of bottoming given Demark exhaustion. This could allow for stabilization and a turn back higher and will be something that many are talking about in the weeks to come if this starts to get anywhere near prior peaks from February. But technically, the same factors which caused the breakout and acceleration on the move above two prominent former highs should now cause this to stabilize. So, yes, utilizing Technicals in fixed income and Spreads can in fact be important.