May 7, 2018
S&P JUN FUTURES (SPM8)
2654-6, 2638-40, 2611-12, 2584-5, 2549-53 Support
2663-5, 2680-2, 2718-19, 2725-6, 2739-40 Resistance
S&P Information Technology index relative to SPX- Relative trends for Technology never really broke down even on the pullback from mid-April in Equities and Tech has outperformed over the last week and the last month, not to mention YTD, a constructive sign for a sector that represents a heavy 25% of SPX. While issues remain with trends and momentum in SPX, we'll take a glass half full approach to studying what stocks should be able to make further gains as Tech looks to strengthen further.
Summary: NO conviction here, as last week's late week rally was in fact encouraging when viewing Technology outperformance, along with recent signs of European indices and Asia rallying. Yet US trends are still under pressure based on ongoing downtrends being intact and continuing negative breadth and momentum. Seasonality also suggests the next few months might be challenging given past history, so it's difficult to take one day's rally and make too much of it. Technically its right to make short-term tactical decisions with stock indices within consolidation ranges and until this changes, and/or we see evidence of more sector participation outside of Technology, the market is unlikely to extend too much further, though also likely does not crash (given Credit holding up and not having widened out too dramatically.) The repeated tests of the 200-day average likely will start to lose effectiveness the greater the amount of the tests. Overall, a shorter-term duration and tactical "hit-and-run" mentality is needed for trading, while trend following investors need to respect when intermediate-term trends begin to give way.
Bottom line, this remains a difficult market, both for bulls and bears alike. Technically it was right to come into last week with a more defensive tone. Yet Friday went very much against that view, ratcheting up above the minor four-day trend to close at multi-day highs. So now many are wondering yet again.. Are the lows in? Is it safe to buy? Technically, one needs to look no further than the Daily SPX chart with all its ongoing downtrend, volatility and swings, mostly to the downside since January to say simply, it's still very difficult to have a lot of conviction on the long side, despite this having been wrong last Friday. Anyone who tells you differently likely experienced a very difficult time in making money over the last few months. Yet with everything, there remains both positives and negatives in this market which i think are important to reiterate to try to make sense of this recent consolidation range (and a few more positives to mention after last week. Initially, let's cover whats still a concern
1) Trends and momentum are both negatively sloped. Despite last Friday's lift, popular technical indicators like MACD are still negative both on daily and weekly charts. SPX prices have not yet broken out of the downtrend from January, nor Mid-March peaks, much less from mid-April, when markets peaked out on 4/18
2) Breadth remains challenging- Only 47% of stocks are trading above their 50-day moving average, and as we all have heard, the percentage of stocks down off their 52-week highs on average is in much worse shape than the indices
3) Lack of capitulation/fear at the lows last week. While sentiment has become more subdued given recent drawdown, we've yet to see evidence of high volume into Down vs Up stocks driving high TRIN readings that could mark a low. Put/call ratios were levels seen in early April in the mid-70s (elevated but nowhere near Feb's .88 reading on Equity put/call or last Augusts .94 reading. They plunged an exorbitant amount into Friday's close down to .55 on a single day reading, the lowest since mid-March. It's unlikely that investors have begun to snatch up calls at a high rate at the bottom and are correct.
4) Financials remain under pressure, and along with Healthcare and Industrials have been sharply underperforming this year, all three down over 2%, and also lower by over 1% during the rolling 30-day period. Industrials actually is down -2.57%. These three groups represent 38.4% of the market, nearly 40%. A very large percentage controlled by three groups which simply aren't working well right now.
5) Defensive outperformance remains a possible concern for equities. REITS were one of 4 sectors higher last week, up 0.95%, while Utilities outperformed Industrials, Financials and Healthcare. This of course comes at a time when US 10YR Treasuries yields have been hovering just shy of 3% and have not backed off too dramatically.
6) Seasonality remains a concern during the Late Spring/Summer months in Mid-Term election years and since 1950, trends show a decidedly negative bias between mid-April and October during these years.
And what's positive?
1) Technology needs to be emphasized how resilient this sector has been of late in continuing to show outperformance both on a YTD basis as well as short-term, with last month's rolling 30-day returns showing this group outperforming every other sector besides Energy, with returns of 3.93% for the month, vs 0.71% for the SPX. While Semiconductors deterioration had threatened to derail technology's run, as of yet, this doesn't seem to have happened.
2) Credit spreads still don't show much concern in terms of when viewing High yield spreads to 5-Year Treasuries (benchmark) which now are trading 343bps over (near the same levels as they started the year) So while credit has shown some minor widening in the past couple weeks, this hasn't been sufficient to warrant concern (as of yet)
3) Europe and parts of Asia have turned up along with the US from early April, yet failed to turn back down at mid-month and have actually continued higher. So there lies some divergence here where other developed countries have been acting much better of late (despite European economic conditions having worsened (Germany))
4) The pullback markets experienced most of the last week until Friday lacked a lot of meaningful negative breadth like what would be expected on a serious correction. Friday's "sitting" near Thursday's highs when a selloff very well could have happened, and then turning up above 2631 caused a short squeeze for Friday and resulted in strong tech outperformance with AAPL moving back to new highs.
So the net result of all this isn't all that satisfying. Markets remain in consolidation since January and have not proven that this is over, and predicting that breakouts can happen with lack of proof in exceeding trends while a number of sectors are showing very sub-par performance just doesn't give all that much conviction. Yet, longer-term uptrends from 2016 remain very much intact. So despite some underperformance and deterioration in individual stocks, indices have held up and it's right to have a more tactical approach, until breadth and momentum improve.
We'll finish with a small discussion on Earnings, since many have been wondering why earnings are so bullish (and even arguably geopolitical tension is easing, yet stocks just can't rally? As many know, earnings aren't necessarily the driver of stock prices. If anything, it's the stock market that tends to lead the economy. From Robert Prechter's book- "The Wave Principle of Human Social Behavior and the new Science of Socionomics"- "Since 1932, Corporate profits have been down in 19 yrs. The DJIA rose in 14 of those yrs. In 1973-4 the DJIA fell 46% while earnings rose 47%. Actually 12-mth earnings peaked at the bear market low. Earnings do not drive stocks"
Furthermore, in a June 1991 Study- Wall Street Journal reported on a study by Goldman Sachs' Barrie Wigmore who found that only 35% of stock price growth (in the '80s) can be attributed to earnings & Interest rates. Wigmore concluded that the rest is simply due to changing social attitudes towards holding stocks
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- Last week's Technology outperformance could help to lift equities further earlier in the week, as this remains 25% of the market and just made a bullish breakout relatively speaking. While trends remain negatively sloped and prices are now near the downtrend from mid-April, its thought that some further near-term gains are possible before any selling resumes into June/July. Futures as of early Sunday evening had lifted up to 2670, and into Monday, there's not much resistance between here and 2682, while over this could allow for brief push to challenge mid-April highs near 2718. However, it's a concern that just one group seems to be doing the heavy lifting while much of the market has been lagging. We'll need to see Industrials and Healthcare, not to mention Financials, start to stabilize and turn up before thinking this is anything more than just a short-term continuation to last Friday's move. However, to start this week, we'll look for this rally to continue a bit more, and use any pullbacks to 2640-50 to buy.
Intermediate-term (3-5 months)- Bearish- Trends and momentum remain negative and markets are entering a seasonally bearish period for mid-term election years that normally sees trends turn lower into September/October before late year strength. While Technology is indeed a positive, other sectors like Financials, industrials and Healthcare have all been dragging substantially and are a problem for a market desperately seeking leadership. The lack of breadth and market momentum suggest this market still could be vulnerable to a late Spring "shock" given that sentiment isn't all that pessimistic while the participation and trends remain in less than optimal shape. Movement down under 2550 would be a concern for a test of 2450, but this likely proves to be appealing initial support to buy into on any correction over the next couple months.
TECHNICALLY ATTRACTIVE STOCK IDEAS WITHIN TECHNOLOGY:
This week we'll take a look at some of the more attractive stocks within Technology which still look to strengthen from a technical perspective. So despite the negative trend for Equities as a whole, these stocks might offer a an attractive risk/reward for those looking for technically based long ideas.
LONGS: CRM, CDW, COUP, TWTR, PANW, RHT, AKAM, SPLK, FLIR, and CSCO
Salesforce.com Inc.- CRM- Ongoing strength and push to multi-week highs bullish
Salesforce.com Inc (CRM- $125.12) CRM continues to show some of the more attractive technical structure within most of Technology. The stock's acceleration into early 2018 was followed by just a minor pullback before pushing back higher to multi-week highs last week. The plane of ascent has steepened in the last few months, and should allow for continued gains up to test and break former highs near $130 in the days/weeks ahead. Until this breaks its uptrend and/or shows some evidence of weakening structure, this should be favored and held long for movement back to new highs.
CDW Corp (CDW- $75.52) The ability to have exceeded the highs of this consolidation in the last few months is thought to be constructive and should bode well for further gains up to $80 in the weeks ahead. Ranges of this sort which are exceeded on heavy volume typically prove to be bullish to the overall structure and should allow for additional strength in the days/weeks ahead. Only a move down to undercut the recent gap would postpone the rally.
Coupa Software (COUP- $50.46) COUP's ascending triangle pattern over the last month bodes well for an upside breakout and acceleration in the weeks ahead, and long positions are recommended technically looking to add to longs on evidence of a breaking back above the intra-week highs. Tight consolidations of the sort which follow steep ascents typically allow for further gains, and given the face that COUP tested the initial highs once already, the act of making higher lows and then revisiting this high yet again is a very bullish development that normally suggests owning and buying more as this attempts to breakout. Only on a move down under $46 would this bullish thinking be postponed. At present, its right to favor an upcoming breakout and further gains to the mid-$50's.
Twitter (TWTR- $31.04) While the stock remains more than 10% off its highs from March, TWTR remains technically attractive from a risk/reward perspective here given the pullback to trendline support from last October lows. Given the reports of active Call buying in the shares last week which drove the stock up to new multi-day highs, it looks attractive to position long for a rise back to $35-$37 with stops under recent lows near $28. Given the upside projections and failure of TWTR to make any meaningful trend violation, one should look at shares as being an attractive technical risk/reward and buy TWTR technically for a push higher to test highs made just two months ago. Breaks of this uptrend would cancel out any positive stance, but for now is unlikely.
Palo Alto Networks (PANW- $195.36) PANW's ability to make a new multi-week closing high should allow the stock to begin some acceleration now that 2015's highs have been exceeded as well. PANW took just one year to retest highs which took nearly 2 years to consolidate, yet the pattern remains quite bullish and PANW should be favored for further gains, with targets up near $215-220. These kinds of wide bases following lengthy rallies are typically quite bullish for the prospect of further gains, and it's typically wise to monitor when stocks manage to get back to new high territory. Overall, technically speaking, PANW looks like a great stock to own and buy dips while using movement back above $197 to add to longs even more for acceleration given that this would represent the first move back to new highs in over two years.
Red Hat (RHT- $166.10) Ongoing higher highs and higher lows with a lack of counter-trend sells being confirmed should allow for even further gains in RHT with technical targets found near $180. As this weekly chart shows above, the stock began an even swifter advance to its ongoing uptrend a couple months ago, and has made four straight weekly intra-week highs above the prior while also achieving new higher weekly closes. Momentum has been overbought for the last few weeks, but the act of challenging the highs from mid-March should allow for even higher prices in the weeks ahead before this shows any evidence of peaking out. Pullbacks to violate this uptrend, currently near $157, are needed to consider reducing exposure.
Akamai Technologies (AKAM- $72.01) The act of exceeding an area of consolidation going back since 2015 is considered quite bullish for stocks like AKAM, and additional gains are likely up to test and exceed the area near all-time highs just below $80. The stock's ability to get back over this area in the high $60's which at the time late last year looked to represent a multi-year symmetrical triangle pattern was considered to be quite bullish on an intermediate-term basis. The stock rose to the high $70s before backing off and consolidating and now looks to be attempting to push higher yet again. Longs favored with initial targets near $80 and movement over that level likely given the symmetry and pattern development.
Splunk (SPLK- $107.25) SPLK's recent consolidation in the last month happened to occur right near prior all-time highs back in early 2014 when this first made all-time highs before pulling back more than 50%. The long-term pattern remains quite attractive after its acceleration late last year, and the act of rising back to new multi-week highs last week looks to have broken out yet again after having formed a recent minor triangle pattern to consolidate gains. Movement up to $120 looks likely technically, and its right to own SPLK and use dips to buy, thinking that recent upward progress should continue in the weeks ahead.
FLIR Systems - (FLIR- $54.52) Additional gains to the high $50's look likely for FLIR after having made a successful breakout of the highs made back in January. The stairstepping pattern in the last month is particularly attractive, as the stock has taken a slightly quicker path of acceleration higher and last Friday's gains in particular should lead up to near $56 without too much trouble. One should use pullbacks under $54 to buy dips, and continue to stay long FLIR providing this recent ascent continues and its breakout leads to further movement higher. Momentum remains positively sloped and not too overbought, and long positions remain correct unless this were to undercut $52, which doesn't seem likely in the immediate future.
Cisco Systems (CSCO- $45.30) The basing pattern since February of this year looks to be setting up for a push back to new high territory, and last Friday's gains in particular are a positive in having exceeded the highs from April, helping CSCO to reach the highest levels since early March. Given the long-term bullish structure in this stock, the rise since last August's lows looks to have made just a partial consolidation after it rose 50% in about six months' time. The decline from March into early April was immediately recouped which is thought to be a real positive and gains are likely to the high $40's before much additional resistance comes in. The risk/reward in CSCO's case is quite attractive given this consolidation and downside risk is pretty easily quantified. Only in the event this gets back under $43 would gains be postponed, while last week's gains are thought to lead directly back to new monthly highs.