Please enable javascript in your browser to view this site!

Rotation, Rotation, Rotation- 5 Technical Longs to Favor, 5 to Fade

 

December 4, 2017

S&P DEC FUTURES (SPZ7)
Contact: info@newtonadvisor.com

2547-8, 2639, 2631    Support
2670-2,  2679-81        Resistance


 

ESd.gif

The parabolic rise continues, as Sunday's electronic session open coincided with a quick burst higher to the tune of 0.50% for S&P futures, of 15 handles as of 8pm Sunday evening.  At the time of this writing, prices did not look to have run its course.  While the reconciliation between the two tax bills could be a complicating factor which brings uncertainty to markets, there needs to be some evidence of prices pulling back to multi-day lows and holding on a close before thinking any sort of consolidation is getting underway.   While prices could easily fill the gap at 2643 before pushing on to 2670-5, a breakdown below the 50% retracement from last Friday's lows alone (2634) is necessary before thinking any sort of pullback is getting underway.  Parabolic moves like this are difficult to join at extended levels;  yet, they're also difficult to fade before having necessary proof.   As we all know in the month of December, prices can get overbought and stay there in the month of December for no rhyme or reason, and this time certainly seems no different.


  

SUMMARY:

Stock indices continue to defy gravity and trade in very resilient parabolic fashion, ignoring the uncertainty of tax reform (even with the passed Senate bill) as the middle of November turned out to be a turning point after all.  Yet instead of being a high, this became a launching pad for a bout of extreme acceleration higher after indices were already overbought.   Since November 15, S&P futures have moved 104 points  in 12 days time, or over 4%, while much of the world has not followed suit.  Europe is down more than 4% in the rolling 30 days, (STOXX50) while both Japan and China are lower than levels made back in early November.  Rotation served to bolster US stocks, as the Industrials and Financials managed to carry much of the load in the last two weeks, while Energy, Consumer Discretionary, and Healthcare all showed sharp gains of 1.81% or more in the rolling 5 day period.   Technology underperformed , with losses of 2% last week, yet this didn't seem to have much of an effect yet on the broader indices.  

Given that only four more weeks are left in 2017, it's difficult to expect any meaningful deterioration, when trends have been going exactly the opposite direction, and quickly.   While the issues of Uber-complacency(ultra-low Equity Put/call) combined with extreme overbought conditions while the largest Sector in the S&P has begun to falter (Technology), we'll need to see evidence of the pullback to new multi-day and/or multi-week lows to pay attention. Some of the problems of waning breadth and momentum have in fact been rectified in the last couple weeks.  Yet the issues of bond yields going in the opposite direction of stocks while the yield curve plummets remain somewhat problematic.  Additionally, (as mentioned previously) much of the world remains in correction mode from October/Early November, with only the US barreling higher. 

Given the composition of Industrials, Financials and Technology amounting to 50% of the SPX, seeing one of these sectors waning, while the other two have ripped to very overbought levels makes for a very difficult spot to consider being long.   Demark indicators have perfected their recent TD Sell Setups on DJIA and SPX as of last Friday which often can lead to consolidation, and from a non-technical perspective, the Algo-led surge in Futures doesn't seem to take into consideration the difficulty which remains on bringing these two bills together to actually achieve some kind of tax relief.  Nonetheless, the trends remain in good shape, despite these other issues, and could grind higher into mid-December before any type of peak to this rally.  The rebound in Small and Mid-caps alone looks encouraging, as these had been lagging for some time.  Overall, it's essential to be alert during this time given the upward volatility as this could easily be quickly erased  (but might be held off until January)  We'll be on watch for signs of S&P possibly reaching 2670-5, as well as trends turning down to multi-day lows.  Given the extent of the rally, this likely would prove important, and worth following in the near-term.   For this week, we'll concentrate on recent developments and then highlight a few attractive stocks which still look likely to continue higher, along with those which have peaked, and/or should move lower, technically.   

The most important Technical Developments of the last week


1) SPX, DJIA, RTY, TRAN all surged back to new all-time highs, furthering the recent parabolic move, and while last Friday attempted an early selloff.. by day's end, prices had recouped this decline to ward off any damage

2) Sector-wise, Financials and Industrials played "catch-up" accelerating back to new highs, which looked to be an important Mean reversion in sector rotation while Technology faltered.   Healthcare looked to have bottomed, while Discretionary extended its gains at new all-time highs, becoming even more stretched

3) Small-caps and Mid-caps also moved sharply back to new all-time highs, as seen by both SML, RTY, and MID, which are often important benchmarks for these groups.  (A few months ago the lagging in both Small and Mid-caps was noted, but this has been alleviated in recent weeks with both pushing back to new highs)

4) Style-wise, Growth stocks had a setback last week with Value outperforming.  While trends of growth to value remain very much intact, the ratio is down near key make-or-break levels from a minor trend formed in July.   Given no trend break, it's likely that Growth could reassert itself, but if this fails, it will be noted.   

5) Europe has not joined the US index move back to new highs, and remains down over 4% from peaks made in October (SX5E),  (Europe still remains below May 2017 peaks) So Europe remains a laggard to US

6) Crude oil managed to rally back to test late November highs which remain at near two-year highs, and trends remain bullish and supportive of further gains

7) Bond yields reversed their recent breakout attempts in dramatic fashion last week, with Bund and Gilt yields snapping back to new weekly lows, while 10yr US Treasury yields also fell back down under the key 2.41% level that had been exceeded the prior week.   Key levels for a breakdown in TNX lie at 2.30%. 

8) Equity put/call ratios got down to the lowest levels since September, with readings as low as .50, indicating nearly 2 calls being bought for every Put.  (This is one concern to the current rally, as everyone seems to be jumping onboard)

9) Percentage of SPX stocks trading above their 10-day moving average(m.a.) jumped to 76%, while the percentage of stocks above their 50-day m.a. 

10) SPX daily MACD moved back to positive territory, while the weekly momentum hit new highs as SPX did, which does not show any negative divergence, nor does the monthly

11) Daily SPX and DJIA charts now show TD Sell Setups (9 consecutive closes where the close is higher than it was four days prior)  In the past both Buy and Sell setups have proven important in suggesting consolidation after a certain move.

12) Financials ETF, the XLF, does NOT yet show signs of exhaustion, and looks to require at least another 2-3 days HIGHER before this will trigger TD signals that might be indicative of some sort of short-term top.  Thus, further gains in Financials early in the week looks likely

13) NASDAQ vs SPX along with NDX both have Daily and weekly counter-trend sell signals presently, while the NDX actually shows Monthly counter-trend sells, (NASDAQ Comp could signal these in January and is one month away)   This could be an important step in the process, as the NASDAQ should be likely to peak out first before many of the other indices and begin to underperform.

14) Semiconductors SOX break of the uptrend from September looked to be an important and negative development which could serve as a headwind for Technology over the next few weeks.  While the pullback became stretched quickly, this sudden downturn in momentum looked serious and suggests that rallies might be used to take profits

15) Emerging markets suffered a sharp setback last week with ratio charts of Developed markets vs Emerging showing signs of having broken out of trends which had been intact all year (Potential China concerns) Near-term, this is a negative for Emerging markets, though looks to have gotten stretched and should attempt to rebound near-term.  Overall, if EEM holds November lows at 45.45 and bounces back to 46.50-47.50 before turning back down under these lows, that would be a larger issue for Emerging markets.  At present, this pullback in EEM looks to be near initial support.



SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term (3-5 days): Bullish- Still quite difficult to fade this market based on price action, (SPX has barreled up through earlier technical targets) and now breadth and momentum have begun to turn upward in a manner that alleviates some of the near-term concerns.   There are offsetting issues of course, with regards to counter-trend signs of exhaustion (Demark) per SPX, Technology weakness, and rampant Call-option buying which all suggest caution at these extended levels.   Yet, given that this is the month of December, and overbought conditions can persist, while sector rotation can temporarily bail out the market, we'll need to see evidence of trends being broken to have concern.  Futures have gapped higher Sunday evening at the time of this writing, and will need to get under last Friday's lows at a minimum - 2605, to have concern.  Until then, upside to 2670-5 looks possible.

Intermediate-term (3-5 months):  BearishStill likely that January/February should be a wake-up call for stocks, and persistent bullish sentiment/complacency, coupled with the start of Technology weakness in extreme overbought territory should offer limited upside. Breadth and momentum have snapped back, which is a temporary positive, but it remains very difficult to expect the market to continue up in the next few months even more given that Industrials and Financials are nearing extremes, and coupled with Technology these make up 50% of the market.   At present, it's thought that the intermediate-term prospects are unattractive given these risk factors, and a defensive stance looks prudent.  Rallies into mid-December are thought to be something to sell into, vs just expecting uninterrupted gains into end of year, and January should prove to be much more difficult than September into early December.   


Comments, targets and Stops of some of the better positioned Technical risk/reward longs and shorts in my opinion at this juncture are listed below, with five longs and five shorts.  For more detailed analysis, email me at info@newtonadvisor.com and i'd be happy to send you more comments that explain my thinking in this regard.


5 Attractive Technical Longs with Targets and Stops

 


Philips 66 (PSX- $97.57) Target 110, 116.85   Stop- 91.40-  Breakout above 3 year Bullish Base
Legg Mason (LM-$40.15) Target 46.10, Stop 37.10- Surge to multi-month highs constructive
Pfizer (PFE- 36.35) Target 40, 44.65, Stop- 32.30- Move back to near last years highs bullish
Nike (NKE- $59.88) Target 67.50, Stop 55- Rally above 2 year Downtrend positive- Move to test '15 highs
Exelon (EXC- $41.83) Target 45.40, Stop 38.75- Giant Double Bottom breakout of base since 2011



5 Attractive Technical Shorts with Targets and Stops

 


Crocs Inc (CROX- $10.75) Target 7,  Stop 12.25  Rally to 5 year Downtrend resistance, Counter-trend Demark Sells
Amazon (AMZN- $1162.35) Target 1070, 1020, Stop 1215- Too stretched, heading into Poor Retail seasonality, Demark sells
Nvidia (NVDA- $197.68) Target 162, Stop 220 Signs of momentum deterioration from very stretched position- Upcoming seasonal mean reversion could be problematic
Urban Outfitters (URBN- $31.32) Target 24.71, $22.70, Stop 34.50 Rally up to near breaking point of 7 year Downtrend
VF Corp (VFC- $71.79) Target $62, Stop $77.55 Rally to near highs of Monthly Bollinger w/ Weekly/ Monthly Counter-trend Sells

 

 

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: FIVE.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

 

NEWTON ADVISORS WEBSITE

 

 

Newton Advisors, LLC. info@newtonadvisor.com 203-339-2944

Energy looks to be bottoming after recent underperformance

February 27, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2360, 2354-6, 2335-6, 2327-8, 2300              Support
2370-1, 2375-7, 2390-3                                  Resistance

 

 

SPX's resilience despite the sector rotation should be unable to carry much higher, but for now, will still require at least one pullback under a prior day's lows before attempting to short this on the way up.   Momentum has reached the highest level in years on daily charts, and prices look like a poor risk/reward until at least some pullback has played out. 

 

 

As we enter the last few days of February, this month has played out much differently than many would nave expected.  Given that January performance far exceeded expectations amidst the uncertainty, many had expected the exact opposite for February which seasonality studies had backed up.  Sentiment has only gradually improved since the Election, and while business optimism has increased, and equities have begun to see fresh inflows, there remains a huge amount of skepticism from many who feel the best has been baked into this market ahead of Trump's State of the Union address.   To say last year's big early year meltdown in January/February is still fresh in the memory of many investors is an understatement.  The degree to which this year has amplified the possibility of volatility increasing given the Election uncertainty and upcoming Policy uncertainty is also worth noting.  Furthermore, many still give POTUS and FOMC officials far too much credit for being able to influence the market with their talk and platform.  Thus, many aren't used to the degree of Trump's comments simply being ignored by the market, when most would expect volatility to increase substantially given the level of Unknowns that exists (regardless of whether most are on board with the platform, or not)  Bottom line, the market remains far too resilient even for the comfort of most Bulls this year thus far.  Yet the index trends simply haven't given us much reason to worry.  The negatives of Overbought conditions, seasonality concerns, shifting sector rotation, Demark counter-trend sells, waning breadth/momentum all take second fiddle to market structure.  While the former might argue for a cautious stance, it rarely pays to go against the latter.

That being said, the market over the last week showed a few different colors than it had in the past that bear mentioning.  Four different sectors turned up counter-trend signs of exhaustion in the last week, which HAD NOT been in place in the past, while the indices themselveshad shown these signals (goes a long way towards explaining why Demark signals sometimes WORK in the indices, but also why they might NOT work if none of the sectors are aligned. )  Two of the four sectors in question, Industrials and Financials, turned down to multi-day lows late in the week, causing some underperformance at a time when most of the sector performance in the past week had been dominated by the Defensives anyhow.  (Utilities, REITS, Staples all outperformed strongly)  The percentage of stocks trading above their 10, 50 day moving averages dropped sharply in the last week, from the mid-80%s to the mid-60s.   And the Advance/Decline pulled back as might have been expected, after peaking around mid-February.   However, despite this minor evidence of sector deterioration and/or rotation into the Defensives, indices held up resoundingly well.  The DJIA went on to set new records for its 11th straight record high close, while as we've heard, indices continue to trade in a very tight range, with little to no real volatility in excess of 1% which has held for a record 45+ trading days thus far. 

Additionally, what has been widely reported is that both January and February stand to close positive in US Equities, a feat that's happened 27 times since the mid 1950's, or a little less than half the total years.  Each one of those years has finished positive, which should be put to the test this year in Q3.  For now, still quite a few bullish technical themes in stocks, while the negatives have only recently begun to surface and have done more damage to the underlying sectors than they have the indices themselves.  At some point, something will have to give.  Watching Financials (which have just started to turn down) and Technology (not yet) should provide the real clues

Outside of equities, we've seen one of the biggest rallies in the bond market globally that's been seen in the last six months.  This goes exactly opposite that which has been seen in "Spec" positioning, which might make total sense, as many seem to be still betting on a steep rate rise ahead of next month's FOMC meeting.  Yellen's comments seem to have come across hawkish to investors, along with other FOMC voting members, yet the market simply doesn't believe.   Given that Fed Fund futures remain at 38% Hike percentage for next month and the bond rally has continued, more will have to be done to "ready" the market for any sort of hike.  IF equities start to turn lower in the next few weeks, as has been discussed, this would most likely take a hike "off the table" or else cause real dislocation, as the FOMC has shown from prior abstinence that it's unwilling to hike into market volatility. 


SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Neutral-  Bottom line:  It's just tough being short the indices until they give at least SOME evidence of taking out the prior days' lows and make multi-day new low closes.  Shorts were stopped out above 2343 and while the upside here looks limited, we'll need to see the indices turn down to echo what many of the sectors have begun to show.   If Technology and Discretionary turn down in the next few days, as very well could happen, this should put sufficient pressure on the indices to put a near-term Short stance back on the front burner.  For now, despite many individual stocks turning down and appearing like good shorts, the market itself has NOT given sufficient proof.  Yet, the sector damage from last week makes it still likely that upside here proves short-lived and limited.  

Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  For now, we look to have either short-term tops, or bottoms in early March which lines up with a couple short-term cycles.  But it's tough putting out bullish thoughts for the next few months when a change of trend is overdue.  Hence, a neutral stance for now looks right until the pullback gets underway. 

 


This week we'll concentrate on some charts within the Energy sector, as we're beginning to see increasing signs that this group can bottom out, despite the recent negative trend

Comments and charts below
 

 

VanEck Vectors Oil Services ETF (OIH- 32.07) OIH has gradually pulled back in the last few months to an area that represents excellent risk/reward support to buy dips given the drop since early December.  The downtrend remains intact, though prices are nearing both early February lows, as well as former highs from last October and June which should now acts as support) The divergence between oil stocks and WTI Crude itself has been striking in recent months, and should represent a good opportunity to buy this sector given that Crude has shown recent evidence of moving higher, while Energy has underperformed all other sectors by a long shot over the first two months of year, down nearly 7%., more than 400 bps worse than Telecom, which weighs in at #9, only down -2.26%.  For now, OIH looks to be getting close, and Energy is increasingly a good risk/reward at current levels. 
 

 

Relatively speaking, Energy also looks to be getting close, and despite its ongoing downtrend, OIH/SPX in relative terms is within 2-3 days of reaching support after a difficult first two months of the year.  This sector has underperformed all others and some of this lagging was evident following the trend break from September of last year.  TD Buy Setups on daily charts should occur this week in Energy, and the group should reverse course and start to act similar to what Crude has done in recent days.  Overall the months of March-August should be far different for Energy than the last few, and even if the S&P begins to trade lower, integrated oil should begin to outperform, providing a good risk/reward sector after its recent lagging.

 

 

WTI Crude has begun to show increasing signs that the OPEC Output cut might be going better than planned and has not been fully factored in by prices in recent weeks.  While inventories remain high, prices have held up in resilient form and are nearing the end of Crude's poor seasonal trend (which appears to have not affected this at all this year.  Higher prices are likely in WTI to the upper $50s and ultimately the lower $60's before any peak this coming Fall.  For now, a move higher looks much more likely than lower in the months ahead given the recent stabilization and ongoing basing pattern.
 

When viewing Crude given Elliott wave's Equal currency Benchmark index, (or BEWI in Bloomberg), we see Crude in a much different and much stronger light than when priced just in US Dollars.  In Multi-currency form, Crude has already exceeded both highs from 2016, as well as late 2015 highs and has begun to trend higher in a manner that should let this move back to new multi-month highs in the months ahead.  This pattern is much stronger than that seen in just US Dollars, but tends to be a more realistic guide of its pattern and often presents a better guidepost when the pattern in US Dollars remains more inconclusive.
 

 

Integrated Oil, when viewed as an index, relative to the broader Energy sector, looks to be trying to bottom out in the short run after pulling back hard since last Winter's market lows, which coincided with the peak in the relative Integrated oil stocks.  Counter-trend indicators by Demark have signaled "BUYS" for Integrated oil just in the last couple weeks for the first time in over a year, and following a huge period of underperformance for this group.  This should help the Integrated stocks stabilize and trade much better in the weeks/months ahead.

 

 


Oil and Gas Drilling, when compared to the broader Equipment and Services index, has shown some definite signs of stabilizing of late after its late year breakout last year which has now been retraced and lies at a much better risk/reward area to buy.  This ratio above comes from two Bloomberg sub-indices, the S&P Oil and Gas Drilling index, and the Equipment and Services index.  In ratio form, the Drillers broke out late last year above the downtrend from mid-2015.   The retracement has brought this down to a key level of support to consider buying.  Thus, the Drillers seem to be improving relatively speaking vs Equipment and Services, but also vs Energy in general.  This should be an encouraging sign given the extent of the damage in this group in the past couple years.  
 

XLE, in ratio form to XLI, is very close to signaling long-term buys that suggest some mean reversion should occur in this ratio after a lengthy decline.  Most of 2016 showed some brief stabilization in Energy vs industrials relatively, but since has given way to a move back to new lows.  For now though, counter-trend buys are evident in a few different timeframes in Energy vs various groups which suggest this recent weakness should give way to some upcoming stabilization.  Crude oil moving higher should help this group and the weakness this year looks overdone.
 

Exxon Mobil Corp. (XOM- $81.08) XOM has dropped nearly 12% in the last two months which has undercut last September lows, bringing this stock down to the lowest levels since last Spring.  Despite this breakdown, the stock is coming into an important area of trend support which is likely to hold prices and help this turn back higher in the months ahead.  XOM has just retraced 50% of the entire rally from 2015 lows, and now is within two weeks of displaying its first weekly counter-trend buy signal since the decline began in this stock last Summer.  Given evidence that Integrated oils might be on the verge of turning higher again vs most of Energy, along with the overbought nature of the market in general, XOM looks like a good risk reward to carry higher as this sector begins its own mean reversion snapback.

 

Chevron (CVX- $110.12) CVX's recent early year pullback should represent a buying opportunity after this has corrected nearly $10 from last December's highs, or around 7.5%, which given its ongoing uptrend from last Fall, looks to represent an excellent buying opportunity as part of this bullish trend from last year.  CVX has consistently been an outperformer within the Integrated space, and given the overbought nature of stocks, combined with WTI Crudes' recent lift, this looks to be a good risk/reward within the Energy space to outperform, even if the broader market does peak out in the next few weeks. 

 

 


Transocean (RIG- $13.75) Given the uptick in most of the Drillers in the last month, it makes sense to look at RIG, which has outperformed all other stocks within the S&P Energy index over the last three months, with returns of 16.82%.  This push higher into December of last year helped to exceed the former downtrend that RIG had traded within since mid-2015.  Last year's bounce broke this trend, and now its minor consolidation has helped to relieve some of the overbought state in this stock.  Combined with the improvement in structure, this represents a good reason to take a further look at this stock, since technically we've begun to see some improvement in both the sector and this name itself in trying to finally turn the corner for the first time in the last couple years.  For now, initial resistance lies at $16-$16.75 while any move back down under $12.88 would postpone the rally.
 

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

5 Charts showing reason for concern, & 5 Attractive risk/reward technical shorts

February 21, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2345-7, 2335-6, 2331, 2300              Support
2360-2, 2373-6                                  Resistance

 

SPX's push up above 2340 puts prices in parabolic mode where gains are tough to fight, despite the many warning signs.  Many can attempt to short current levels with stops at 2360, looking to revisit near 2375, but prices should not experience too much more upside in the next couple weeks before giving back recent gains.  Timewise, there are a plethora of time and price based indicators that suggest selling into this rally by early March if prices have failed to turn down, as the period from LOW - to - LOW that has coincided with the last few bottoms since 2015 projects into this time.  For now, the trend is stretched well beyond where it should be based on recent slope of the trend.  Yet, we'll need to see some evidence of trend reversal to have any kind of confidence, which thus far, has been lacking.

 

 

Not a real satisfying week for the Bears, despite many of the mounting signals that a change of trend should be near.  Prices rose to close near the highs of the weekly range, producing the best full week of performance thus far in 2017..   The recent breadth acceleration that arose when SPX, DJIA moved back to new high territory managed to help sectors like XLF move back to highs, while Small-caps also outperformed as Russell 2000 also hit new high territory.  Meanwhile, breadth gauges like Advance/Decline (All stocks) moved back to new all-time high territory while counter-trend indicators continued to mount, with last week's daily charts showing Demark indicators having TD 13 Sell confluence on SPX, DJIA, NDX, COMPQ, VALUA index now being joined by XLK, XLI, and XLU, with XLY, XLV, XLF still 3-4 days away. (Meanwhile, IYZ, XLP, and XLE remain well off last year's highs.)   The Percentage of stocks trading above their 10, 50-day and 200-day moving averages have both risen to the low-to-high 70% range in the last couple weeks. 

Many have attempted to attribute the positive equity performance of late to optimism regarding President Trump's policies despite an overwhelming amount of uncertainty in Washington with the Budget proposal upcoming on February 28th.  This cautious optimism on Business and markets while the anxiety is ever-growing makes for an interesting take on Sentiment, which has gradually become increasingly more bullish.  The Equity put/call ratio last week produced the lowest readings of the year, while Investors intelligence surveys also have widened out to the highest Spread between Bulls and Bears in the last few years.  However, as many who have talked to professional money managers can attest to,  it still certainly doesn't FEEL this complacent.   Most remain begrudgingly invested, and hopeful, despite no end to the mass uncertainty.

Overall, from a directional standpoint, there does look to be a small window for shorting this week with prices having stalled near last Wednesday's highs.  Momentum remains overbought and seasonality is bearish for post-February expiration weeks.  Demark indicators have flashed "13-Sells" on many indices and would just require a minimal multi-day low close to confirm these signals, suggesting ther start of at least a minor pullback.   Yet we still haven't seen any real evidence of a downturn in stocks, but merely a couple days of stalling out.  As the saying goes.. "A watched pot never boils"  For this week, movement above 2360 would most certainly put the focus on later in the week, if not early March, where many advances have encountered serious Time-based resistance.   Movement UP to 2375 in this instance, would be likely, as this would represent a 50% absolute retracement in price of the prior rally from Pre-Election into mid-December.

Interestingly enough, we've witnessed signs of both Treasury yields and the US Dollar index produce minor trend reversals in the last few trading days.  The action in USDJPY along with TNX should always be monitored as they've shown remarkably high positive correlation to SPX in the weeks and months past, and often can serve as a leading indicator to equities.   Treasury yields backed off down to 2.41 from Wednesday's highs of 2.52%, a meaningful drawdown, yet one which had little to no net effect on Financials, which continued to outpace the broader market, leading all other 10 sectors last week, with returns of 2.95%.

So most of what was written last week really hasn't changed too dramatically.  Still quite a few bullish technical themes in stocks, while the negatives have only recently begun to surface and haven't really done too much damage thus far.  The bearish technical reasons of prices being stretched outside of Bollingers, Counter-trend Demark sells, an uptick in optimism, coupled with bearish seasonality have not yet produced any real reversal. 

SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bearish- Shorting last week's gains from a counter-trend perspective looks to be a good risk/reward, though with realization that movement back above last week's highs would likely carry indices higher into early March before any peak.  For now, the upside looks limited, and should be ideal to consider lightening up and hedging gains for at least a minor pullback in the weeks ahead. IF prices move directly above last Thursday's highs, however, this would serve as an immediate Stopout for Shorts, so it's best to keep stops tight until there is evidence of at least some type of trend reversal.

Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  For now, we look to have either short-term tops, or bottoms in early March which lines up with a couple short-term cycles.  But it's tough putting out bullish thoughts for the next few months when a change of trend is overdue.  Hence, a neutral stance for now looks right until the pullback gets underway. 

 


This week we'll concentrate on five charts of factors which suggest upside should be extremely limited in the near-term, along with five stocks which look to be attractive risk/reward shorts, largely from a trend following point of view.

Comments and charts below
 

 

S&P futures chart shows the extent of the recent rise following the nearly 10% lift just since the Election into December 13.  This consolidation proved brief before yet another liftoff which has helped S&P gain over 5% just in in the first seven weeks of the year.  Counter-trend sells are present but not confirmed on daily charts, while momentum indicators like RSI, MACD have begun to diverge on intra-day timeframes along with showing minor divergence on daily charts, as RSI is not following price back to new highs.  A 50% price retracement of the first leg up from the Election would target 2375 which should be a maximum amount which S&P would reach over 2360 into early March before falling.  For now, those with a trading bias can short with stops at 2360 and look to reinitiate hedges up at 2375, as this trend has gotten a bit too parabolic in the near-term.
 

 

3 key points to make on the NASDAQ-  First, prices are extending outside Bollinger Bands on Daily, weekly and monthly charts now.  Second, counter-trend sells are apparent on multiple timeframes as well which suggest an upcoming change of trend should be imminent.  Third, momentum has reached overbought territory again per RSI, but as can be seen, is at far lower levels than was reached back in 2014/5 when the Russell 2000 peaked.  This is not considered a healthy advance when momentum thrusts higher again after consolidation, though at much lower levels while price is surging.  Often the combination of these factors indicate that upside should prove limited. 

 

 

This is a snapshot of the breadth of momentum as shown by the Summation index, which sums up the values of McClellan's Summation index.  Often when this starts to diverge substantially it can bring about peaks in stocks, and recent trading deserves to be scrutinized in that regard.   Values currently are far below where they were last Summer, and/or Spring, while momentum indicators such as RSI have begun to diverge negatively given the recent push up in the last two weeks which wasn't followed by momentum.  While many would prefer to wait for actual price deterioration to short, when overlaying Demark indicators on this Summation index, we've just completed TD Sequential sells, which might bring about near-term peaks in price as this turns down simultaneously.

 

 

Ten-year yields and Equities have largely moved in tandem in recent months outside of the last few weeks, where we've seen yields pullback after making lower highs, while Equities continue higher, uninterrupted.  While this can certainly persist in the short run, the correlation between the two has consistently been strong and positive and suggests that Equities might be close to turning down to join the move in Treasury yields.  The last few days of Treasury gains while Equities have gained also has been unusual of late, as seen by the mid-December peak, late Dec low, late January low, while yields peaked out last week and turned back lower in the near-term.  Stocks, however, have pushed higher, while not only Treasury yields have not followed, but neither has most of the world either for that matter, as most Global stocks peaked out in 2015.
 

 

PUT/CALL (Equities) This sentiment gauge tends to be fairly accurate at extremes, as the Put/call on equities has shown just in the last six months, by moving from extreme pessimism ahead of the Election (which turned out to be the lows) to extreme optimism into mid-December, with more than 2 calls being bought for every Put (this in turn, led to sideways action for the balance of the year).  The recent pullback in Put/call failed to get below mid-December levels, but fell to multi-week lows (and the lowest level of the year) which potentially says something about how optimistic or complacent investors have become of late in the last couple weeks with lots of rhetoric which "COULD" have caused volatility, but didn't.


5 SHORTS TO CONSIDER FROM A TECHNICAL PERSPECTIVE:

 

 


United Parcel Services (UPS- $106.90) UPS near-term trend remains bearish following its gap down three weeks ago to the lowest levels since last July, the biggest plunge in two years on six times average volume. Technically speaking, this decline served to violate the uptrend from last January's lows, correcting 50% of that prior advance in the process.  Its subsequent bounce attempt doesn't look to be getting much traction, and last week's pullback towards lows of the week suggests some additional selling to come before this has officially bottomed out.  Weakness down to at least test prior early February lows at $103.23 looks likely, and additional corrective activity could take the stock down to just below $100 at Fibonacci targets at $99.96.  At present, the weekly chart is not oversold and technical structure remains negative, so it remains difficult to buy dips until this can begin to show more signs of stabilization.  Technical shorts over the next 3-5 weeks look more appealing than longs, and the near-term trend remains bearish.
 


Trip Advisor (TRIP- $47.06) TRIP remains a underperformer, and the stock has trended downward since peaking out nearly three years ago at $111.24.  Its ongoing pattern of lower highs and lower lows doesn't look complete, and last week's move back to new multi-week lows should serve as a technical catalyst for this to challenge and break December lows on its way to $41.   While former monthly lows could serve as temporary support, any violation of this level would have little overall support until down near late 2012 lows, and this looks certainly possible from a technical perspective.  Overall this looks like an attractive risk/reward technical short for the weeks ahead and one should avoid buying dips until this selloff has completely run its course.  For now, no evidence of counter-trend exhaustion is present, nor any attempt at bottoming out, which remains premature.
 

Bed, Bath, & Beyond (BBBY- $41.14) BBBY remains a better short than long after having broken down from a multi-year Head and shoulders pattern in late 2015.  Despite the market's 10%+ rip following the Election and a good bounce from the Retailing sector, BBBY has participated in none of this strength.  Its shares lie near recent lows of the past year, and remains an ongoing underperformer which still looks to have downside in the weeks/months to come.  Its pullback throughout much of 2015 into early last year took BBBY down to the 61.8% retracement of its advance since 2009, but its recovery efforts thus far have proven futile.  The recent bounce from early February hasn't helped the stock show any real technical strength, and should prove to be a selling opportunity for a move back lower to challenge and break recent lows near $39 to test last October's lows.  Support lies near $38.60 and under this could allow for a selloff down to near $30-$31 which constitutes a better suited area for trading buys than attempting to jump onboard the recent minor bounce.

 

Fossil (FOSL- $20.73) the recent pullback down to new multi-month lows on about 15 average volume took FOSL down to the lowest levels since 2009.  Its bounce from last Wednesday's lows has helped the stock regain about 10% off these lows, but it remains quite bearish Technically and this recent bounce should be one to sell into for a possible decline down to test 2009 lows just north of $11 up to $12.70 which looks to be a good level of intermediate-term support.  Momentum remains near oversold levels but not as extreme as last year given the attempted consolidation down near recent lows.  Yet, this can't officially be called positive divergence given little to no real advance by this stock in recent months.  Overall, recent strength should be used to sell into for FOSL as additional downside looks likely.

 

Tractor Supply- (TSCO- $72.18) TSCO has corrected now more in price and time than any of the pullbacks since its 2008 lows.   The technical damage which has unfolded since its April 2016 peak has violated the long-term uptrend as of last September, and momentum remains negatively sloped while not too oversold.   The attempted bounce since last Fall looks to have run its course with the monthly reversal seen in January, and this month's drawdown to multi-week lows looks to have more ahead given the ongoing negative structure and short-term momentum having turned back lower.  Near-term resistance lies near $74-$74.50 while support is found at $70, and then $67.80.  Weekly closes under $67.80 argue for a potential full retrace of prior lows made last October.  For now, this is one to definitely avoid in the short run unless TSCO can get back over $75.  Short-term gains in the next week should be used to lighten up and/or short for technical reasons.
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Small Caps, Financials break out of recent range, while prices grow stretched

February 13, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2303-5, 2285, 2273-4, 2262-3              Support
2318, 2323-4, 2329-2333                     Resistance

 

 

SPX's push back to new highs looks to be near upside targets of importance, with 2320 up to 2330 likely holding this first push higher out of this consolidation.  Counter-trend indicators such as Demark's TD Combo indicator shows sells developing within two days, which could bring about a top between Tuesday and Wednesday of this week.  While February expiration tends to be positive, prices have simply run out of upside room to maneuver in the near-term, and it's best to consider selling into this from a counter-trend perspective.

 

 

SPX and DJIA join the NASDAQ, but upside looks limited
THE POSITIVES:
Last weeks' ability of SPX and DJIA to push back to new all-time highs was certainly constructive from a price perspective, and trends have continued to advocate sticking with a bullish thesis, with little or no evidence of any real trend erosion.  While many began to point out the dangers of uncertainty, or Demark signals prematurely, there really has been very little to suggest stocks were turning down structurally, outside of breadth beginning to wane, which largely began in mid-December.  Outside of many equity indices pushing back up to new highs, however, we also saw a few examples of Sector and style breakouts, as Consumer Discretionary (XLY ), Industrials (XLI) Technology (XLK) all pushed back to new weekly closing highs, while meaningful consolidation breakouts happened in both Financials( XLF), and Russell 2000 (IWM), with both of these exceeding lengthy consolidations on a closing basis for the first time since mid-December.  Additionally, we saw the Percentage of stocks trading above their 10-day moving averages (MA) for SPX breakout of a trend that's held from mid-December which is also a clue that prices have begun to push higher across the board after a lengthy consolidation. 

Another noteworthy positive has to do with seasonality, as markets remain in the bullish six-month period that typically delivers above-average gains.  But expiration week in February also has fared fairly well, with a positive gainof 0.17% in the SPX since 1994 with 14 of 23 positive weeks.  Much of the negative seasonality of February tends to play out the week following February expiration which has been down more than half the time since 1994.  

THE NEGATIVES:
1) Overbought conditions: S&P's gains have carried popular momentum gauges like RSI up to near 70 on daily charts, the highest since early December, while weekly RSI is also nearing 70, which constitutes the highest levels since 2014.  Monthly meanwhile, has shown some divergence with prior peaks which occurred back in 2014 and while also showing levels near 70, is substantially below 2014 peaks, despite the fact that price is higher.  Additionally, prices lie above 2% Std. Deviation bands on both a daily and monthly basis.
2) Demark indicators which signal counter-trend signs of exhaustion have again come together on a daily basis for many of the US indices- SPX, S&P futures, NDX and could be in place by Wednesday of this coming week in DJIA, NASDAQ Comp. and others.  While these signals must be confirmed by actual reversals of trend, the fact that indices are beginning to show these sells looks important.
3) Divergence in breadth with push back to new highs- Advance/Decline on NYSE "All Stocks" failed to move back to new high territory last week despite the breakout in the SPX, and remains near, but not above the levels from late January.  Additionally, McClellan's Summation index lies well below levels that marked peaks last Summer.  Despite a rally from last November, the Summation index lies at only around 62% of the highs from last year.

Apart from Equities, we've seen what appears to be a turn back higher in both the US Dollar index as well as Treasury yields, two asset classes which seem to have correlated well with stocks rising in recent months.  The yield deterioration which had occurred back in the latter half of December and coincided with stocks slowing down, now looks to be turning back higher, just a time when the S&P has pushed back to new all-time highs.  While this should prove to be a positive for Financials,  Equities seem to have taken the lead in turning higher this time around, which might lead to some near-term consolidation before both move up in unison.  The US Dollar rally in particular will likely need some time before moving too aggressively back higher, but does look to have begun a bottoming process that should allow DXY to move back to new highs by late Spring/early Summer.

Bottom line, with regard to Equities, still quite a few bullish technical themes still, while the negatives have only recently begun to surface and haven't really done too much damage thus far.  So, positives in Structure, and an uptick participation will eventually give way to buying drying up on this surge, and overbought conditions and counter-trend sells should cause trend reversals that likely should be in place by February expiration.  For now, flattening out certainly isn't wrong given that prices lie outside Bollinger band highs, and selectivity in this rally at this point is an absolute must.  

SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Neutral- Upside limited- Use rallies Monday-Tuesday to sell into, looking to establish trading shorts by mid-week, (and if price reverses right away on Monday to multi-day lows than this might happen sooner -  Prices have reached the lower end of upside targets, and while a bit more strength can't be ruled out early in the week, this should be an area to consider lightening up and hedging by mid-to-end of week.  


Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


This week, given that there remain quite a few positive, while negatives are beginning to creep into the picture, we'll focus on 5 charts that support the Bullish case along with 5 charts of things that are of concern.   Comments and charts below
 


Value Line Arithmetic Avg has just pushed back to new highs, exceeding the base that's been intact since early December.  This index looks quite a bit more bullish than S&P and not as extended, and with 1700 stocks, is a much larger sample as to how to view "the market" vs purely looking at SPX.  Near-term, prices still look to have limited upside this week, but Monday/Tuesday gains would be used to sell, expecting some backing and filling by end of week and the following week.

 

 

 


The chart above highlights the Percentage of SPX stocks trading above their 10-day moving average (PURPLE) which just broke out to the highest levels of the year in the last two trading days.  This, coupled with the number of stocks making new 52-week highs both give a sense of recent breadth expansion in the last couple days that had been largely absent since the beginning of the year.  Given that this peaked out last December at 86% while the uptrend from those highs has just been exceeded, this looks to be a short-term bullish factor which could push prices up even higher in the near-term before peaking. 

 


CBOE Equity Put/call ratio Despite all the rhetoric about sentiment having become ultra-bullish in the last two weeks, the Equity put/call remains very much in neutral territory, nowhere near levels seen late last year when Calls were being bought at greater than a 2/1 ratio over Puts.   Now at a .70 reading, this is very much mid-range, and doesn't confirm the recent bullish readings on seen in Investors Intelligence data which had widened out to the greatest levels seen in years.  This neutral reading tends to align more closely with the mildly bullish readings seen in AAII data which showed just an 8% greater spread in Bulls to Bears.  Overall, this data, given the widespread thinking that sentiment has turned bullish, presents much more of a subdued picture, which in turn, makes for a more constructive view on equities.

 

 


Financials have taken a much needed step higher with XLF's push above the highs of the consolidation that has been intact since mid-December.  This looks to be an important and positive technical development, and given Financials weight in the SPX, is something to consider for those turning bearish too quickly.  The rise in yields looks to have bullish implications for this group, and this entire two-month consolidation looks to be possibly giving way to a push higher for Financials.  This should have bullish implications for the months ahead, regardless of the degree that most indices are stretched.

 

 


Russell 2000-  Similar to Financials, Small-caps seem to be breaking out, which is evident in IWM getting back above the highs from late January just in the last couple days.   While there are various concerns about NDX, SPX having run a bit too far too quickly of late, it looks constructive to see both Financials and Small caps make sufficient headway last Friday to clear recent highs on a closing basis, while giving both a good chance of extending in the months ahead.



THE NEGATIVES:

 

 

 


NASDAQ vs SPX-  Recent underperformance in the last couple days suggests that NASDAQ likely should lag the SPX after a sharp couple months of outperformance.  Counter-trend sell signals are now present on relative charts of NDX vs SPX, which previously were quite accurate in projecting lows in December (though the opposite)  For now, given that NASDAQ has led the market since the election, a sign of this reversing course could very well be negative and should be watched carefully. 
 

 

Quite a few US indices have now pushed up to test if not exceed the higher border of their own Bollinger Bands for a second straight month for the first time in the last couple years.  Given that counter-trend sells are now evident on monthly charts, this doesn't look to be an ideal time to be involved on the long side, thinking that too much more upside is likely.

 


The NYSE "All Stocks" Advance-Decline, remains below levels hit in late January, so despite the push higher to new all-time highs, breadth lagged substantially up until last Friday. 

 


VIX has pulled back to within former lows in late January, but now shows counter-trend BUY signals forming after nearly a full year of selling off down to former lows.  Counter-trend buys for implied volatility looks to be complete this week potentially.  Given the ongoing level of uncertainty, one should look to buy the VIX this week, thinking that further deterioration in implied volatility is unlikely.

 

 

Long-term charts show the extent to which momentum still hasn't caught up what price has achieved this year, which in a normal environment, might have carried price back to new highs.  The former peaks in both 2000 and 2007 showed the extent to which the momentum gradually began to drop off, and this year's push to new highs still failed to carry breadth back to levels hit back in 2015-6.  While the broader trend remains very well intact , prices have become quite strong.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Top Stocks to Consider Technically

 

February 6, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2280-2, 2273-4, 2264-5               Support
2300, 2310-2, 2318-20                Resistance

 

SPX's surge back to recent highs managed to help the index close positive for the week and eliminated the short-term concern about this recent consolidation experiencing a downward break.  The ability to close back over the prior week's highs should help S&P push up to at least 2315-20 in the short run, and pullbacks should be used as buying opportunities.

 

What a difference a week makes
Last week's ability to push back to make new all-time weekly closing highs confirms the prior week's breakout as being "legit" and gives much conviction towards the thinking that a rally back up to 2315-2320 is underway.  While volume came in less than prior sessions on the latest Breakout, we did see breadth expand to nearly 4/1 positive.  Financials showed very strong performance, which despite the early Bond strength, still managed to move back to multi-day highs (and by end of day, Rates had moved back higher) Healthcare also managed to further its recent outperformance, and despite the ongoing rhetoric on Drug pricing, sub-sectors like Biotech, & Pharma still have managed to stabilize and turn up sharply.  Meanwhile the US Dollar index's decline still looks to be ongoing, while yields have also continued their recent upward trend.

While there were notable negative reasons of late to think this recent consolidation could in fact lead lower, and many were betting that the low Vol levels coupled with this stallout should in fact lead prices lower, the combination of the structural positives in terms of the pattern improvement coupled with the heightened tension and uncertainty which the Inauguration has brought about, still seems to favor being long for a move back up over 2300. 

When considering the possible negatives, the lower number of stocks trading above their 10 and 50-day moving averages (m.a.) seems to be something that merits attention, as these gauges were at/near yearly highs back in early January and even last March-July while being quite a bit lower of late (2/3/17) value of 65% of stocks trading above their 50-day ma vs 85% back last year.  Additionally, the fact that Small caps have been declining in relative terms since December of last year is also worth mentioning as a concern.    Additionally the Summation index remains lower than it was in late January, and still well off the highs seen last Summer.  What this means is that the momentum of the breadth has slackened off severely in recent months, and despite the Advance/Decline near all-time high territory, the dropoff in participation in some sectors seems to have hurt the recovery effort to some extent.  Despite the fact that indices are at or near all-time highs, we still have fewer stocks participating, which will need to be monitored closely in the weeks ahead.

For now though, last week's breakout looks solid, backed by good breadth numbers while Demark exhaustion counts still remain premature to form on daily charts.  Therefore, movement back to new highs represents a better time to consider selling into this rally than now.  Given that Healthcare has begun to join the fray and Financials are showing some evidence of trying to break out again of the recent consolidation, the combination of these along with a noted lack of weakness out of Tech are definite near-term positives. 

Given that yields continue to be resilient, the key message should be to favor the Financials, Healthcare, Tech, while being more selective on what to own in Industrials and Materials.   The US Dollar index's decline still looks to have a bit more to go on the downside, so this should favor Metals and Mining stocks still showing more outperformance in the near-term. 



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Push up over 2300 likely in the near future given last week's surge to exceed the highs of the recent consolidation.  Breadth expanded on the push, and indices improved their near-term structure in a manner that makes rallies much more likely than declines in the next 1-2 weeks.  Use pullbacks to buy with initial targets near 2315-2320. 


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Overbought conditions combined with counter-trend sells and waning participation all look to be important in signaling that this year might turn out far differently than the Bulls expect.  For February, Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


Charts of 10 Technically attractive stocks to consider following last week's breakout
 

 


Bank of America (BAC- $23.29) BAC has quickly gone from one of the worst Financial stocks in its sector to one of the best in the last few months, and currently is primed to break back out to new highs in the months ahead.  Financials leapt higher post FOMC this past week, helping BAC to close back near the highs of the range that's dominated since the middle part of December.   BAC's 40%+ gains from Election time into last December look to have been fully consolidated, with momentum pulling back to less overbought levels, while the stock's "flag" consolidation is likely to be resolved by a quick move back to new highs (which could have begun late last week)  Long positions are favored, looking to press longs over $23.55 which should allow BAC to move to at least $25.  Only a move back down under $22.50 would negate this rally potential, which for now, looks to be an alternate and less preferred scenario.
 


Citrix Systems (CTXS- $76.70)  Another interesting risk/reward from within the Infrastructure Software space is Citrix Systems which has just broken out above highs that have held since 2011.  This brings CTXS up to the highest levels since 2000, and should allow $CTXS to move back to the low $80's at a minimum, with intermediate-term targets back near all-time highs in the high $90s from March 2000.   In the short run, momentum has neared overbought levels given the recent surge over the last couple months, and CTXS maintains a steep uptrend from last year's lows.  While many might be concentrating simply on the last few months, it's important to put this move into context of the stock's long-term structure.  Quite often, breakouts of this sort allow for additional follow-through sooner than later, and it's wise to stick with this, rather than holding out for pullbacks.  At any rate, longs are favored and any weakness back to the low $70's should constitute an excellent buying opportunity.

 

 


Norfolk Southern (NSC- $120.46) NSC's ability to weather just a minor pullback attempt since late January and push immediately back to highs bodes well for this to continue its recent acceleration since November, and push higher up to $125 in the near-term with intermediate-term targets at $135.   While the Industrials sector has stalled a bit in the last month, the Rails have consistently shown very good outperformance and structurally remain one of the better parts of this group.  NSC exceeding late 2014 highs looks important, and despite being overbought, should help this continue higher in the short run.  The act of getting back above a former high from 2+ years ago often can serve as a source of near-term acceleration for a stock, and in this case, longs are favored with thoughts that little resistance lies in the way now that NSC is back at new all-time highs. 

 


Union Pacific (UNP- $108.51)  UNP has been a consistent leader since early 2016 but remains still roughly 13% under all-time highs from early 2015.   Its pattern is not unlike other Rail stocks like NSC, but the trend of higher highs and lows has begun to take a steeper rate of ascent of late, and should help this get back to new all-time highs in the weeks ahead.   Initial resistance lies near $111 with movement over leading this up to near $120.   Stops for longs lie near $101, but the path of least resistance for now remains to the upside, and longs are favored.
 


Fluor (FLR- $55.66) The near-term pattern of FLR is more bullish technically than the long-term, but the stock's recent basing following the late 2016 breakout is positive and should let this trend up sooner than later to test and exceed late December highs at $57.77.  Momentum remains positively sloped, and the fact that FLR moved up to the highest weekly closing level since mid-2015 creates an attractive risk/reward situation in a stock which is not terribly overbought.  FLR remains nearly 50% off its all-time highs from 2008 and over 30% off highs made just three years ago in 2014.  Overall, the combination of the near-term pickup in momentum coupled with the lack of overbought conditions bodes well for further gains in the months ahead.  Upside technical targets lie near $61.70 initially with intermediate-term targets between $65-$67.  This represents a 50% retracement of the stock's 2008 high to low range, along with a 61.8% retrace of the stock's decline from 2014.  Overall, FLR looks attractive to buy here and pullbacks to the low $50's would afford better risk/reward opportunities as part of this near-term uptrend from 2015.

 

 


Newmont Mining (NEM- $36.76) NEM looks attractive as a Gold mining stock given the combination of its recent breakout of the range since early January coupled with the fact that it's been such a dramatic underperformer during this recent Gold runup.   While the top-tier of the S&P Metals and Mining ETF constituents are up 24% or more in the last six months, stocks like NEM are down more than 18% during this same time span.  However the jumpstart in momentum of late is noticeable and bodes well for additional gains in the weeks/months ahead.  Its close last Friday finished at the highest levels since November, breaking out of a minor pattern as well as having already exceeded the downtrend from last Summer.  Momentum is not overbought and NEM looks like an excellent risk/reward to continue this recent surge in momentum considering Gold could rally to near 1245-55 before any bounce is complete.  For now this looks appealing.

 

 


AmerisourceBergen Corp (ABC-$89.28) ABC looks appealing technically given the recent improvement in structure and momentum following its breakout of long-term downtrend line resistance coinciding with the gradual improvement in Healthcare in the last couple months.  ABC successfully bottomed out right near its 50% retracement of the runup from 2008/9 into early 2015.  While monthly momentum gauges like MACD remain still slightly negative, they're improving rapidly given this recent breakout and are on the verge of turning back positive.  Given that ABC remains more than $30 off its all-time highs, the stock looks like an excellent technical long for a 3-5 month basis given the jumpstart in momentum of late.  Longs preferred here, looking to buy any dips given the chance, down in the mid-$80s for a move up to $95, then $100.70 which represents a 61.8% retracement of the prior pullback from two years ago. 

 


Merck & Co. Inc. (MRK- $64.29) Yet again, MRK finds itself back up towards recent highs after a recent stalling out on the retest from 2014 levels.  The stock remains quite attractive technically, having formed a massive long base which began over 15 years ago.   The pattern since the late 2007 highs alone represents a massive intermediate-term Cup and Handle pattern and movement over $65 on a monthly close should help MRK to accelerate up to near-term targets in the low $70's.  While many might look at MRK as being still largely range-bound, the near-term improvement in momentum on last week's gains should help the stock to break-out of this pattern sooner than later, given that its made its way back to highs in just a relatively short period of time following the recent stallout.

 


Halliburton (HAL- $56.58) HAL looks well positioned to continue higher in the months ahead following WTI Crude's ability to stabilize during a time of traditional seasonal weakness.  Given that Oil typically tends to turn up into the Summer months, a move higher in Crude should help Energy to continue its recent gains, with targets on HAL up near $70 with July 2014 highs near $74 being important.  The uptrend in HAL has not shown any signs of wavering in the last 12 months, and this remains a solid technical risk/reward within the Oil Service space.  Pullbacks to the low $50s would offer attractive opportunities to buy HAL, and only a move under prior months lows on a close would represent a cautionary sign that could lead to possible weakness.  For now, additional gains look likely, despite some recent signs of waning momentum as the monthly charts still look quite attractive.

 

 


Valero Energy (VLO- $65.51) VLO's minor weakness of late represents a likely good opportunity to buy dips, given the ongoing strengthening in the Refiners in general since last Fall.  This stock's weakness has failed to severe meaningful Ichimoku Cloud support, and the decline looks to be stalling out.  This should represent an attractive opportunity to buy with targets up near $71.40 and then $73.88, the highs from late 2015.  What most weekly charts don't show, however, is the presence of a large Cup and Handle pattern, when going back since 2007 highs, so any move back up through $73.88 would be extremely bullish, and not necessarily the opportunity to sell into the move which investors wouldn't notice who haven't scanned the long-term charts.  Gains back to the low $70s look likely, with a keen eye on 2015 highs.
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

 

NEWTON ADVISORS WEBSITE

 

 

Newton Advisors, LLC. info@newtonadvisor.com 203-339-2944

 

Breakouts, Breakouts everywhere... Now what?

January 30, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2280-2, 2273-4, 2260               Support
2296-7, 2300, 2310-2               Resistance

 

 

Bloomberg World index shows the breakout which happened last week to carry this index of 5000+ constituents over prior highs from last Fall and late 2015.  While overdone potentially in the near-term, this is certainly a positive development technically and could help to start some mean reversion to SPX which made all-time highs this year while most of the world peaked in 2015.
 

 

Breakouts, breakouts everywhere..  Now what? 
With two more full days left in the month, January is set to show far better market performance than most believed possible heading into a new year under the uncertainty of new leadership.   Despite cautious optimism on the economy as a whole, there continues to be much more skepticism on the stock market, as shown by the recent inversion of Bulls to bears in the AAII poll.   Uncertainty and uneasiness about the shake-up going on in Washington following the Inauguration and the new refugee ban also seems to have cast a thick fog of worry over the US and the world, yet most equity indices have largely ignored these concerns.  

Yet this year is playing out almost exactly the opposite of last year.  This time last year, equities were spiraling downward towards DOW 15k, not breaking out above DOW 20k.  Yields were about 50 bps lower, while Commodities were hitting new lows, led by Energy, as Crude oil had shed about 50% from its highs the prior fall, and was down about 75% from highs seen back in 2014.  Little did most investors know at the time that Crude was bottoming out at this time last year, and proceeded to nearly double off those lows in the last 12 months.   Sectors like Telecom, Utilities, and Staples were outperforming last January, reflecting the bearishness and Defensiveness of last year's volatility, while this year's winners for January look to be Materials, Technology, Discretionary and Industrials, all up more than 3% for the year.  Far different leadership, yet important to note that last year ended up just fine performance wise despite getting off to a rocky start.  

Yet concerns about this market remain and many have attempted and failed to "top-tick" this bounce from November lows, citing all the right reasons, outside of price alone.  As we all know, US indices continue to be resilient, and price action itself is the single most important factor alone when trying to forecast price Technically, far more reliable than sentiment, seasonality, volume, or momentum.  Looking back, last week's breakout in the SPX and DJIA joined the NASDAQ in moving back to new all-time highs, which looked important.  Mid-caps and Large cap indices participated, while Small-caps failed to keep pace, with this group having underperformedsince peaking out in December.   World indices like the Bloomberg World index, or MSCI World index (MXWO) also broke out to the highest levels since mid-2015, while Advance/Decline for NYSE is back at new all-time highs.  The percentage of stocks meanwhile above their 50 and 200-day ma are treading water around 69%, bullish, yet not nearly as high as what was seen last year, or in 2014/early 2015 when these approached 85-90%.    The fewer number of stocks trading above these gauges might seem like a subtle shift from prior, but yet important nonetheless.

Looking forward, the seasonality for February along with the level of overbought conditions and counter-trend signs of exhaustion in the making (Demark) are certainly negatives.  However, despite price having reached 2300 for SPX, time factors still appears elusive and have not quite lined up properly to signal a top of any magnitude.  Specifically, Demark indicators on daily charts are premature in showing sells for SPX nor NDX, and while present but not confirmed for DJIA, CCMP, would benefit from another 3-4 days of upside, which could take indices up into late this week.   (Note, all indices don't have to move up from here, the start of some divergence would be particularly telling, and confirm thinking that a top should be near)  Sentiment also is very tough to get a handle on these days.  Bullish sentiment per Investors Intelligence and AAII have dropped substantially over the last week, but most seem more neutral than bearish or bullish.  Yet if the anger and frustration being played out given the ongoing marches around the world is any guide, equity market selloffs from here would likely generate fear very rapidly, thereby preventing any type of large selloff of any magnitude from happening.  In other words, a tremendous amount of uncertainty and doubt being felt during a time when equities are near their highs is rarely the recipe for any sort of meaningful peak in stocks, particularly when the Advance/Decline is at/near all-time highs.  For now though, a few technical gauges do show that a reversal of trend should be near.  It's just wise to wait until the price action plays out instead of selling prematurely and getting shaken out of a trend just when indices have moved back to new all-time highs.


For those looking for shorts, we'll concentrate on the Consumer Staples index this week which has been the worst performing sector out of all 11 S&P GICS Level 1 groups over the last three months.  This is the only major sector with negative returns during this timeframe, with -0.06% performance through 1/27/17, vs an SPX return of 7.58%.  Specifically, Food/Beverage and Tobacco remains the best part of this group, while Food/Staples Retailing is the worst (led down primarily by WMT.  Household Products has perked up, and has trended higher vs Staples Retailing which looks to continue.  Overall, the group looks to be close to bottoming within a month.  Yet for now, the next 1-2 weeks look to be particularly bearish for this group and additional undeperformance in the short run looks probable.


SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Despite S&P futures and cash getting up to 2300, which was thought to be a price area of resistance, time seems not to be lining up just yet, and a bit more strength is likely back to new highs before any peak is in.   Last Friday's pullback to new multi-day lows could lead to 1-2 days of weakness, yet this looks to be a buying opportunity near 2280-5 for a move up to 2315.  the NDX did not follow suit on the SPX's move and still looks to be quite strong.  Area for profit taking will arise likely within 1-2 weeks on strength back to new high territory.


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Overbought conditions combined with counter-trend sells and waning participation all look to be important in signaling that this year might turn out far differently than the Bulls expect.  For February, Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


Charts of the Consumer Staples sector are shown below, both absolute and relative along with several Sub-sector relationships.  Finally, three stocks are analyzed, WMT, TAP, both which look to fall further, while MO looks to be a source of strength. 
 


XLP, the Consumer Staples sector ETF, looks primed to fall further in the short run following a rollover in prices in the last few days coinciding with a TD Combo and TD Sequential sell signal on daily charts.  Pullbacks to $51.75-$51.80 look likely in the short run, with a move down under $51.35 leading to a much more severe drop to test last November's lows.  This chart shows a mild uptrend in place since early December, yet Staples has been the worst performing sector out of any of the major 11 ,and the only one with negative returns.   The pullback last September was hugely damaging to the trend from 2015, and despite the mild bounce, it remains difficult to have much conviction in rallies in the weeks ahead.  For now, additional weakness is likely in the short run before this can stabilize, with the area near trendline support just under $52 being key.
 


Weekly XLP charts show a bit of a different picture than the daily, as XLP remains in a long-term uptrend from 2009 which has proven very linear and steady over the years.  Last year's outperformance proved to have gone too far, too quickly (as shown by the mean reversion in Discretionary to Staples in the back half of 2016) and the break of this red line uptrend from 2015 caused some weakness which doesn't appear to have completely played out.   For now, additional corrections could happen which might take XLP down to a maximum of $50 right near last month's lows, though that would represent a compelling buying opportunity for 2017 from a pure absolute standpoint. At present, this sector looks close to have bottomed on an absolute basis, yet the next 3-5 weeks still look to present much higher likelihood of downside than upside.  So this remains a sector to avoid in the near-term.

 


Consumer Staples relative to the S&P shows the underperformance which hit this sector hard after breaking down in September.   Relative charts have neared former lows and momentum has reached oversold levels.  Yet more evidence of stabilization is necessary before reaching for this sector, expecting an immediate bottoming process.  For the next 3-5 weeks, Consumer staples is likely to underperform further, with notable laggards like WMT, KR, MNST and TAP leading this sector lower before it can bottom out. 

 

FDSRSTPL.gif


Food Staples Retailing in relative terms to the broader Consumer Staples group remains under pressure near-term after peaking out in 2015.  Wal-mart (WMT) makes up a fair chunk of this index, and while having outperformed in years past it's taken a turn for the worse this year and this sub-sector of Staples is the weakest part of the group.  In the weeks ahead, additional underperformance looks likely for Food Staples Retailing, which includes WFM, SYY, KR, WBA, CVS, and COST outside of WMT.  Weakness into March/April might represent a better time to take a stab at this on the long side.  For now, however, it clearly looks premature, despite the monthly chart showing a lengthy bottoming process at work.

 


Outside of Food/Staples Retailing, the Household Products sub-sector also stands out as showing some of the more negative performance within this Staples group in the past eight years, and still appears to be a sub-sector within the group to avoid.  Until there is evidence of this downtrend being exceeded, one should consider using any bounce to sell, as weakness back down to test the lows within Staples looks possible in Household products.
 

FDBTSTPL.gif

 


Food/Beverage and Tobacco however, has outperformed substantially within the Staples group and continues to be the "go-to" part of this group worth investing in.  Tobacco related stocks like RAI, MO, PM have shown far better outperformance than most of Staples and are leading the group in performance this year as well as in the last 12 months.  This ratio chart above highlights a ratio of Food/Beverage and Tobacco stocks vs the broader Consumer Staples index.  Bloomberg's ticker for this index is S5FDBT and includes stocks like HRL, CPB, MCK, HSY, as well as the stronger Tobacco oriented RAI, MO and PM.  Interestingly enough, the Tobacco and the Food stocks have fared much better than the Beverages, and TAP, PEP, DPS, KO all represent the bottom half of performance for2017 for the Food Beverage Tobacco.  For now this group as a whole remains the best part of Staples, and should be favored for outperformance.
 

 


Food/Beverage & Tobacco relative to the SPX looks far different, and much more negative than when viewing this group vs the broader Staples index.  Thus, despite (FBT) being the strongest part of Staples, we can see that ALL the groups in Staples are having a difficult time beating the market, specifically following September of last year when most of the group turned down.    Momentum is negatively sloped but oversold, and further lagging could bring about attractive buying opportunities in the next couple months.

 

 


Household Products relative to Food Staples Retailing turned up sharply in the middle part of 2016, making this the second most desired part of the Consumer Staples group after Food Beverage Tobacco.  Relative charts of S5HOUS vs S5FDSR indicate that Household products should be favored between the two, as this continued to gain strength after the breakout of the relative pattern that held Household products down for the better part of five years.  Stocks like PG, CHD, and CL are all positive for this year and some of the better performing stocks within the Household products group, despite Consumer Staples lagging substantially in the last 12 months.
 

 

 


Wal-Mart Stores Inc. (WMT- $65.66) Additional weakness looks likely for WMT after this stock broke down under prior lows from mid-2016 as well as having violated the entire minor uptrend from 2015 lows.  WMT made what appeared to be a large intermediate-term breakout back in 2012 when it rose to exceed the highs that had been in place in this stock since late 1999 and kept this range-bound for over a decade.  2012's breakout certainly changed this view for the better, yet the rally lasted only two years before giving back over 50% of what had been accomplished since 2007.  For now, WMT looks attractive near $62.50 to buy in about 2-3 weeks on further weakness.  Below the area near $60 stands out, and then nothing until down near $56.  For now, the near-term prognosis for the next few weeks is decidedly bearish, and WMT looks like a much better short than long.  Those looking to buy dips should hold off until WMT gets to near May 2016 lows at $52.72 at a minimum before buying. 

 

TAP.gif

 

Molson Coors Brewing (TAP- C$- 95.35) Another laggard within the Staples group whichlooks to underperform further is TAP,  which shows a -2.01% negative return for 2016 and has lagged all other stocks but 2 within the Consumer Staples group over the last 3 month period with a -9.07% negative return.  Daily charts show this stock having attempted to bottom out after retracing 38.2% of the prior rally from late 2015 into last year.  However, the near-term consolidation remains bearish technically and should result in break and final pullback to near $88 which would be a more attractive area to take a look given how this sector remains under pressure.   Given the multiple tests of recent lows between $94-$96 which have marked support over the last few months, additional selling looks likely which should break $94 and cause further near-term technical deterioration.  For now, this is an "avoid" technically, and breaks of $94 would warrant not buying dips until this decline has completely played out. 
 

 

 


Altria Group- (MO- $71.03) MO belongs in the group of outperformers within Staples, which has shown a 10% return over the last three months and is the 3rd best performing stock in the group in the last six months, with returns of 6.41% at a time when Consumer Staples was down -3.17%.  MO has just pushed back to new all-time high territory which is a structural positive at a time when the group has been under substantial pressure of late.  While overbought conditions might limit its upside to near $75 until the group can successfully bottom out, this is one to favor within Consumer staples given its stellar track record and no signs of weakness.  Additional gains look likely in the weeks and months ahead, with dips being buyable in the high $60s.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Equity Resilience coupled with subdued sentiment should be the recipe for higher prices

January 23, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2149-50, 2218-20, 2200-279-81        Support
2270-3, 2288-9, 2299-3k                    Resistance

 

Europe has been slowly but steadily gaining ground on the US, but now reaching areas of important downtrend line resistance which has held since mid-2015.   This ratio should be watched carefully of EZU vs SPY, representing the European Monetary Union stocks vs the S&P, and if broken, would favor Europe continuing to gain ground after a severe 2+year period of underperformance.  For now, this hasn't occurred, and this ratio lies up against what should be very solid resistance.

 

Well.. for all the excitement, anger, uproar over the Inauguration, there certainly wasn't that much overall volatility.  Equities ended last week with just fractional gains.  While some of the sector rotation gave a few clues, the underlying price action in the main US indices remains deadlocked in consolidation that has resulted in little net change since mid-December.  The bullish sentiment we commented on last week seems to have contracted rather dramatically given the uncertainty of the Inauguration, and/or what might in store during Trump's first 100 days.  Meanwhile equities have been undergoing their own mild sector rotation, with Technology, Materials and Industrials all starting to gain ground again, while Financials have been underperforming of late, despite some of the weakness in the Bond market.    Bottom line, until there is some evidence of equities attempting to violate lows of this consolidation since mid-December, it's thought that the combination of increasing bearish sentiment coupled with stocks holding up near all-time highs should result in an UPSIDE breakout before any pullback gets underway.

Three key developments are important to highlight for this week:  First, the acceleration lower in the US Dollar index lower, is important, and should boost emerging markets and commodities in the short run.   Second, the breakout in Treasury yields higher above trendline resistance is also significant and should prove to be a source of strength for Financials, which have begun to underperform lately.  (This hasn't just happened in the US, but globally).  Third, Industrials have shown evidence of trying to break out.  The Rail index surged last week on CSX's rally, and we saw both absolute and relative strength in the Industrials sector vs SPX that looks likely to continue.

As mentioned above, sentiment seems to have contracted very quickly, just after having widened out to optimistic levels in the last few weeks.  The latest AAII poll shows a severe pullback in Bullish sentiment, while Bearish sentiment jumped to narrow the gap between Bulls and Bears to just a level of "5", down from over 30

Seasonality does seem to favor pullbacks in the month of February, and a sub-par period of performance following Inaugurations in post Election years, no matter what party is elected.  For now though insufficient evidence of weakness is present to make for a compelling argument that this has begun, or should happen right away.  If anything, a move initially to the upside looks more likely given the Industrials and Tech outperformance, coupled with the drop in bullish sentiment with ongoing Stock index resiliency.



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish, and movement above 2270 should result in a quick move up to 2300 which represents serious resistance to the ongoing rally.  For now, it's important to witness the consolidation breakout, which has come close on both sides in the last few weeks, but remains pointed higher, despite the near-term consolidation.


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  Demark indicators now show TD Sequential and Combo sells on many longer-term timeframes, while the participation out of Technology and Healthcare has lacked the kind of surge seen in the Financials and Industrials, and is a work in progress.  Overall, the longer-term structure for Equity indices certainly remains structurally bullish, despite the overbought conditions, but it's doubtful that February will prove bullish given the aforementioned factors.  Yet, price alone is key to analyzing the true technical trend.  For now, we haven't seen sufficient technical damage to make an intermediate-term bearish call on anything more than just a counter-trend basis, and some evidence of momentum starting to wane will be important on weekly/monthly basis to justify fading equities during this period of bullish seasonality into April.

 



Charts of SPX, NDX, TNX, DXY, CCI, Gold, Crude, FXI, Sector absolute and relative charts along with analysis, shown below.
 


SPX daily chart since the Fall shows the base-building that's been in effect since mid-December , as none of the recent pullback attempts have gained much traction and prices still lie within striking distance of mid-December high closes which occurred after the Election surge.  Meanwhile, the trend from late December lows higher also remains intact, and has not been violated, even on several attempts last week.  Prices brushed the 50% retracement of the late Dec-January rally while snapping back to avoid any real damage by the close.  The key level for S&P futures remains near 2260 for short-term traders, and then 2249, near the late December lows.  Meanwhile, on the upside, getting over 2270 initially and then 2276-7 is important.    Until there's some evidence of technical damage, the trend remains structurally bullish, despite the recent sideways pattern.  The combination of the huge drop in sentiment coupled with minimal technical damage and resilient prices likely still results in an upside breakout for SPX. 
 

 


The hourly S&P futures chart really puts the recent consolidation into perspective, as prices have followed a pattern of lower and lower highs, while producing lows which are higher and higher since early January. This kind of consolidation typically follows a large move, so it's likely we do see an end to this neutral consolidation, given the recent narrowing in the range, and given the recent strengthening in both Industrials and Technology, it looks likely to be on the Upside, vs thinking prices break lower.  Some evidence of strengthening in the Defensives likely should take place at/or near any type of market peak, and for now, given the uptick in rates, Utilities are more likely to trend back lower, along with other yield sensitive sectors.  

 

 


Bloomberg World index shows a pattern which is largely structurally bullish, with a giant ascending triangle, which looks to have failed in its last few breakout attempts, the last coming early last week.   Additional upside still looks likely as a way to resolve this pattern unless we see some real structural damage in seeing prices breach trendline support.  This minor pullback globally in the last week "should" be buyable given the uptick in uncertainty, and lead back to new yearly highs.   The All-time highs were made back in 2015, and remains in divergence with the all-time highs shown in US stocks.

 

 


Industrials are on the move again, thanks to the Rails strength and specifically CSX's surge last week.  While the Rails remain just a minor piece of the puzzle, this technical breakout of the ongoing neutral range does seem important for the group, and also for the market, and along with Technology, should show further outperformance in the weeks ahead.   Stocks like EMR, UNP, NSC remain some of the better stocks to favor within Industrials that still appear like good risk/rewards, along with Airlines like DAL, JBLU, AAL, and UAL.

 

 


Relatively speaking, this upswing in the Rails resulted in a big turn back higher in the relationship between XLI and SPX, which had peaked and turned down in early December after the huge one-month surge since the Election.  This recent relative strength suggests that Industrials likely can continue its outperformance and show further relative strength vs the broader market in the short run.  Given it's percentage in the S&P, along with Financials and Technology, participation out of this group seems likely in the days/weeks ahead and could serve as a tailwind for the broader market.
 

 

 


Sentiment has pulled back substantially in the last few weeks, and particularly in the time leading up to last week's Inauguration, as might be expected given the lack of certainty regarding policies or what might be accomplished during Trump's first 100 days.   The AAII Bulls/Bears spread, which a few weeks ago had risen to 30, the highest level in over 1 year, has now pulled back to just low single digits, as Bears jumped to over 32% as of last Thursday 1/19, while Bulls also retreated to near 37.  This contraction in sentiment might be understandable given that uncertainty is on the rise, while indices have not really shown much headway.  For now, it's thought to be bullish that sentiment has pulled back with equities near all-time high territory, and could help this rally continue.

 

 


10-Year Treasury yields look to be on the move yet again, after stabilizing last week and turning up sharply, not unlike what's happening around the globe.  While sentiment had started to turn more bearish on Treasuries into end of year 2016, we saw nearly a 40bp pullback in yields.  Yet that looks to be proving short-lived as yields have pressed higher up above this downtrend from early December.  Movement up to 2.53-5% looks likely which if exceeded, invites a test of 2.60% and above.  Financials should begin to turn up this coming week given the resilience in rates, as it seemed to be Earnings that dragged down stocks like BK and KEY.  For now, additional upside looks likely for yields, and technically it's right to expect at least a retest of former yield highs.

 

 


German Bund yields have pressed up lately at an even faster clip than Treasury yields, and as this weekly chart of German 10s shows,  with rates on 10-year German bunds having closed at the highest levels since early last year.  The trend from 2014 highs has been broken and should help yields continue to press up in the next few months, with intermediate-term resistance from 2011 highs found up just below 1%.   It's important to present this to put the rally in 10year yields into perspective, which hasn't come close to showing the strength in besting recent yield highs, but yet looks likely in the weeks to come.

 


US Dollar index- Last week's late week pullback indicates that more weakness is likely before this move has run its course.  Pullbacks to test 100 in the DXY or even below near 99.50 are likely before the Dollar index can stabilize.  Movement into Commodity based stocks should continue for the near-term, and recent spikes in CCI index up to former highs that have consolidated a bit should lead to this being an excellent risk-reward long for further upside in the days/weeks ahead.  While the Dollar index is likely to turn back higher in February into late Spring, for now the trend is down, and appears early to think is bottoming.
 


The Trend in Growth vs Value (SGX/SVX) looks to be bouncing of late after a very sharp decline into early January of this year.  The intermediate-term trend was violated on last year's weakness, and now has given up about 50% of the entire uptrend since the 2013 lows.   For the next 1-2 weeks, Growth could outperform Value as this ratio bounces, and SGX should fare better than SVX.  However, rallies into February/March should be used to underweight Growth and think that Value should reassert its relative strength (ie.  this ratio moves back lower in SGX/SVX) and outperform Growth.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Technical longs and shorts to consider at this stage of the rally

January 9, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2142-3, 2218-20, 2200-279-81, 2164-6    Support
2272-3, 2288-9, 2299-3k                           Resistance

 

While most of the US indices pushed back to new all-time highs last week, the Bloomberg World index flirted with its own breakout, testing levels that had been hit three times since mid-2015 as part of a 16-month Bullish ascending Triangle formation.  While a move to new yearly highs looks likely, it should be noted that prices peaked out globally back in 2015 from all-time highs,  and are not happening now as is the case for US equities.

 

 

Equities Back at new highs is Bullish right?  Well.. Yes.. and No   S&P along with NDX, NASDAQ Composite, and DJIA all advanced back to fresh new all-time highs last week.  The countdown clock was ticking for DJIA 20k, which as we know, just missed by a nose.   Bond yields and the US Dollar index began to stabilize a bit after recent declines,  while both WTI Crude and Gold gained ground.   Global equities joined the S&P in making some upside headway, but as we know, most other developed and emerging market indices lie well off All-time high territory, with many having peaked in 2015 and/or 2014.  So all is fine right? Well there remain both positives and negatives about this rally that are important to mention. Most of these were covered in the 2017 Annual 2017 Technical Outlook, so we'll just concentrate on the short-term developments and reasons for optimism/pessimism. 

Short-term POSITIVES:
1) S&P joined DJIA, NDX, and COMPQ in moving back to new all-time highs
2) Technical trends and structure remains bullish, with breakouts showing ongoing trends of higher lows and higher highs
3) Advance/Decline line remains at/near all-time highs, having made a fresh new high last week
4) Defensive sectors are still underperforming, even with yields having pulled back, as Consumer Staples, Utilities along with Telecomm were the worst performing sectors last week.
5) SPX has just had one day's close under its 20-day moving average since the Election.  Until some evidence of deterioration sets in, trends remain constructive


Short-term NEGATIVES:
1) Breadth was very subpar last week on the move back to new highs and throughout most of the day while volume was more skewed towards "Down" stocks than "Up"  So despite the Media talking up Dow20k and the move to new highs, there were barely more positive than negative issues, and volume was positioned nearly the opposite of what bulls would have liked to have seen
2) Sentiment remains elevated and much more bullish than bearish with nearly 3/1 spread between Bulls to bears in some polls and both Investors Intelligence and AAII depicting more bullish conditions to start the year than ever before
3) Demark indicators have shown a greater confluence of counter-trend sells on weekly, monthly and quarterly charts than at any point over the last 20 years.  While weekly and monthly sells were in place in 2014 and failed to be confirmed and produce any downturn, markets are now showing TD Combo and Sequential indicators lining up with Quarterly sells, while Weekly charts show officially completed 9-13-9 patterns on DJIA, SPX,
4) Nearly 80% of stocks are now trading above their 50-day moving average, fairly overbought and near levels which marked peaks last July and prior to that in March, when equities largely went sideways for six months
5) The divergence between US and the rest of the world is very pronounced, as Europe nor Asia moved back to new high territory when viewing their equity markets and the US remains one of the few developed markets that's making this move. 
6) VIX closed down last Friday at 11.32, less than half of the levels seen prior to the election, when S&P was nearly 200 points lower
7) Treasuries have been rallying over the last couple weeks, and this near-term uptrend has caused underperformance in Financials which is a key part of the market, the second largest sector by capitalization.   When looking at performance in Financials over the last month, it's interesting that this group actually has underperformed the SPX at number 7 of the 11 major sectors.  Most of its dramatic move, along with equities, came in late November/early December, but has since consolidated given overbought conditions
8) As fellow market colleague Urban Carmel pointed out in his blog over the weekend, Short-term protection was trading at less than 80% of three-month protection.  This indicates quite a bit of complacency and is a definite concern sentiment wise
9) Treasuries and equities both moved in tandem last week, not unlike what was seen from April-October of last year.  Both of our recent strong rallies in stocks in the last 12 months were led by Treasury yields, which spiked up while Equities followed suit.  February- March and then November-December.  If sentiment remains bearish on Treasuries and yields have started to turn lower, stocks might have a difficult time pressing up, given recent correlation trends and Algos which have caught onto last year's movement.
10) Given that DXY, TNX and SPX have all moved in tandem to new highs, while DXY and TNX just turned lower, for this correlation to hold it's likely that either the selloff in DXY, TNX proves shortlived, or SPX turns down in the near future



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- The move back to new high territory still looks to have upside given structural progress technically and lack of daily Demark sells on this latest push higher.  However, in the next week, on strength up to 2290-2300, the near-term upside likely should prove limited, and one would be inclined to take profits from a short-term perspective.  Overbought conditions coupled with bullish sentiment are both important short-term negatives which could limit the degree of progress above 2300.

Intermediate-term Thoughts (2-3 months): Neutral-  Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  Demark indicators now show TD Sequential and Combo sells on many longer-term timeframes, while the participation out of Technology and Healthcare has lacked the kind of surge seen in the Financials and Industrials, and is a work in progress.  Overall, the longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions, but it's doubtful that January and February will prove bullish given the aforementioned factors.  Yet, price alone is key to analyzing the true technical trend.  For now, we haven't seen sufficient technical damage to make an intermediate-term bearish call on anything more than just a counter-trend basis, and some evidence of momentum starting to wane will be important on weekly/monthly basis to justify fading equities during this period of bullish seasonality into April.

 



5 Technical Longs and 5 Technical Shorts ideas will be featured below- The first 5 will be longs, and stocks that have begun to show mean reversion which still look to rally further, despite markets having gotten stretched.


LONGS
 


Celgene (CELG- $119.64) CELG's ability to lift off recent lows post election are constructive for the stock's structure technically speaking and suggest that this lengthy base which has been ongoing in CELG since July of 2015 should be coming to an end and is being resolved by a move back higher after multiple months of sideways churning.  CELG's surge up above $118 helped momentum begin to turn positive on weekly charts and is on the verge of doing so also on monthly charts (MACD) for the first time since August 2015.  This recent breakout from last November looks to have been consolidated in the last couple months as prices pulled back to fill the gap from November and is now turning back up coinciding with the Biotech ETF (XBI) making its own minor breakout last week.  Additional upside looks likely with targets up near $123 initially and then $127 with movement over that leading to a rally above which should eventually test July 2015 all-time highs just above $140.  Overall, the surge in momentum from a low level makes CELG attractive to own here with prices still more than 14% below its all-time highs.
 


Vertex Pharmaceuticals (VRTX- $79.39) VRTX is finally beginning to show evidence of mean reversion after turning in some of the worst performance of any stock in the SPX.  Last year's -41.45% earned this company the dubious distinction of having the fifth worst stock performance of any of the names in the SPX last year.   Now after VRTX looks to have found strong support right at the 50% absolute Retracement level of its all-time highs which also happened to be right near the 50% retracement of the stock's rally off the 2008 lows from low to high range, VRTX has begun to show compelling evidence of turning higher.  Its move back to multi-week highs last week helped it recoup its former lows from November, which from an oversold state should help this begin a more serious rebound.  Weekly momentum indicators like MACD showed positive divergence from back in early 2016 and now the stock has begun to turn sharply higher at a time of the year when last year's laggards often do tend to snap back after dismal performance the prior year.  Gains up to $84 look likely in the short run, with movement over that level leading up to near $93-$94.  Overall, VRTX looks like a very attractive risk/reward as part of a poor sector which is gradually showing evidence of trying to make a comeback.

 


Nike (NKE- $53.91)  Don't look now, but NKE has gone from worst to first, very quickly.  Last year's underperformance caused NKE to turn in -18.67% returns, the worst performance of any DJIA stock by a long shot.  This year, however, NKE is up over 6% thus far to start the year, as mean reversion helps another laggard snap back during the early stages of the year.  NKE's price has managed to recoup prior lows from last Summer, and should rally further up to near-term targets at $56-$57.50, and then $58.50.  Given the choppy overlapping correction that's taken place since late 2015, NKE would only have to get up above $56 to break this entire downtrend from late 2015 which would suggest this downtrend has likely run its course.  For now, NKE should work its way up to the mid-to-high $50s, and long positions are recommended technically in the short run.  Once this breaks out above this intermediate-term downtrend, one can make the case for a much larger rally up to the mid-$60's, which for now is premature.

 


Pinnacle West Capital (PNW- $78.49) PNW is showing increasing signs of turning higher after peaking last July and making a minor consolidation into last November, but maintains an attractive long-term uptrend from early 2009 which still doesn't look to have run its course.  Utilities in general have begun to strengthen in the last month ever since stocks initially peaked in mid-December, returning over 5% in the rolling 30-day period.  Signs of rates turning back lower could help this group to begin showing better outperformance.   PNW has been a consistent outperformer, but despite being up over 21% in the last 12 months, it's lagged on an absolute basis given last year's Summer peak.  Evidence of this turning back higher just in the last month makes this one to consider technically.  Momentum has turned back higher on a weekly basis, while climbing back above a minor downtrend since last June's highs.  Rallies up to former highs just below $83 look likely with stops on any move down under $76, which would postpone the rally.

 

 


Public Storage (PSA- $228.35) This REIT declined almost 30% from last April into year-end before bottoming out and making a sharp recovery back over this intermediate-term downtrend.  Gains look likely with targets at $239 and then $248 as the group slowly begins to recover after severe underperformance last year where REITS lagged every group outside of Healthcare, returning almost exactly 0% last year while the SPX was higher by 9.5%.  However, last week REITS outperformed every other S&P group (+3.05%) PSA is singled out in this occasion given the extent of the underperformance last year coupled with the fact that it maintains an attractive long-term uptrend from 2009 and still looks to push higher given the recent surge in momentum in the last month.  Overall, this snapback from severe underperformance -9.27% last 12 months, coupled with the downtrend break makes PSA attractive to show better relative strength in the weeks and months ahead.  Given that rates rallied up to near 30-year resistance in their own downtrend, a move lower looks more likely this year, and the REITS could show much better performance.  PSA, in this case, looks to be one to favor.


SHORTS
 

 


L Brands (LB-$61.23) Increasing signs of technical damage in LB make this one to avoid in the near-term and/or consider shorting with targets down near $53 initially with intermediate-term targets at $42.50.  LB just violated its long-term uptrend and looks to have failed in its retest attempts into August of last year.  Last week's decline breached prior monthly lows, bringing this down to the lowest levels since last May, but on a monthly closing basis, back since 2014.  Additional weakness looks likely until this can begin to show more evidence of stabilization.
 


Tractor Supply (TSCO- $75.16) TSCO looks like a good risk/reward short after the high volume decline in late 2016 was followed by an above-average bounce which took the stock up over 20% in just the last three months, yet the rally now seems to be stalling out and could give way to a meaningful pullback lower to test last October's lows.  Short positions can be considered in TSCO with targets at $71.80, then $69.83, which would constitute a 50% retracement of the gains since last October.  For now, given the ongoing poor intermediate-term momentum combined with short-term rally starting to fade, TSCO looks like a far better short than long for the weeks and months ahead, technically speaking.
 

 

Fossil (FOSL- $25.21)   Additional losses look likely for FOSL and despite the recent carnage seen from late December, no realistic support looks likely until this makes a complete retracement of the rally from last November with minor support near November lows at $23 and more important areas down near $20.50.  This stock has already seen huge losses since peaking out in 2012, yet this minor stalling out since March of last year hasn't produced any real evidence that the stock is bottoming out.  It's attempts to breakout back in November proved to be false and resulted in nearly a complete reversal of these prior gains.  Now a final push down to new lows looks possible, and FOSL should be avoided in the short-term and/or considered for trading shorts with stops near $27.35.
 


Kohl's (KSS- $41.43)  Additional losses look likely for KSS after violating the uptrend from last year, which occurred last week on very heavy volume of around 6 times its normal average of 3.8 million shares.  Last week's trend violation makes the rally attempt look like a failure which now should result in a decline back to the low to mid-$30's at a minimum.   This stock has consistently been a laggard within the Retail space, with virtually no change in trend since 2000.  Now the move to multi-month lows last week should arguably result in weakness back down to challenge last year's lows.  While near-term momentum became oversold with last week's move, any bounce attempt should be used as a chance to sell into KSS, as last week's selloff occurred on such heavy volume that losses appear far more likely technically before this can stabilize.
 

 

Bed, Bath and Beyond (BBBY- $40.61)  Similar to KSS above, BBBY's rally has nearly been completely retraced in the last couple months and makes further weakness likely, in this case down to test former lows near $38.60 and below.  The stock's technical pattern took a turn for the worse when it violated a Head and Shoulders pattern going back since 2011.  BBBY has since lost more than 20% of its value and is down around 50% of its absolute highs from 2013.  However, insufficient signs of bottoming are present, and momentum remains quite weak and should allow this to see further losses in the weeks ahead, which should take this down to $38.60 and then the low to mid $30's.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Bullish Seasonality should outweigh near-term equity stallout

December 19, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2142-3, 2218-20, 2200-279-81, 2164-6    Support
2272-3, 2288-9, 2299-3k                           Resistance

 

SPXvWORLD.gif

The divergence between US and Europe has been widening most of the year and should continue to be monitored closely for any evidence of weakness in US equities and/or sufficient strength in Europe that support a bigger period of mean reversion and snapback in this ratio.  For now, Europe (shown in Blue) remains under its highs from last year

 

Equities have stalled, yet still haven't shown much signs of weakness and this might be postponed until next year.  The last five days have brought about massive volatility in bond and currency markets, yet precious little real progress in either direction for Equities.  The SPX finished the week within 2 points of its prior weekly close, while the DJIA is knocking on the door of 20,000 for the first time ever, a level that's more psychological than important technically, and should be exceeded into year-end.   Meanwhile, most momentum indicators remain overbought and the recent waning in the last couple days means that prices need to push back up to highs immediately to avoid at least a minor correction in the days ahead.   While a few other sectors have joined the rally in the last couple weeks, the outperformance is still largely dominated by Financials which seem to ebb and flow along with the movement in rates.(which lately as we all know, has been straight up) Breadth-wise, we've seen a bit of deterioration in recent days, which makes sense given the sideways action in prices, but despite Advance/Decline being back at new highs, the participation isn't as robust as we saw from February lows into May of this year.

Sentiment continues to be very optimistic, which might be expected given the combination of Election uncertainty being relieved, economic data beating expectations at a quicker rate, along with Equities heading into year-end on much better footing than most expected.  Readings by AAII, Investors Intelligence, Consensus, and CNN's Fear and Greed index all show investors to be as bullish as they've been all year.  While sentiment gauges at these levels can often precede pullbacks,  they're more difficult to come by in December, and often most declines are postponed until January, which given that only nine trading days remain in the year, looks increasingly likely.

Sector-wise, the Defensives have all begun to sprout up in recent days, showing some of the strongest outperformance of the week, with Telecom, Utilities and Consumer Staples all being within the top five sectors in the past five trading days. Financials continued their own recent dominance, and with yields still not showing much signs of reversing, still look to have a bit more to go on the upside.  The biggest change seems to have come with the recent stabilization and rally in Healthcare, while Technology has improved in recent weeks, two sectors which should be favored for outperformance between now and February.

With only nine trading days left in 2016, Seasonality should kick into gear in a bigger fashion over these last two weeks as equities are entering a traditionally very bullish time of year.  The Santa Claus rally period which begins the last five trading days of the year into the first two of the following year typically brings about returns of 1.4% gains since 1950According to Stock Traders' Almanac, Presidential Election year Decembers rank #2 for DJIA, and NASDAQ and #3 for the SPX.  So given that our recent rally has stalled out, but yet has not shown evidence of making any serious move to the downside, this churning could very well allow for upside surprises into year end before any volatility rears up in January.

For now, technically speaking, these seem to be the main reasons why rallies can still happen into year-end despite the overbought conditions and recent slowdown:

1) The 10-Year Treasury yield rally still doesn't show sufficient signs of being complete.  While the pace of the rise has slowed a bit, no real evidence is present for a turn back lower just yet.  Upside looks to be possible to 2.70-2.75%
2) VIX has moved back down to multi-day lows and looks apt to test if not break lows seen at 11.33with no evidence of any daily signs of exhaustion while weekly will require another 2-3 weeks of drawdowns which should coincide with equities moving back to new highs into end of year.
3) Financials have been consolidating at/near highs with no real signs of weakness.  Despite some minor slowdown over the last week, this hasn't led to any real technical damage.
4) Signs of both Healthcare and Technology joining the rally have occurred in the last two weeks, with XLK, MSH moving back to new highs which should lead to additional strength in the weeks ahead as mean reversion helps both of these groups show better performance.
5) Counter-trend signs of exhaustion (per Demark indicators) are present on daily charts of SPX, DJIA on a daily basis, but not yet weekly, and often the two need to be aligned before providing a bigger than average correction. 
6) Technical structure remains quite positive , with the recent push to new all-time highs not showing sufficient weakness to fade, and sideways consolidation not necessarily a negative
7) Seasonality remains quite positive for this time of year traditionally rewards Bulls, which given above-average technical structure, still looks likely.
8) Credit spreads continue to show a contraction which keeps Equities in a "risk-on" type environment.  Given that most market declines tend to start on the credit side with a widening out in spreads, the relative lack of this happening just yet is bullish.



TECHNICAL Long/Short Ideas:
Longs: 
  NVDA, NTAP, WAAS, APA, TXN, SLB, HPT, AVGO, MRK, EXP
Shorts:  VXX, YHOO, CRM, TRIP, TWTR, FLS, CCI, EEM



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- The sideways grinding of the past week hasn't negatively affected the technical uptrend since November and despite some waning in breadth and momentum given this recent slowdown, the final nine trading days of the year likely should have an upward bias given the structure and bullish seasonality.   2273 will have importance on the upside, while 2243 on the downside.  Movement up above 2273 should result in a quick move to 2285-2300 into end of year.


Intermediate-term Thoughts (2-3 months): Neutral-  Equities are starting to look increasingly like a poor risk/reward after a huge lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  While the near-term view remains positive and should press up higher into year-end, the 2-3 month likely will have a noticeable "backing and filling" early next year after this most recent surge.  The longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions and possible counter-trend sells in the making which might be present at year end.  Additionally the downturn in monthly momentum into last year still has not been properly recouped and should be a possible larger issue next year.  Most of these factors make it difficult to trust this move continuing too much higher, yet are just warnings only amidst a bullish backdrop of trends of higher highs and lows.

 



Charts below feature SPX, TNX, DXY, along with a few sector charts and other currencies, commodities of interest
 


SPX's daily chart shows five days of consolidation as part of this ongoing rally.  While evidence of upside exhaustion is present on daily charts which could be confirmed as early as Monday with a daily close under 2271.72, the last nine days of the year traditionally have a very bullish bias, and the combination of this positive seasonality combined with the current uptrend should allow for SPX to work its way higher up to 2285-2300 before any meaningful peak.  Downside should be limited to 2233 for now.

 


QQQ successfully broke out to new highs last week before pulling back Friday to consolidate this move.  Technically, a pullback to the base of a breakout typically marks an attractive spot to consider buying dips with upside targets near 125.  For now, neither daily nor weekly counter-trend exhaustion sells are present via Demark's indicators, so this minor weakness looks like a good risk/reward opportunity to buy.

 

 


Healthcare's ascent looks to have begun two weeks ago with the group's outperformance vs SPX which has exceeded the downtrend from early November and should pave the way for additional gains in the next couple months.  While the intermediate-term downtrend for the group remains intact from 2015, the recent stabilization and lift in the Pharma and Medical Devices group bodes well for further strength in the weeks ahead.  Momentum has turned bullish on daily charts and it would take just a move above $63 in XBI before Biotechs would join the rally.  Overall, this looks like an attractive risk/reward group given that mean reversion in the market looks to have begun.

 

 


Crude oil managed to pullback nearly all week after breaking out of its six-month consolidation range, but yet rallied back to recoup much of this loss last Friday.  For now, it's tough calling this a failed breakout, but rather a chance to buy technically for a move back to new highs.   Momentum remains positively sloped and movement back up above $53.41 should drive prices back to the mid-to-high $50s.  While this WTI Chart is important for how Energy stocks likely perform, it's insightful to note that in multi-currency form, Crude has already moved back to new highs for 2016, with Energy as a sector providing the best performance of any of the major S&P sectors this year, outperforming the next best sector, Financials, by over 500 bps YTD through 12/16/16.  In this daily chart, long positions are favored unless Crude were to move back down under $49.95 which would postpone the rally. 

 

 


This weekly US Dollar index chart shows why last week's breakout was so important, as prices moved up above peaks which have held one time already since last Spring.  This breakout has now resulted in the Dollar index accelerating to the highest levels we've seen since 2003.  No evidence of any counter-trend sells are apparent on weekly, nor monthly charts, which makes further strength likely next year with potential technical targets found near 110.

 

 


As might be expected, the Euro also made its own significant breakout last week, albeit to the downside, as this accounts for over 60% of the US Dollar index.  Closing down under 1.05 in EURUSD makes a move to Parity likely next year and makes this entire consolidation from 2015 just a large trading range which has now been violated.  The intermediate-term trend for the Euro has continued lower since 2008 and after the near-term two-year neutral range now has been broken, most minor rally attempts should be used to sell with downside targets potentially near levels which were reached back in the early 2000's.

 

 

2-Year Yields spiked up to the highest levels since the Financial Crisis last week, a steep ascent which along with the Dollar move, was one of the most pronounced Technical breakouts of the week.  The yield curve flattened out as a result, and upside technical targets lie near 1.35% in the short run. 

 

 

Ten-year Yield charts show the driving force behind what has largely served to boost Financials substantially in the last month.  Following the Election surge in yields, Financials and the broader stock market followed suit, and at this time, shows no compelling evidence that pullbacks need to happen right away.  Rallies in yield up to 2.70-2.72% in the next 3-5 trading days would provide a good area to consider buying Treasuries for a move back down near 2.40-2.45 in yield.  As this daily chart shows, yields have begun to take an even steeper trajectory than the uptrend projected from mid-November following the initial surge.  Sentiment has reached the most bearish levels in two-years for 10-year Treasuries with most Speculators starting to bet heavily on further upside for yields.  This likely should put at least a temporary ceiling for yields at levels just above.  However, between now and end of year, a bit more upside does in fact look likely.

 

 

This chart of the 5s/30s curve shows that despite the FOMC ramping up Fed funds rates at the recent meeting the back end of the curve has not moved nearly as quickly, causing a severe flattening in the yield curve of the 5s to 30s along with 10s to 30s.  Given that the US is moving towards tightening in a global era of monetary accommodation, attempts at normalization in the US are being possibly interpreted in the US as something which might hurt growth, as long rates have remained subdued.

 

One noticeable development which might be expected given a rapidly rising US Dollar looks to have affected Emerging markets negatively, as the Ratio of Developed to Emerging markets has broken out of a trend which has been intact most of the year.  After several years of outperformance, Developed markets had largely underperformed Emerging markets this year until late October right before the Election.  Since Trump's win, the combination of a rising US Dollar and rising US rates have resulted in severe lagging in Emerging markets, which on this chart, takes the form of Developed markets breaking out sharply vs Emerging.

 


VIX pullback to new multi-day lows should keep continued pressure on the VIX, leading to a test and break of early December lows into end of year.  Given that VIX doesn't reflect any signs of turning back higher from a counter-trend exhaustion perspective, this breakdown last Friday should provide for implied volatility to steadily decline into end of year, coinciding with a likely equity market rally.  For now, this downward pressure in the VIX and lack of any stabilization is one reason to expect that equities still have some tailwinds to move higher in the final nine days of the year.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Making Technology Great again- Large Caps leading the charge in Tech

December 12, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2144-6, 2218-20, 2200-279-81, 2164-6    Support
2270-2, 2288-3, 3k      Resistance

BWORLD.gif

Bloomberg World index rallied all the way back to new yearly highs after last week's pullback to support.  Its rally now has taken it over prior highs from September, but also higher than late 2015, which provides some extra confidence in this rally.  For now,

 

Participation in this rally is growing, and while near-term overbought conditions and bullish sentiment are minor concerns, the positive structure in US equity trends along with a pick-up in sector participation should help to fuel this rally into year-end.   Just in the last week we've seen pushes back to new all-time highs in the Consumer Discretionary sector, DJ Transportation Avg, Materials ETF (XLB) and the Technology Sector SPDR ETF (XLF) .  Four of the 11 major S&P sectors would stand to make new all-time high monthly closes at current levels, with Industrials rounding out the Materials, Discretionary, and Technology groups.  Amazingly enough, the 7% rally since the Election has added nearly $1.7 trillion in value, which has caused near-term momentum to spike back to rather lofty overbought levels.   The spike to new all-time highs in Small-caps over the last few weeks followed by Transports now confirming the Industrials move (from a Dow Theory perspective) are certainly positives.  Yet, a sharp move outside the upper Bollinger band for SPX on weekly charts and to the edge on a monthly basis is a definite concern regarding the longevity of this rally without any sort of consolidation.  While this might not materialize in December, it is a factor to watch carefully as the market enters 2017. 

Breadth has expanded, yet still some reasons for concern- When examining the internals of this rally, we have begun to some pick-up in stocks hitting new 52-week highs reach reached nearly 500 at the end of last week on NYSE, while the Percentages of SPX stocks trading above their 10 and 50-day moving averages have increased to near 87% and 75% respectively, the highest levels since July.   The Advance/Decline for "All Stocks" (excluding Fixed income) rose back to new highs in mid-November, while even the standard "all-inclusive' A/D line has just now pushed back to new all-time highs.   The key complaint concerns the Summation index, the McClellan based Sum of the McClellan Oscillator values as a "momentum of breadth" of sorts, which is just a fraction of levels hit back in July.  The lack of Technology participation of late could be called as a notable culprit in this regard.  All in all, quite a few indicators have turned more constructive.  Yet, still a few that have not, and should be watched carefully.  

Trump Rally? or Inflation expectations growing, while Economic data improves?  Many have taken to calling the Stock surge the "Trump rally" , a media savvy soundbite, but one largely based on psychology, more than any material change in the market.   Given that no turnover in government or Presidential/Vice-presidential switches have occurred, most of this stock surge has been driven by "Hope for Change" rather than our current "Hope and Change mantra for the last eight years.    Industrials and Financials have certainly made up the bulk of this move along with Energy, but it's notable that economic data has improved globally in the last month, with data beating economic expectations jumping to multi-month highs when examining the CESIG10- or Citigroup Economic Surprise index for G-10 countries, and this same index for US and Europe alone have both enjoyed a sharp upward trend in the last couple months.  A Ramp-up in inflation expectations that set yields moving sharply higher can be used to justify the Financials move, as the yield curve steepened sharply, but aside from this data, not much has materially changed to explain why markets would run 7% higher in a month's time.   Seasonality is the traditional fall-back to explain Positive performance in December, and happens frequently enough that it rarely pays to fight a surging stock tape, regardless of how bullish sentiment has become. 

Specifically for this week, the rally in Technology is worth talking about a bit more in detail, as the highest percentage S&P sector by capitalization (20%) has enjoyed a nice bounce at a very opportune time when Financials had gotten stretched and were in dire need of some relief.   This sector's move back to new all-time highs (S&P Information Technology index) last week is seen as a bullish move specifically for Large-Cap Technology which should be able to lift the broader group to outperform and keep this rally going a bit longer. While much of this has been Semi related, the larger group should eventually follow what's being seen in Large-caps.



The key technical takeaways in the Technology space:

1) Information Technology index hit new All-time Highs last week, clearing the highs of the consolidation that had held since September.
2) NDX(QQQ) hit new weekly All-time highs while Daily closes came within pennies of achieving the same.  Structurally the higher low as of December 1, followed by the sharp rally back to the highest closing level since October looked quite positive. 
3) XLK, the S&P Sector SPDR ETF for Technology, rose to the highest levels since 2000, and similar to S&P Information Technology index, cleared former highs from the last few months.
4)  Semiconductor stocks engineered a sharp rebound from late November weakness after the SOX lost 6% in the final week of November.  NVDA regained all of its decline after losing 10%, while ADSK, FSLR, MU, AVGO, WDC, JNPR were all up more than 6% in the last week. SOX managed to rally back to the highest levels since 2000, retracing 61.8% of the decline from 2000-2008.
5) Equal-weighted Tech has not yet moved to new highs, but remains in consolidation over the last couple months
6) Relatively speaking, Technology VS the SPX, when viewed as MSH (Equal-dollar weighted basket of 35 names from 9 sub-sectors) vs the SPX has rallied up to, but not yet OVER the downtrend from October
7) Neither Software not Tech Hardware indices nor ETFs have moved to new highs, but have made considerable progress in recent weeks, rallying to within striking distance of highs.  The recent move to new highs in S&P information Technology index and QQQ on a weekly close is thought to eventually lead these sectors higher, making it right to overweight them, expecting a similar move.
8) Demark's Counter-trend indicators (which show signs of exhaustion on a given move) on Tech, when viewing weekly/monthly counts on XLK, SOX, S5INFT index, MSH, all show the group to be close to, but not yet at levels which would suggest a top in place.  Thus, this most recent surge still looks to continue into end of year. 
9) Semiconductor stocks look to be close to peaking out vs most of Technology after a stellar run throughout most of the last seven months along with most of the last couple years.
10) Hardware looks more attractive than Software after a seven-month rally on the heels of a two-year downturn.



TECHNICAL Long/Short Ideas:
Longs: 
  APA, TXN, SLB, HPT, AVGO, HQY, MRK, EXP
Shorts:  TRIP, TUP, TWTR, AN, FIT, FLS, CCI, EEM



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Additional upside still looks possible for this week, despite the extent of the prior move.  Prices have indeed pushed up to near-term overbought levels, yet there remain no signs of upside exhaustion while seasonal tendencies should carry indices higher into year end given the recent momentum and structural patterns.  Near-term weakness should be bought for a move back up to 2270 which might be a better area for profit-taking into end of week.

Intermediate-term Thoughts (2-3 months): Neutral-  Equities are starting to look increasingly like a poor risk/reward after a huge lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  While the near-term view remains positive and should press up higher into year-end, the 2-3 month likely will have a noticeable "backing and filling" early next year after this most recent surge.  The longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions and possible counter-trend sells in the making which might be present at year end.  Additionally the downturn in monthly momentum into last year still has not been properly recouped and should be a possible larger issue next year.  Most of these factors make it difficult to trust this move continuing too much higher, yet are just warnings only amidst a bullish backdrop of trends of higher highs and lows.

 



Charts below of the Tech sector, shown as Information Technology index, along with SOX, MSH index, XLK and relative charts of the sector
 


Technology just moved back to new high territory as seen by the S&P Information Technology index surpassing the highs of the last few months last week.  While Software and Hardware both could stand to strengthen a bit more to allow for relative charts to confirm what Absolute charts achieved last week, it's certainly a step in the right direction and makes the near-term trend bullish for this index.

 


QQQ managed to push all the way back to former highs last week, failing to record a new record high on a daily close, but successfully doing so on a weekly basis after a lengthy period of consolidation in the last few months.  Given the pattern of highs being at equal levels while the recent 12/1 low being substantially higher than the prior, the formation has taken on a more bullish shape in recent days.  A move back to new highs is likely in the weeks ahead, despite if minor consolidation takes place given this retest.

 


When viewing ratio charts of Technology vs SPX, or MSH index,( the equal-weighted index of 35 Technology names from nine various sub-sectors) vs SPX, this has failed to show the same degree of breakout as was seen in the S&P 500 Information Technology index in recent days.   The Downtrend for Technology in relative terms remains since October and until broken, it will be tough to suggest that Tech should begin to outperform materially,  Most of the strength occurred in Large-cap Tech and specifically the Semi group in recent days,  which should eventually spread to most other parts of Technology.

 


Semiconductor stocks managed to recover all of their recent losses in late November, after SOX lost 6% in the final week of the month before rallying to move back to new multi-month highs.  While near-term stretched in a fashion that could allow for 2-3 days of consolidation, the trend is bullish in Semis and should allow this rally to extend higher into year-end. 

 

Semiconductors have outperformed all other parts of Tech since August of last year as part of a larger period of outperformance vs all of Technology since 2014.  In the very short run, Semis stalled out in late November, and recently peaked after retesting this area, yet remain very much the group to favor in the short run and one to buy on any weakness.  Movement back to new highs in relative terms seems likely into end of year before any meaningful peak.

 

In Equal-weighted terms, Technology shows the same degree of choppiness in recent months which can be seen in both Tech Hardware and Software as they struggle to keep pace with the Semi group.   The chart above details the Equal-weighted Technology index vs SPX, showing that most of Technology has not yet joined the recent push to new highs seen in the QQQ and XLK on a weekly basis.  For now, this consolidation will need to move back to new highs to have some confidence of Technology as a group beginning a larger rally.

 

 

Semiconductor stocks vs Software, as shown by S5SSEQX vs S5SFTW (Bloomberg) have stalled out near where prices peaked out back last Spring which proved to be an important area of resistance for Semis vs the Software group.  Near-term, it's unlikely that Semis can show the same degree of strength that they've shown most of the year when compared to the Software group, as this ratio looks to be stalling out.

 

 

Microsoft (MSFT- $61.97) Movement back to new high territory after its two-month consolidation near where the stock peaked out in 2000 looks meaningful and should result in MSFT trending higher up to the high $60's in the weeks ahead.   The pattern has been quite bullish after moving up above prior highs, and now the recent multi-week sideways pattern is being exceeded by a price move back to the highs.

 

 

Facebook (FB- $119.68)  Tough to say too much negative about FB overall, despite the pullback from $130+ in the last couple months.  For now, prices look to have stabilized and a counter-trend bounce looks to be underway.  This should allow FB to rise up to $122 and then $127.50-$128 which would be initial selling areas for traders.   When looking at Facebook's long term trend from 2014, we see that the ongoing uptrend for this stock remains very much in place, and still precious little to suggest anything more than just a minor trend reversal from late October.  The stock looks like a good risk reward to buy anytime it dips down under $115 which it did into mid-to-late November.   For now, a counter-trend bounce looks to be underway.  Failure to achieve this which results in this pulling back again to take out $113 would be a more negative intermediate-term signal.  For now, FB should rally back to the mid-$120's before its next big test.

 

 

Xilinx (XLNX- $55.91) Structurally, XLNX looks to be one of the better positioned stocks within the group after its rally to hit new highs for 2016.  The longer-term chart shows highs from over two years ago which are now being tested and are providing a technical setup which appears like a long-term Cup and Handle pattern.   Gains to the highs $50s and/or early $60's look to be underway, which looks to be a decent target area following the stock's recent breakout. 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

5 Top Technical Developments from this past Week

November 14, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2147-8, 2122-4, 2104-6, 2028-30    Support
2180-2, 2194-6, 2213-5                   Resistance

 

 

The post Election volatility is shown above, where S&P futures quickly lost over 5% from 8pm til 12 midnight on Election night, then recovered all of the weakness back, and then some.  This resilience is thought to be solely based on Treasury yields spiking along with Dollar/Yen, with SPX following suit.  The last three days alone have brought about near 8% gains.  Movement back to highs and above to near 2193-6 looks likely before any stalling out.


One of the largest reversals on record since 07/08 as markets record best weekly gain in at least two years. (5 years for DJIA) Last week was one for the record books.  Not only did the US markets soar back to within striking distance of new high territory (which did happen for DJIA) but did so in an amazing V-shaped fashion that yet again seemed to catch most investors off guard.   The initial plunge on election night in Futures erased nearly 6% from the highs between 8pm and 12 midnight, bringing Futures down to their daily limit, only to recoup the entire loss and then some, with the DJIA rallying over 1200 points from low to high. (While some ignore the DJIA given its price-weighting, it does have over a 90%+ correlation with the S&P)  All in all, the S&P 500 index managed to rally nearly 8% in the last three days, putting prices in near-term overbought territory, but on much firmer footing technically. 

Why the Rally?  Looking back, many scratch their head as to the reasons for the plunge and recovery, with many taking partisan stabs in saying with conviction that a Trump victory caused the decline, and others giving credit for the rally.  But who can say with any real certainty that this could be responsible for Both?   Which one was it really?  The fear of an uncertain world with Smoot-Hawley-like fears of high deficits and Trade protectionism, or the second coming of Ronald Reagan?  One thing's for certain.  Those who banked on declines initially likely failed to cover shorts at the lows.  And many who pared back gains likely failed to buy into the rally after such a steep ascent from Midnight Tuesday night into Friday.  As the saying goes though, sometimes when the Horse bolts out of the barn and runs away, it's proper to chase it.  Those who hope that the horse comes back can often be disappointed and are then faced with a very difficult task of when to start the search party late (re-enter the market at a much higher levels)

One things for certain, the global sovereign bond selloff has continued in a big way this past week, and Bond yields reversed course nearly exactly when Equity futures did Election night, around 12:00 Midnight, with both bottoming out and moving straight up.  The surge in yields is a far more credible reason for why Equities rose so quickly, as the global Financials space stabilized and turned higher in Europe along with Dollar/Yen moving up, creating a "risk-on" type environment where Algos kicked in and took equity futures much higher, without any rhyme or reason.  Short covering was attributed to some of this advance, with Goldman's Most Short Rolling index swamping the returns on US Equity indices with over 11% gains since 11/3/16.   Lack of positive market breadth was also a concern, as when tossing out Industrials and Financials last week, and even Technology finished the week lower as the giddiness of the "FANG" space finally gave way to some much needed sobriety.


5 Key Technical Positives which suggest additional gains still lie ahead:

1)  Russell 2000 Breakout on an absolute and relative basis- Amazingly enough, the RTY has gained nearly 12% since 11/3, moving up sharply to the highest levels since July of 2015.  This has helped Small-caps regain the trendline that was broken last month along with exceed the larger downtrend in the ratio of Small-caps /SPX which had been present since 2014.

2) 10, 30 year yield breakouts of the trendline from the last 3 years-  This jump in yields has helped the yield curve steepen dramatically coinciding with a big surge in Financials, as might be expected.  Though overdone at present, this is probably the most important technical development of the past week.  Further gains into year-end are likely for Financials after a brief consolidation given the shift in momentum, which is positive given the Percentage of composition within the SPX.

3) Breakouts in several Equity sector ETF's including Industrials, Financials along with Transportation - Looking over the last week, we saw impressive breakouts back to new multi-month highs for the Industrials- (XLI) along with Financials (XLF) while the DJ Transports exceeded former monthly highs to reach the highest levels for 2016 after a lengthy period of basing/consolidation.  While many of these moves have made the sectors near-term overbought, they're good structural moves which keep the indices bullish and are a driving factor to the Tailwind being seen right now in the Equity market despite the Technology weakness.

4) US Dollar Breakout which looks to be a real net negative for Commodities as seen in Precious metals plummeting last week along with WTI Crude falling to the lowest levels since early August.  The DXY closed last Friday at the highest levels since January of this year, rising right up to test prior highs from October following just a minor pullback.  This bullish technical action suggests additional US Dollar strength ahead

5) Upward Shift in Developed markets to Emerging markets-  This happened largely because of the Dollar breakout, but is a positive shift for US Equities given that Emerging markets have largely outperformed most of the year.  The Emerging market ETF, (EEM) broke down under the prior month's lows along with severing a multi-month area of intermediate-term trendline support.


Positives outweigh the negatives currently given snapback-   Overall, there are some Technical negatives of course,  which largely have to do with ongoing low level of breadth which would be expected to surge back to highs given this positive price action of late.  For now, we see several sectors rallying, but yet others are fading, so we've seen very little net change.  The Percentage of stocks trading above their 50-day moving has moved back up above 50% by a small margin, but is nowhere near the levels seen back in July of this year when this recorded over an 80% reading.  The Advance/Decline also lies far off the highs it made back in September, while the DJIA currently sits at all-time high territory.  While this has begun to rebound in a way that suggests additional gains can occur, the overall low relative levels compared to this past summer will have to be monitored closely.   Additionally, monthly levels of MACD are well off the highs seen back in 2014/5 despite markets being at/near all-time highs.  This had much to do with the selloff into August of 2015 continuing into this past January/February.  While gains still look likely, this will create a level of intermediate-term divergence that will be hard to snap.   Despite these negatives the positives listed in the list above, coupled with a very bullish seasonal picture for November/December and a healthy degree of skepticism regarding the levels of uncertainty present with a President-elect Trump make stocks still the place to be.   High prices not accompanied by breadth is an intermediate-term issue.  Yet not one to make ignoring bullish trends prudent.



TECHNICAL Long/Short Ideas:
LONGS: 
 HZN, RSG, NTES, AGN, RF, FDX, VMW
Shorts:  FLR, PM, TRIP, FOSL, EEM, GDX, PHM, ITB, IBM, ANF, TSCO,  HON



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish-  Insufficient grounds to call for any type of meaningful weakness this week, despite S&P having risen 8% in just the last 3 sessions. Groups like Financials and Industrials are stretched, yet others like Healthcare and Technology might follow-through and take their place, if last Friday was any guide. (NASDAQ outperformance and Tech bounce) Technically the first key level lies up near 2180 and over that gives the chance to grind to over 2193 which looks increasingly likely before any kind of stallout.  Under 2122 would suggest there should be a more meaningful pullback which could give back 61.8% of this rise, but given the improvement in sector rotation, it's unlikely that a larger pullback gets underway.   Election year Novembers tend to be the best month of the year which could keep the rally afloat into early December before any stalling out. 

Intermediate-term Thoughts (2-3 months): Bullish-   The Election volatility failed to bring about any true weakness, and despite being down 6% from former highs, that proved incredibly short-lived and resulted in a sharp rally back up to near all-time highs.  Advance/Decline has begun to shift back higher and has broken a minor downtrend from mid-August which should allow for further strength.  Meanwhile, longer-term uptrend lines for SPX remain very much intact and the uncertainty has lessened a bit given the Election outcome, putting full focus on the December rate hike probabilities, which are back up to 84%.  While the negatively sloping momentum on a daily, weekly and monthly basis IS an intermediate-term concern, the bullish seasonality for this time of year should provide stocks with a healthy rally into year-end before any larger correction gets underway. 

 



Charts below show S&P along with various charts of Healthcare indices and sub-sectors on an absolute and relative basis.  


While S&P did seem to beak the uptrend from February lows when looking purely at an absolute trend guiding the lows from June, the actual price/time trend from February never got broken.  The Nov 4 pullback fell down to a place which was nearly exactly 268 days and price points up from February 11 lows, which often is a much more realistic area of support.  At present, prices have jumped above the minor trend from August but could continue pressing higher to test 2185 up to 2196 before any stalling out.

 


Transports broke out of a large base this past week, one of the more meaningful technical developments outside of the breakout seen in Treasury yields.  This move took the Trannies up to new highs for the year and the highest levels since July of 2015.  While certainly stretched here, any pullback should provide attractive buying opportunities into year-end, particularly in the Rail sector which looks more attractive than Airlines on a relative basis.

 


Russell 2000 provided the other meaningful move this week with its surge up above September highs, carrying this also to new highs for 2016 along with surpassing a giant Downtrend which has been intact in the relative relationship in Small-caps vs SPX since 2014.   This is a bullish development, and likely means that any equity drawdown in the weeks ahead proves premature.

 

 


Treasury yield strength managed to breakout above the long-term trendline which has been intact since late 2013, which happened both in 10 and 30 year Treasury yields.  While near-term stretched, this is a bullish move for yields and suggests a bit more upside into Year-end, which could be bullish for Financials.   The start of this acceleration higher began right near Midnight on Election night and was a much more practical example of why stocks rose vs suggesting President-elect Trump's speech sounded "Presidential".  The uncertainty had been eliminated, paving the way for most to focus on Rate hikes in December.

 


Financials managed to show some of the sharpest outperformance that this group has demonstrated in years with relative charts of XLF v SPX showing a very powerful move up to near 2013 highs.  While stretched, this is a bullish move for the group, and looks premature to sell other than just from a 24-48 hour trading perspective.   Seeing the relative performance since 2013, Financials have been laggards for quite some time, so this Yield rally is a real wake-up call for the group.

 

 


The Breakout in the US Dollar index looks to be on the immediate horizon after prices closed up at the highest levels since January while USD made a new intra-day and closing high.  This current technical pattern is bullish and suggests additional upside to test the levels hit back in late 2015 when the US Dollar index peaked near100.50.  This bullish trend could spell doom for the Commodities space and we saw some brief evidence of that last week with the falling Precious Metals and Energy.

 

 

Developed markets relative to Emerging markets experienced their largest one week gain all year as a result of recent Dollar strength.   As seen in this relative chart of the MXWO vs MXEF index, most broader indices have begun to outperform Emerging markets in a major fashion in the last few weeks, which goes for both equities and Fixed income.  Additional US Dollar strength looks likely which would translate into further Developed market outperformance over Emerging, and send this relative chart likely back to this past Spring's highs.

 

 

Gold is looking increasingly more vulnerable after it broke down in early October, failed to make much headway with its bounce, and now has sold off back under September lows.  As this daily chart shows above, the trend from early last year was violated on this recent weakness, turning the trend from neutral from within an uptrend, to bearish.   while the area near May lows at 1210 also represents a 50% retracement of the gains from last year, additional selling looks likely, and this doesn't seem to be any real major support.

 

 

MSCI Emerging Markets ETF violated key trendline support last week for the first time since this consolidation began in July.  This breakdown under prior monthly lows also violated an uptrend for EEM that had been ongoing most of the year, suggesting additional downside for Emerging markets as the US Dollar rallies. 

 

 

The NYSE Cumulative Advance/Decline for "All Stocks" looks to have made major headway this past week by not only regaining the area near prior lows from September/October, but also exceeding the minor downtrend from September highs.   This should help this trend higher into end of year and is one reason to have a supportive view of the near-term equity strength, despite breadth thus far still being somewhat subdued.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Healthcare Bounce looks likely Post Election

November 7, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2078-9, 2070-2, 2049-51     Support
2107-8, 39-41, 2148-50       Resistance

 

 

The Sunday night ramp in Equity futures given the Clinton file being put to rest brought prices back to the area where they broke down last week.  This should be an area to sell into this move, but pullbacks into the Election Tuesday and/or Wednesday would become buying opportunities .  Over 2110 on a close likely helps prices extend higher.  For now, this area looks important as trading resistance for S&P to sell into, and doesn't represent any meaningful change in structure.

 


Electronic session pre-mkt gap in futures has neared the former area of the breakdown from last week at 2107 as of Sunday evening, which should be a strong area of resistance to sell into prior to the Election.  The market seems to be attempting to "front-run" a possible Clinton win given FBI Director Comey's statement that the re-opening of the Clinton case had now been officially closed.  Whether or not a Clinton win would truly be bullish for stocks or not is truly difficult to handicap.  However, prior swings on news announcements tend to lead to the conclusion that the market views a Trump presidency as far more uncertain with more potential for volatility, vs having more clarity under Clinton.  At present, without taking sides, it's at least possible to say that the market has at least given a thumbs-up given some degree of uncertainty having been cleared up.

Overall, the recent selling in Equities had neared initial support, but technically it was still difficult to mark this as an official bottom after last Friday's trading.  Indices managed to snap consolidation on day six of the current nine-day decline, causing a rapid pullback to the lowest levels since early July for S&P, DJIA and NASDAQ Composite.  The MSCI AW World index fell to new four month lows while we saw Treasury yields follow suit along with the US Dollar, all of which were different moves than what occurred throughout most of October.  Momentum had pulled back to oversold territory, but yet there really wasn't much sign of any capitulation in volume to the downside, nor counter-trend signals officially in place for indices such as the NASDAQ which should lead the S&P. 

At present, uncertainty remains high ahead of Tuesday's US Election, and if Sunday evening volatility is any clue as to the degree of volatility in store with a close election, it will truly still be tough to handicap directional movement in the next 24-48 hours.  While the weekly selloff in indices over the last week does look important and negative, the jump in momentum given Sunday's gap higher in Futures (if it holds into Monday, which at the time of writing, is uncertain) would likely signal the start of an oversold bounce.  (Even on pullbacks back to lows at this point, we would see a pickup in momentum that would create divergences and be thought of technically as a minor positive.   For now, despite a very negative short-term tape since mid-October, insufficient signs of fear in the market, and low breadth and momentum readings, a few things stand out that are positive that bear mentioning:


Key Technical Positives that Could help Stocks stabilize & rally post Election:

1) Oversold conditions- Daily RSI readings have broken below 30 for just the second time this year (January being the first) while only roughly 1/4 of all stocks remain above their 10 and 50-day moving averages - 25%, & 27.80% respectively for SPX
2) Intermediate-term Trendlines for NASDAQ remain in place from February lows, while SPX remains above key Price/time lines 1x1 from February-  (One unit of price per unit of time, which tend to be more important as a source of support than Static trendlines)
3) Demark counter-trend signs of exhaustion - Currently quite a few major indices and sectors are showing TD BUY SETUPS( SPX, MSCI World index, RTY, and NASDAQ) (within 1-2 days) that suggest this selling should face at least a pause, and potential sharp reversal
4) VIX Backwardation- Spot VIX is trading above both 3 and 6 month futures at levels seen post Brexit announcement.  While this signal isn't a single factor per se that could drive stocks higher right away, it should mean that implied volatility has gotten elevated to levels where any sense of calmness or elimination of uncertainty in the Election could cause a stock market bounce.
5) Transportation Strength-The degree to which Transports held up well in the last week is encouraging, with this sector turning in the ONLY positive performance of any of the 24 SPX Level 2 Industry groups last week, with returns of 0.63%.  The Dow Jones Transportation Avg was higher in four of the last five days last week and closed at the highest levels since early October.
6) Small-caps gave some clues last Friday that a sharp reversal could be imminent with strong outperformance vs the broader market.   While the deterioration in Small-caps was pointed out as a bearish factor that preceded this recent selloff, the bounce last Friday near key support vs. S&P in relative terms suggests an oversold bounce is close. 
7) Evidence of Healthcare trying to bottom out-  Healthcare's underperformance this year has been staggering, but there looks to be sudden signs of stabilization in the last few days, coupled with counter-trend signals that suggest an oversold rally is very near.  Given that Healthcare represents 13.96% of the S&P, the second largest sector by capitalization, this would be important and positive for stocks if Healthcare could begin to rally.
8) Seasonality-  Equities remain in a bullish time of the year seasonally with Election year Novembers being the #1 month for the NASDAQ and DJIA and #2 for SPX since 1950.  Given that this first four trading days recorded losses of nearly 2% for S&P and DJIA and nearly 3% for NASDAQ, the odds seem to favor a bounce in the weeks ahead.
9) Sentiment remains poor, and some evidence of Fear in the short run-  It goes without saying that an uncontested election will help uncertainty lessen dramatically, which should be a major positive for an oversold, scared market ahead of the election.
10) Treasury yields and the yield curve itself are positively sloped, and rising, and the market has given the Fed a "Green-light" to hike rates in December as seen by Fed Fund Futures pricing in a 76% probability, despite this market weakness of late.  So rising yields (provided they don't rise too rapidly) should help Financials outperform into end of year, which given their 13.43% representation in the SPX, is also thought to be a positive.
 
This week's Weekly Technical Perspective concentrates on the Healthcare sector, which despite last month's report suggesting further weakness, now is showing several things which could allow for some stabilization to this decline and looks to be setting up for an above-average risk/reward bounce, no matter who becomes President.  The FBI Director's "Case Closed" announcement might seem to be a negative for Healthcare early in the week as Clinton's chances might show some uptick, but the worst looks to be factored into many of these stocks and enough is there technically to consider buying selectively, and awaiting a turn back higher.   14 stocks within the S&P Healthcare index were down 20% or more in the last three months.  Below we'll pick the ones we



TECHNICAL Long/Short Ideas:
LONGS: 
 VRTX, EW, MNK, REGN, AGN, RF, FDX, VMW
Shorts:  PM, TRIP, FOSL, EEM, BKS, GDX, PHM, ITB, IBM, ANF, TSCO,  HON



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bearish into the Election, Then Rallies likely could take hold-  (Sunday evening early Surge in Futures has risen right to former Breakdown spot for S&P as of Sunday evening, which should be a good risk/reward area to sell intoThe near record number days of consecutive decline for US Stocks looks to be nearing a bottom into the election, as Demark signs of exhaustion per daily charts along with a ramping up in Fear could help stocks bottom out.  However, given the depressed levels in breadth and momentum, the degree of participation in a year-end rally will be extremely important.   For now, the area from 2050-70 is quite important for S&P futures, and lows should come about in this range sometime this coming week.  Meanwhile, prices will need to get back above 2107 to expect the worst might be over for now, which would help SPX futures move back up into this prior consolidation that was violated.

Intermediate-term Thoughts (2-3 months): Bullish-   The recent downward acceleration in stocks has set records for consecutive days down, but is thought to be unlikely to extend into end of year.  A few factors are important in this regard, such as the elevated level of bearish sentiment/indecision that's giving way to the beginning of Fear (gauged by Equity Put/call ratio spiking to new four-month highs) along with VIX backwardation.  Meanwhile, longer-term uptrend lines for SPX remain very much intact and we're nearing a time where the uncertainty "should" subside post Election, putting most of the focus on the December rate hike probabilities, which now stand at 76%.  While the negatively sloping momentum on a daily, weekly and monthly basis IS an intermediate-term concern, the bullish seasonality for this time of year should provide stocks with a healthy rally into year-end before any larger correction gets underway.  For Election week, weakness is likely, but should translate into buying opportunities in formerly strong sectors like Technology and Financials which have slumped a bit in the last week, while severely oversold sectors like Healthcare stand a good chance of rallying. 

 


Charts below show S&P along with various charts of Healthcare indices and sub-sectors on an absolute and relative basis.  


Healthcare is showing some evidence that an oversold bounce might be right around the corner, regardless of whether Clinton takes the White House or not.   XLV has lost over 13% in just three months' time, having given back about 75% of the prior rally from February to August.   Signs of downside exhaustion are now present, with Demark 9-13-9 patterns present on daily charts of XLV which often can bring about a sharp reversal of trend.  Prices seem to have stalled in this decline over the last couple days, which has caused momentum indicators like RSI to jump from the most oversold level this year to near 26 in just the last couple of days.  While prices will need to climb back over 68 at a minimum to suggest the possibility of a larger move higher, it looks like a good risk/reward here to buy at 66.48 in XLV, thinking that 68 is a worthwhile target for the short run, with over leading quickly back to near $71.  For now, despite the severe downtrend in place, it makes sense to play for some mean reversion in this year's worst performing sector heading into the last six weeks of the year.

 


Monthly relative charts of XLV vs SPX show this area to be important as support after the severe selloff from last year.  While the near-term trend has been quite negative and downward sloping, this monthly chart puts the group's recent underperformance into perspective.  A retest of an area near two prominent former highs typically can equate to an above-average risk/reward to buy on a pullback attempt like what's been seen.  So the combination of near-term oversold levels with indications of counter-trend buy signals per Demark indicators along with monthly relative charts showing this area to be much stronger than what most Daily or weekly charts might show, looks important. 

 

 

 


Pharmaceutical stocks don't look as attractive to buy just yet as the XLV does however, with prices having just pulled back under prior lows from February.  An additional 2-3 weeks of decline would help this index line up with counter-trend buy signals similar to what are now present in the XLV and XBI.  For now, DRG will need to regain 473.20 on a weekly basis to have a chance at stabilizing in the short run, so a bit more selectivity is needed for this particular part of Healthcare, at least until late November when any further weakness would make this a compelling buy from a counter-trend perspective. 

 

 

 


Biotechs look to have hit a key area of trendline support in the last couple days after this steep selloff and given the stabilization in the last few days along with indications of counter-trend buy signals developing on both a daily and weekly basis similar to what's now present in the XLV.  Given that this area has been an important area of trendline support for Biotechs since February, a lift seems likely in the days and weeks ahead.  If prices can manage to exceed $58, a larger rally should get underway, as this would surpass the downtrend which has existed in this group since late September.
 

 

 


The Healthcare Equipment and Services index relative to Pharmaceutical and Biotech index looks to extend recent gains and outperformance over the next few weeks given the ongoing upward sloping relative chart and momentum in this relative chart which continues to favor the Equipment and Services stocks.  However, on a weekly basis here there is evidence of the opposite signals seen in XLV and XBI, where now exhaustion signals on the upside are near completion.  This could allow for an upside peaking out in these stocks, relative to Pharma & Biotech, which very well could come from a bottoming out in the latter and sharp bounce in December and January.  For now, the presence of these signals being near completion potentially by the end of November is worth at least some mentioning, as the uptrend should face at least some resistance in the weeks ahead after gaining ground for 2-3 weeks.

 

 


Vertex Pharmaceuticals (VRTX- $78.96) VRTX was down 21.26% in the last three months, but is showing above-average signs of holding prior lows from March along with trying to break out of its downtrend from August highs.  Weekly charts show the formation of TD Sequential buy signals in place with a completed 9-13-9 count which are the same but opposite signals which occurred at the stocks' highs last August.  While a weekly closeabove the close from four weeks prior is necessary to confirm this signal, VRTX looks like an excellent risk/reward under $80 for a move back up to the low to mid $90s in the months ahead.

 

 

Allergan PLC ($195.00) AGN is another example of a stock which has lost over 20% in the last three months, and in this case 23% into last Friday's close with over 15% of that coming about just in the last 10 trading days.  Needless to say, AGN has gotten quite oversold but last Friday's "Inside Day" could translate into a reversal of this downtrend, particularly given the presence of Demark's TD Buy Setup in place which has marked quite a few lows in this stock in the last six months, along with highs (See the presence of Green 9 counts at many prominent highs above )   The act of finishing right back at former May lows looks important for last Friday, and any move above $199 should result in at least a rally to $210-$215 which initially might provide resistance.  Unfortunately, the stock will need to show more evidence before thinking a large rally back to Summer highs can occur.  For now, an outsized bounce looks likely in the weeks/months ahead.

 

 

Regeneron (REGN-$341.39) REGN is yet another example of a stock which has gotten oversold of late, having lost more than 21% in the last three months, yet finds itself right near a prominent former low which could act as near-term support.  Shares rallied hard last Friday to eclipse the former Down day from Thursday, and the risk/reward for shorts in this stock at this point look poor given the extent of the decline.  Rallies back up to near $370 to $385 look likely which constitutes a good near-term technical target.    Weekly support in REGN does lie a bit lower in the event that Friday's lows are broken.  Under $325 on a close would lead down to $298-$300, so one would hold off on continuing to buy in the event this requires one final pullback.

 

ew.gif

 

Edwards Lifesciences (EW- $89.63) EW's -20.67% loss in the last three months has taken this right down to a very important long-term area of trendline support which should create a decent buying opportunity for the stock for a bounce in the near future.  This area has held as support since 2013 and could provide a decent risk/reward opportunity at a time when weekly momentum has reached the lowest levels in nearly three years.  While failure to get back up to highs and then downturn could be an intermediate-term concern, for now EW looks attractive to buy here given this strong area of support that has held on every pullback the stock has experienced since 2013.

 

 

 

Mallinckrodt PLC (MNK- $54.65) MNK's 30+% decline in the last few months is now nearing a very important area near former lows that should create an attractive risk/reward entry for longs with the stock under $55.  Momentum has become quite oversold but the stock has held $50-$55 since 2015 and this selloff should hold these former lows given signs of counter-trend buys emerging in the XBI and XLV.  While declines under $53 would necessitate holding off on buying until this reached $50, it's hard to not see MNK as a good technical risk/reward given the severe decline to near important former levels that have held over the last year.  Bounces to the mid-$60s look likely.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Special report-Technical Analysis of NFLX, IBM, GS, JNJ, PM ahead of Earnings

IBM- Weekly-  A poor risk/reward for longs given its rally UP to , but not OVER key trendline resistance with some recent evidence of cracking this trend in the last couple weeks

Similar to US Equities as might be expected the trend is mildly negative over the last couple months, but still within striking distance of highs.

UNDER 152 is important for IBM, & would lead lower down to 146.60.. while for any bullish stance, IBM will need to show some improvement in its structure with an initial move over 158.50 but really over 165 helps this structure tremendously.  For now,  near-term momentum has begun to wane, and technically this stock doesn’t have much interest as a long until it can either consolidate some of the gains from early this year, or make further progress to get OVER these key areas of resistance directly above.

 

IBM- Daily-  IBM when dialing in a bit closer to the near-term daily chart, we see that the uptrend from early this year was broken and then retest attempts also failed.

The stock has been churning near September lows and wouldn’t take much to get below these areas which would cause a larger pullback into late October/ November

 

NFLX-  -  A good risk/reward long ahead of earnings given the pullback to near its four-month uptrend as part of a larger neutral pattern which has spanned most of 2016

Key to note:  NFLX rose early this month to the highest levels since April before showing some consolidation over the last couple weeks.  This has helped to improve momentum and help to steepen the uptrend over the last couple months and now this pullback should provide a more attractive risk/reward entry for longs-  Important levels for NFLX lie at 97 on the downside, which if broken, would warrant caution and postpone this advance while the stock likely tests Sept lows at 93.26-  Above last week’s 104.45 highs would help to improve the structure even further and suggest a likely start to a bigger bounce.  For now, longs are suggested, looking to add over 104.50 while cutting exposure or hedging under 97

 

JNJ- Daily-  Little to no real damage in JNJ despite the severe downdraft that’s hurt most within this group and this has proven quite range-bound with 117-120 containing most of the price action since August-  A break below 117 would cause a larger breakdown while over 120 should be a real positive.  Overall this looks like one to favor within the group though given its relative strength among real weakness, so longs are favored more so than shorts while keeping the 117 level in mind should JNJ get below this (as a level not to immediately buy more, but to look to hedge)

 

PM- Daily-  Signs of a bigger breakdown just in the last month with PM’s breakdown of a level of support that has held lows in PM since early this year.

The daily pattern resembles a giant TOP and until the stock can regain 98, it’s right to avoid PM and/or not buy stock until it can show further consolidation and/or get down to a better level of support

Based on recent price action, selloffs down to 93 and even 89.75 look likely.  So technically this is one to avoid/short until we see pattern improvement

PM- Weekly-  Another perspective with Move to new highs into this year now faltering.. so I expect a probable pullback into one of the zones shown below before this can move back higher

For now, the trend in this remains strong but wavering in the intermediate-term and definitely poor in the short term.  PM would benefit from a pullback down to 93 before getting too aggressive in buying, technically

Goldman Sachs- GS-  Movement up to former highs has caused some stalling out in GS and as the chart shows, the broader structure has improved for GS, but near-term it remains choppy and definitely range-bound between 160 – 173.

A pullback to 165 looks more likely between now and the next couple weeks , but given the intermed. Term strength, one would look to buy into weakness with only a move down under 158 causing concern and/or warranting hedging

 

 

 

 

S&P Sector Review, and stocks to favor technically

September 6, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2167-8, 2155-7, 2141-3, 2119-20, 2086      Support
2184-6, 2191-2, 2210, 2214-6                     Resistance

 

S&P resilience last Friday following the less than stellar Jobs report is seen as a real technical positive, eclipsing a minor downtrend and rising to new multi-day closing highs.  Additional strength looks likely in the days ahead.

 

Key Takeaways

US Equity trading range ongoing; Rally continues to be selective, but last Friday's close argues for additional upside near-term.  If this sideways pattern since mid-July has taught market participants anything, it's to expect the unexpected.  We've had at least 3-4 breakout attempts over the last couple months which have failed.  Equities along with Treasury yields, continue to be range-bound, though with a decidedly upward bias since late June.  These types of trading ranges following large upswings rarely prove to be topping patterns, and traditionally tend to follow-through in the direction of the original move.  Given a lack of counter-trend exhaustion on numerous timeframes for SPX along with Advance/Decline still within striking distance of highs, it doesn't seem like a trend reversal is all that imminent.  The dropoff in breadth since early July is not unlike what happened back in March-April after the initial spike from mid-February and isn't necessarily bearish. For now, it should pay to stay long and anticipate a move over 2200, though potentially with limited upside to 2215-2220, or 2250 maximum.

Sector-wise, the dropoff in Healthcare and Consumer Discretionary are somewhat concerning, and if Clinton's gap on the Presidency widens, this very well might continue to pressure Healthcare.  For now there's only so much that Financials and Technology can carry the market, and there is some evidence of a bit more selectivity in stocks, despite the Advance/Decline near all-time highs.  For now, this ongoing sector rotation seems to continue to bail the market out, and really no signs are there that this will change, regardless that the market has entered September.

The rotation out of Defensives looks to be nearly complete now, which was written about over the last couple weeks.  Specifically, the positive momentum divergence seen in Utilities over and in Telecomm recently is encouraging for these sectors after backing off to near key support.  Much will depend on Treasury yields NOT breaking out though to argue that these should work, and over 1.63% for example, on TNX, would be likely quite negative for both sectors.  Additionally, a move up towards 2200 and above would likely also not be led by the Defensives, so this needs to be taken into consideration.  For now, these sectors seem to be stabilizing after dropping off from June, so rallies should happen in the next 30-60 days, which would coincide well with potential negative US stock seasonality. 

The US Dollar's rip and reaction post Jobs report last Friday was telling, and despite all the weak economic data, the Dollar still finished quite strong while Treasury yields closed well up off the lows, in a rapid roller-coaster style reversal for both.  Quite a few came out to bolster the case for rates to go higher, and some of this was based purely on the stock market's resilience, i.e. "Dow Dependency" vs "Data Dependency", which can't really be ruled out these days(If the Fed has a "window" where the market has held up amidst Election uncertainty or otherwise, it very well might choose to hike, if the market comes to expect it)  Last Friday saw a huge swing in Fed Fund Futures incorporating all this data and by end of day, the chances stood at 32%, up from the low 20's.  If this continues to move to 50 on lack of a market correction ahead of the Equinox FOMC meeting, and/or various other Economic data come in strong, one can't be surprised that the Fed very well might hike, which would cause further spikes in Yields, and the US Dollar index, and be negative for Commodities, but also for these Yield centric sectors which have been stabilizing.  We'll see.



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- As stated above, it remains difficult to have a real bearish stance on stocks given Advance/Decline data being strong and ongoing trading ranges for SPX and others after the late June surge, while sentiment remains largely skeptical.  The latest data came in with More bears than Bulls for AAII, and while just one datapoint Sentiment-wise, it's certainly important to not exclude this in making an opinion.  Overall, as has been said here in the past, a move up to 2200 and over towards 2210-2215 remain legitimate upside targets to consider possible before any larger top appears.  Use any early week decline under 2157 to buy at 2141 with thoughts that a snapback to 2200 and above should occur.

Intermediate-term Thoughts (2-3 months): Bearish-  No change in thinking here, and despite the short-term view being inconclusive and largely still positive on move back to new highs, i still view a selloff to be a possibility in the latter half of September into October.   The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.

 



Attractive Technical Long Ideas per Sector:

Energy:  PXD, VLO, CXO, NFX, SLB
Industrials:  UPS, PH, TYC, MAS, GD
Technology: ATVI, FB, TTWO, GIMO, AVGO
Financials: AFL, RF, NDAQ, GS, DFS
Consumer Staples: TSN, SYY, KHC, MKC, STZ
Consumer Discretionary: BURL, CMCSA, CASY, SBUX, HD
Materials: PX, IP, AVY, MLM, APD
Healthcare: VAR, MRK, ZTS, HUM, DVA
Utilities: EIX, LNT, NEE, PNW, WEC
Telecomm: T, TMUS, VZ, S, EGHT


 

 



Relative charts of the 10 major S&P Sectors shown vs SPX in ratio form.  

 


Technology remains the most bullish sector right now technically as gains in the last few months have helped the group climb back to new highs vs SPX, and while stretched near-term, there remains little overall evidence of any real deterioration.  While the group does not show sufficient performance to rank among the top five for YTD Returns, the 3 month performance beats all other nine sectors handily, as Semiconductors have outperformed all other 23 groups that make up the S&P Level 2 GICS sectors.  While Semis have lifted to overbought levels relative to both Hardware and Software groups within Technology, any pullback in the weeks or months ahead should give the opportunity to buy dips in this sub-sector.    In the short run, some of the software stocks like ATVI, EA, TTWO, GIMO have begun to show excellent momentum and structure, and might be preferred over the Semis.  Overall, until some evidence arises of Tech beginning to slow, it's right to use dips in this sector to buy, technically speaking.
 


Financials breakout in the last couple weeks is a step in the right direction after nearly a full year of underperformance as part of a three-year pattern which has also consistently lagged.  As the chart shows above, the Financial sector managed to breakout of its downtrend vs the SPX formed last year.  The technical deterioration that resulted when the group cracked three-year support was nearly directly linked to Treasury yields, which have recently begun to show more strength.  This in turn has led to strength in this sector, which outperformed all other nine S&P GICS Level 1 groups last week, with returns of nearly 2% on the week, regardless of Friday's weak Jobs report.  Going forward, there needs to be additional strength to break back into this former range which was violated early this year, in order to have additional conviction of Financials working.  For now, the group remains near-term attractive, and any TNX move over 1.63 should help the group show continued strength, despite September being a lackluster month for stocks.

 

 

Industrials have stalled near former highs from 2014 relatively speaking in the last couple weeks, but the sector remains attractive given its strength in recouping all these losses since June 2014.   The two year relative decline has been nearly 100% recouped in the last seven months, and the act of stalling in the last few months right near all-time highs is a bullish sign which eventually should allow for this group to push back to new highs.   Transports steadying would be a step in the right direction (which has already occurred) while the act of exceeding former highs from a relative position is proper technically before expecting prolonged outperformance.  Similar to Technology, Industrials had finished near mid-range of all the major sectors in YTD performance, while their 3 month performance has shown near 5% performance, outperforming all other sectors outside of Technology, so this remains a sector to favor, until proven otherwise.

 

 

The trend in Materials leveled off a bit in the last few months, but remains the top performing sector in the past six months, higher by 14.88% since 3/2, vs SPX performance of 9.74% during that timeframe.  While many of the Metals and Mining stocks have lagged in the last couple weeks, stocks like CF, MOS, SEE, BLL, FTI have all turned over 2%, helping this sector to outperform all but one.  While the near-term trend looks choppy for now, there has been some recent evidence of this sector turning back up and this would improve if Materials were to take out the resistance highs vs S&P which has been in place since April. 

 

 

Consumer Staples has been one of the more attractive of the Defensive sectors over the last couple months, broadly outperforming Utilities and showing nearly 500 bps of outperformance over the Consumer Discretionary group, despite the broader market being up nearly 7% thus far this year.  The relative chart vs the S&P shows this group holding a level of support near former lows after its pullback from June, but has gradually been stabilizing in the last month, despite US Equities having risen sharply higher since late June.  For now, this is a group to FAVOR within the Consumer space , over Consumer Discretionary, and could be positioned long in even bigger size on evidence of any sort of weakness in US Equities which would help this group outperform even more.  For now, stocks like TSN, SYY, KHC, STZ, MKC, are all showing stellar signs of strength and should be overweighted within the group.

 

 

Consumer Discretionary has been a laggard this year, owing much to Autos and Media weakness, while groups like Consumer Durables have recently moved back to new all-time highs.  Stocks like HD, NKE, AMZN typically have huge weightings within the Discretionary sector, but even the Equal-weighted Consumer Discretionary ETF (RCD) remains trending down after peaking out last September.  Overall, one must be quite selective when buying stocks within Discretionary and stocks like HD, SBUX, CMCSA, BURL and BABA are ones to consider for the space (despite BABA not technically being a US Discretionary member)  Some evidence of Consumer Discretionary turning higher relative to SPX would give far more conviction to the market rally which for now, is getting more selective in its advance.

 

 

Utilities has shown some minor evidence of stabilizing in the last week after its huge pullback since late June which has erased about half of the groups performance since last November.  looking back, this recent underperformance has caused the group to underperform all other groups on a one-month basis with returns of -4.79% through 9/3/16 vs an S&P return of 1.06%.  Some of the reason why Utilities underperformed was due to rising rates and the perception of a Fed hike this month.  However, the other reason however had solely to do with the market showing "risk-on" tendencies which helped sectors like Technology and Financials lead the charge.  Over the last 12 months, Utilities have been the best group of any in the SPX, with returns of 20.11%.  If evidence arises that the FOMC likely does not hike this year, this group should yet again start to turn back higher, and would also outperform on any downturn.  At present, there is some technical evidence of this showing positive divergence when looking at momentum indicators like RSI which have made higher lows since its recent bottom in mid-August.  For now though, insufficient strength is there to consider a full overweight, but merely some evidence of any upcoming bounce.  Utilities should be watched carefully for signs this starts to trend back higher, which would give a possible warning sign of flows back to defensive sectors.

 

Energy remains a technical laggard after peaking out three months ago in early June.  The relative chart of OIH vs SPX shows the breakdown which violated this entire uptrend attempt from early January lows.  Its bounce attempt into mid-August failed to regain the prior area of the trend violation, and has since pulled back to within striking distance of lows made five weeks ago when Crude briefly broke beneath $40.  While any decision to cap output by Saudi Arabia and Russia might result in a snapback rally, for now, Energy is not attractive technically and appears to merit further near-term selling before any low is at hand.  Given that OIH's relative attractiveness seems to mirror WTI strength, we'd need to get back above $49.36 to have optimism that Energy could rally.

 

Healthcare's attractiveness also took a turn for the worse in the last month after peaking out in early August and breaking a four-month uptrend which had been in place for the group.  As the relative chart of XLV vs SPX shows above, Healthcare as a group peaked out back in mid-2015 and has formed two separate lower highs since that time.  While it's right to look at buying dips from an absolute basis near $71 in XLV given the ongoing uptrend in place, we'd need to see some evidence of relative charts turning back higher to have confidence on a relative basis.   Four straight "down" weeks for the Healthcare group amidst a growing chorus of Drug Price escalation fury" has cast some real negative sentiment on the group of late.  Signs of Clinton gaining further ground on Trump in the weeks ahead would likely prohibit this group from making too large of a bounce, given her focus on reigning in Drug prices.  (Her speech last month coincided with the huge setback which was seen in many of the Biotech stocks.)

 

 

Telecom looks apt to bounce in the months ahead given its sharp pullback to near initial support over the last two months.  Similar to Utilities, this defensive group began to suffer as rumors of a possible Rate hike helped Fed Fund futures price in a much higher likelihood for September rate hikes.  In the last week we've seen some partial evidence of Telecom stabilizing, and Sector ETF's like IYZ for Telecom have held near $31.50 on the drawdown from July which coincidentally marks the former highs from September 2015 into April 2015 when this group began to stall out.  (Former resistance now becoming support on declines) Snapback rallies from $32.36 back to $34 or higher look likely for Telecom, which should help this group outperform the broader market during September/October.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

USD, Bond yield breakout more meaningful than US Stock weakness

August 29, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2157, 2141-3, 2119-20, 2086        Support
2184-6, 2191-2, 2210, 2214-6       Resistance

 

S&P divergence vs Europe is further highlighted here, showing the extreme underperformance in Europe as seen by SXXP (STOXX600 index) vs SPX which has continued on its steady downtrend.  While oversold by some measures, we'd need to see some evidence of trend improvement before thinking Europe could outperform the US.

 

 

Key Takeaways

Stocks largely still range-bound, not bullish, nor bearish, while last week's breakouts in Treasury yields and US Dollar index are worth noting.   Yes, last week's performance in US Equities did manage to finish "DOWN", but S&P prices still failed to get beneath 2165 in Futures on a close, and finished at 2169 in SPX cash, or 5 points away from where prices closed back on July 14th, which marked the start of this massive sideways consolidation.   While the NASDAQ did in fact snap an eight-week win streak, it's still quite difficult to think the "Highs are In" with regards to Equities, and a significant selloff is right around the corner.  Prices managed to close up above the prior week's lows in SPX and NDX, while slightly weaker in DJIA.  Additionally, there are signs of positive momentum divergence on Hourly and 120-minute charts now on S&P futures, while weekly charts for DJIA, NDX, NASDAQ Composite and SPX do NOT yet show evidence of TD Sequential sell signals, a counter-trend indicator of upside exhaustion which normally would be expected to show a confluence of "13 Sells" on various indices right near the highs. 

Will the US Bond yield breakout lead to similar movement in the near-term in Europe?  UK Gilt and Bund yields need to be watched carefully for signs of breakouts early in the week-   Asia actually looks to have precipitated this move a few weeks ago with JGB yields bottoming and turning sharply higher.  US Yields managed to breakout of out their 1 month+ long consolidation, while both UK Gilt and German Bund yields look to be on the verge of similar moves.   So while the technical divergence between US Stocks and Bond yields had been noted recently as the two have not moved in tandem, last Friday's breakout is notable.  "Should" this breakout now lead stocks LOWER?  That's tough to say,  Financials certainly would benefit tremendously from a rise in rates, and last week's Euro STOXX Banks index breakout seems to suggest higher prices for European Banks which could also bolster US Financials which got see-sawed tremendously last Friday.  But the Fed trying to "coax" the market to be more prepared for Rate hikes quickly in a fashion that causes stocks to fall based on uncertainty of Future rate hikes and the Fed just hiking based on "Dow" resilience, not "Data" resilience could have the opposite effect if stocks fall into the mid-September Equinox Fed meeting, already a frequent time of market turns over the years.   Stock declines that frighten the Fed into believing volatility is back would certainly keep the prospect of any hike on the Back burner until December or early 2017.   For now, key to watch for next week is both 10-year Gilt and 10-year Bund yields, which both confirmed short-term "BUY" signals based on Demark indicators late last week, despite being in downtrends.  Breakouts of their existing ranges would be a likely boon to Financial stocks.  But as mentioned, whether or not stocks fall depends largely on how much the market feels it's behind the curve in gauging the Fed's newfound "Hawkishness" and whether or not that's built into perceptions.

The month of September is approaching this coming week, which is a reminder for investors not to get overly complacent given this month's consistent record of poor returns.  The average decline of SPX 0.5% in September makes this month rank last for the DJIA, SPX and NASDAQ, and even in Election years, the month typically is lower by 0.2% for SPX and NASDAQ and -0.4% for DJIA.    Barron's points out (8/29/16) that cumulatively over the years, one would have lost 31.6% of one's portfolio by investing only in September, (while investing all year would have netted 551% on a price basis. )  Sentiment wise, there did seem to be a rush towards bullishness from late June into mid-July, as would be expected on a stock rally, but that now seems to be dissipating.   The AAII % Bears has spiked to 29.64% from 24.6% in mid-July, while the VIX has jumped over 20% in the last five trading sessions alone.  While 13.65 seems to be relatively a very low VIX number compared to having registered readings above 25 in late June, our latest "mini-Drawdown" for stocks has definitely not gone unnoticed.   The Equity Put/call ratio registered a reading in the upper 70s during last week, or the highest reading since late July (hitting its upper Bollinger Band in the process) while the composite aggregate Total Put/call ratio reached OVER 1 last week after having bounced from readings just near .60 during mid-July.  Overall, sentiment seems to have ratcheted down in the last couple weeks, as might be expected given a market that now seems "unprepared" for a rate hike in September.  Any selling we get as expectations rise further would only serve to stoke bearishness even more, which contrarianly speaking, should be "good" for stocks with SPX closing prices still only 1.1% off all-time highs logged on 8/15/16.  

The rotation out of Defensives, which we noted might be nearly complete, still looks to have a bit more to go on the downside, as per last week's movement.  Despite the market finishing with small negative returns for the week, defensive sectors like Utilities were the worst performing of the major groups in one-week performance while Staples also finished down in the lower tier, with -1.16% returns in the S&P Consumer Staples index.  Conversely, Financials outperformed ALL other major sectors last and along with Technology, was the only other sector achieving positive gains for the week.  Further signs of Treasury yield increases after last week's range breakout would only further embolden the bullish sector bias, suggesting that outflows from Defensives might have a bit more to go.  XLU, IYZ,VNQ, and XLP have all violated six-month + Trendlines which supports the notion that these could still weaken a bit further heading into the bearish month of September.  Stay tuned.

The US Dollar's advance last week caught many off guard, us included, when prices in the US Dollar index broke back above a one-month downtrend which had kept rallies contained.  This surge last Friday exceeded the early August lows as well, so despite being seemingly stretched on intra-day charts, it IS a bullish near-term technical development, regardless if Rates in fact are not hiked in mid-September.  The FOMC's long-term economic uncertainty doesn't seem to bode well for a lengthy US Dollar advance, though in the near-term that DOES seem now likely.   This should have ongoing bearish implications for Emerging market equities and commodities, while helping Growth stocks to outperform Value.  Many had noted how rapidly the Metals and mining sector had imploded late last week, with GDX undercutting its 50-day moving average for the first time since late January (if one throws our the 2-3 day minor undercut from late May)  This formerly leading sector has definitely begun to deteriorate more quickly and any signs of Gold violating the key 1300-1310 level which marked both former May highs and July lows, would certainly cause additional weakness here.  Commodities, as shown below in one of our featured charts, now appear to be turning back lower after their six-month advance into July.  Any break of 415 in the CCI index would not only take this index down to new monthly lows, but also violate the entire uptrend from January, putting the commodity rally in serious doubt.


SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Neutral - While prices seem to have gotten down to near-term make-or-break levels before bouncing last Friday, it remains difficult to be overly bullish or bearish in the very near-term, and I think a short-term tactical approach makes sense until more evidence arises of how this trend should be resolved.  Buying into indices after weakness over the last two of three sessions to near short-term support makes perfect sense, though with realization that any decline back under 2157.50 in September futures likely will precipitate additional short-term weakness down to early August lows at 2141.    Even in this case though, a move back to new highs still looks to be necessary before a breakdown under August lows.   Movement up to 2200 and over towards 2210-2215 remain legitimate upside targets to consider possible before any larger top appears.  Use any early week decline under 2157 to buy at 2141 with thoughts that a snapback to 2200 and above should occur.

Intermediate-term Thoughts (2-3 months): Bearish-  No change in thinking here, and despite the short-term view being inconclusive and largely still positive on move back to new highs, i still view a selloff to be a possibility in the months of September/October.   The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.

 



Actionable Ideas for active traders:

Attractive Long Ideas:  NLS, FB, NFLX, HRT, BABA, PLNT, GRUB,

Attractive Short Ideas: EIX, DE, COH, SCG, KORS, RL, DTE, CBRL




 

 



Absolute charts of QQQ, TYX, Energy Sub-sector relationship charts, Breadth charts and commodity index CCI analyzed below.

 

The churn continues, but Fading US Stocks remains difficult, trend wise-   Some minor pullback last week, but as shown above, we still remain above 2168, 8/17 lows in SPX cash, 2165 in S&P futures, and even on a minor break down to early August lows, would barely show any real technical damage to the larger trend.  Only on a break to new monthly lows is it likely that we're beginning to top out, which for now, remains premature.  Hourly positive divergences are present in momentum looking at S&P futures and Daily TD Signals for upside exhaustion are not complete.  Overall, a neutral stance heading into this week as there "could" be a test of 2141 which can't be ruled out, but based on the ongoing resilience, this would be a buying opportunity and back above 2188 should cause a test and breakout to new highs into September.

 


Europe has been largely more range-bound than US Stocks since the Spring, though larger underperformance continues.  This trend in the last couple weeks doesn't seem all that bearish from an absolute perspective, near-term and should be able to mount a climb back to test Spring highs, which would be more serious resistance to consider "fading"  For now, the trend has improved a bit since July given the rebound in European Financials.

 

The near-term stabilization in Europe vs US hasn't yet triggered any sort of buy signal, as this daily chart of SXXP v SPX shows, which is a close-up of the weekly chart shown at the top of this report.    European Bank strength has helped SXXP to hold support a bit since July, but the downtrend persists, and even on minor strength in the weeks ahead, Europe should be avoided/shorted vs the US.  This goes a long way towards supporting shorts in VGK, EZU, IEV and even EUFN on strength.

 

 

The NASDAQ Composite looks to be giving indications of a possible peak in price which should drive underperformance in the NASDAQ as September arrives.  While Election year tendencies for August tend to be quite bullish for the NASDAQ, they're quite different for September, and the combination of a slowing in momentum of this ratio along with counter-trend Demark Sells arriving in confluence should result in NASDAQ Composite reversing course just as August comes to a close.  For now, this remains very much a counter-trend trade, as we've seen precious evidence of the reversal.  But sufficient signs are now present which should drive a reversal in this ratio and one should consider fading this bounce from June.

 

The breakout in the US Dollar index is a new bullish technical development, a meaningful surge above the USD's one-month downtrend while getting back up above late July lows.  This should drive commodities lower, while favoring Growth vs Value in the weeks ahead into the FOMC.  On lack of any hike, which would be postponed if stocks exhibit any kind of traditional seasonal weakness, this move likely should be reversed.  For now, additional Dollar index strength looks likely, which translates into EURUSD pullbacks.

 

Commodity indices have begun to falter on recent US Dollar strength, regardless if economic strength is a reality, or merely providing a near-term window for FOMC hikes.  Movement down under this "RED LINE" shown above, or 415 would not only be seen as an intermediate-term trendline break, but also a move down under July lows which would be negative structurally for the Commodity complex. 

 

 

Gold has shown signs of breaking down out of its symmetrical triangle that's kept prices range-bound over the last couple months.  Movement down under 1300 would drive Gold to 1200 and be a bearish technical development, which would likely become a reality on any September Rate hike.  For now, the weakness is worth watching as it nears Gold's support at 1300-1310, representing the area at former May highs and July lows.

 

Ten-year Treasury yields have now successfully broken out above their one-month consolidation range along with exceeding the entire downtrend since early this year.  This is a bullish near-term development for Yields suggesting additional gains ahead of September's Fed meeting.  While a slow yield rise likely shouldn't be all that damaging towards stocks, and if anything, help the Financials complex, it is worth watching near-term and not immediately fading given the length of time this consolidation has been in place.   Unless this trend is immediately reversed Monday through Wednesday of this week, TLT should be temporarily avoided, while TBT would work better as yields rise.

 

 

German Bund yields have to be watched carefully now for signs of breakouts given that US Yields have made this move, given that UK Gilt yields and Bund yields have both confirmed Daily TD Sequential "13 buys" as of last Friday's close.  While the downtrend remains very much in place on both, movement back above -0.027 bps would drive yields up to +0.093 or even to .20 bps technically before any slowdown, which would be a giant move, exceeding this downtrend from December 2015 and allowing for a big decline in Bunds on par with April 2015's yield rally.

 

 

Healthcare weakness was fairly persistent last week, which resulted in some damage to US indices, given the percentage amount of Healthcare in the SPX.   Following the Epi-Pen pricing controversy, the Presidential front runner Hillary Clinton spoke out against these hikes, which resulted in a big drop in performance in many of the Biotechs, which earlier in the week last week were set to close at the highest levels since January of last year.   For now, we'll need to see a big rebound in the group to gain confidence after the amount of weakness which has taken place just since early August for Healthcare.   At present, Healthcare represents 14+% of the SPX, the third largest group behind Technology and Financials, so some evidence of stability is necessary to help this group start to trade better, and in turn, provide some necessary tailwind to the SPX at a time when it's entering the bearish month of September.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

US Markets diverging substantially from Europe

August 22, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2164-6, 2151-3, 2139-43, 2119-20        Support
2191-2, 2210, 2214-6                             Resistance

 

S&P divergence vs other indices in Europe, such as Italy's FTSEMIB index, details the extent of the severe widening out which has happened since earlier this year, as SPX managed to recover back to new all-time highs, while most of Europe remains well off those highs, in many cases by 15-20% or greater.  This Divergence doesn't look to mean-revert in the immediate future and still suggests underweighting Europe as a strategy vs long US.

 

Key Takeaways

SPX remains largely range-bound with a slight bullish bias, and insufficient weakening to suggest any pullback is imminent.  After six of the last eight "UP" weeks, with just 2 "misses" failing to turn out positive returns by just 2 SPX points, the trend has been higher, and largely uninterrupted since late June.  However, as we all know, most of this move happened from 6/29 into 7/14 with the last month being extraordinarily challenging for both bulls and bears alike.  Given the less than 1% rise in the last month of trading, breadth has waned since mid-July, though with bullish sector rotation largely offsetting this minor.   Overall, given the lack of any real price deterioration, it remains correct to have a bullish bias given no weekly closes BENEATH the prior week's lows since late June.  Higher prices look likely into end of August before any peak

SPX continuing to outshine Europe, which is growing increasingly weak.  Most European indices fell nearly 2% last week (STOXX50) and have lagged the US since 2007, with the decline since the most recent peak from last Spring growing quite pronounced.  While SPX, DJIA hit new high territory in the last month, Europe remains down 15-25% from last year's Spring peak, and this trend doesn't appear to be reversing course anytime soon.  While UKX and the DAX are the two standouts, the majority of Europe and Asia for that matter remains in far weaker shape.  No evidence of mean reversion is apparent, nor is it right to fade this widening divergence in expecting an immediate snapback anytime soon.  For now, for those concerned about downside risk heading into the Fall, Europe still looks likely to fall faster to the downside, and the European benchmarks remain in downtrends and better risk/rewards to consider "shorting".

The move out of Defensives which began in early July looks to be nearly complete.  A few signals have appeared in the last week to suggest this should be in place by early September, arguing to buy dips in REITS, Utilities, Telecom, and Staples as August comes to a close.  Both on a relative basis along with absolute, many Telecom and REIT stocks are pulling back to important uptrend lines as part of their bullish uptrends.  The flow out of the Defensives has helped to embolden investors as to "why" stocks should be moving higher, with High percentage sectors of the SPX like Technology, Healthcare, Consumer Discretionary all showing above-average strength.  Conversely, we've seen huge underperformance in the last month out of most Defensives.  Even in the last week, Utilities and Telecomm dropped more than 1% a piece, while Staples also finished negative,  and in the bottom 5 sectors in performance.  Bottom line, the combination of counter-trend signals of exhaustion for the defensive groups as they approach key support should prove beneficial towards these groups bouncing, and also means our equity rally could be running out of steam as September approaches.  For now, another week of Defensive underperformance looks likely.

The decline in the US Dollar index has approached initial support, but still no evidence of this bottoming out, and both Treasury yields and US Dollar declines look to continue into September.  The failure of Treasury yields to rise as equities have pushed higher might be seen as a warning sign for stocks, yet if the resilience in JNK is any guide, it still looks early to fade the move in equities.  For now,  Treasury yields remain nearly as range-bound as Equities, and even more so of late.  Given the ongoing intermediate-term downtrends in place for yields and the lack of any complete Demark signs of weekly and/or monthly exhaustion, there remains a high likelihood that this consolidation in yields is resolved by a downside breakout.  Such a move would likely cause Financials to turn back lower into the seasonally bearish month of September, while providing a lift in the Defensive groups, which would bolster the argument made above regarding the yield sensitive sectors getting a lift. 

SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) :  Bullish-  For this week, the ongoing deterioration in defensive sectors could extend one more week, while stocks still looks to complete their larger pattern with a move to the upside.  The rally has become more selective of late, and Technology and Discretionary have begun to slip in favor of Energy, Materials and Industrials with the US Dollar decline helping Commodity prices.  Given lack of any serious technical deterioration whatsoever, factors like bullish breadth and momentum should help keep equities afloat a bit longer.  The bearish factors of increasing optimism towards stocks along with less upside participation don't yet suggest to sell stocks.  Movement up to 2200 and over towards 2210-2215 remain legitimate upside targets to consider possible before S&P futures stall out.  Look to stay long and use any weakness that early week pullbacks offer to buy dips with thoughts of prices moving back to new high territory.

Intermediate-term Thoughts (2-3 months): Bearish-  The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.



Absolute charts of QQQ, TYX, Energy Sub-sector relationship charts, Breadth charts and commodity index CCI analyzed below.


Some minor evidence of NASDAQ 100 starting to stall out in the last week, as seen by prices attempting to push higher repeatedly and failing while counter-trend Demark indicators showing exhaustion appear on daily charts.  Momentum has begun to roll over as seen by commonly used Technical indicators such as MACD.  While it's still possible that a final push higher could happen this week, QQQ in particular looks in dire need of consolidation following its advance.  Daily closes back under 116.43 would warn of a pullback getting underway, and one should hold off on immediately looking to buy dips.  Until this happens, however, the trends here for QQQ remain bullish, but stretched.

 


The Percentage of stocks trading above their 50, 150, 200 day moving averages remains quite constructive for stocks given their move to multi-year highs with no meaningful signs of turning back lower.  While there has been some minor evidence of the Percentage of stocks > 50-day ma coming down from very extreme levels reached in April/May, this doesn't represent a "sell" signal by any means.  Important to see the degree to which these big moves in momentum earlier this Spring led the market higher, providing positive divergence to the lift back above November/December highs.  A severe plunge in these Percentages would be problematic if stock indices remained near highs, but for now, with all three gauges registering readings over 70%, there doesn't look to be much deterioration in the Breadth surge which happened earlier this Spring which would warn of an impending pullback.

 

 

McClellan's "Summation index" has dropped off since mid-July and threatening to break its 50-day moving average for the first time in nearly two months.  This gauge is a cumulative tally of the McClellan Oscillator readings for breadth and typically tends to show divergence at both highs and lows which can often precede index turns.  The flattening out in stocks in the last month is largely responsible for the weakening in this gauge, but given the high level in being well above former troughs for June, can't be looked upon all that negatively.  For now, a resolution to this trading range in the indices in the next couple weeks by a move back over 2200 which doesn't cause this to turn back higher and challenge highs might be considered a minor negative.  However, ideally, to have any type of bearish stance, this Average would need to get back under lows made in June.

 

 

This closeup of another Percentage study (the percentage of SPX above its 10 and 50-day Moving average) is another chart to watch carefully in the weeks ahead. To reiterate earlier comments, the peak and stalling out is not something to view that negatively as of now, but would be expected to move back higher as SPX moves up out of this range to the upside.  The lack of any followt-hrough higher in this gauge and/or weakness during times of Equity index strength could be a problem for September, but remains premature to grow overly concerned about at present.

 

 

30-Year Treasury yields remain locked in range-bound consolidation as part of this ongoing downtrend.  Technically speaking, it's difficult to see this recent triangle as anything but bearish given just a minor Yield rise before this range began to form.  A pullback to test and break early July lows near 2.1% looks likely in the next 1-2 months before any recovery.  Breaks of 2.20% would be an important and bearish development, while any move back over 2.35% would postpone the decline.

 

 

Sector-wise, Energy is continuing to gain ground, and this chart shows the performance of the Exploration and Production ETF, (XOP) vs the OIl Services ETF (OIH) which in relative terms broke down hard late last year into early January 2016.  The subsequent rebound has been sharp, and recently has moved back up to challenge the initial resistance created by June highs.  The quickness with which this rose back up to recent highs is a positive development technically after just a minor drawdown into July.  The rally in the last couple weeks is suggestive of a larger move in Exploration and Production stocks, which should continue to gain ground once it exceeds former June highs.  Overall, the XOP looks to be a sub-sector to favor within Energy and should be overweighted for outperformance in the weeks and month ahead.

 

 

XLE vs OIH is showing signs of peaking out in the last couple weeks after a sharp two months of rally by the Integrated Oils vs Oil Service stocks.  This ratio has reached an area of resistance that has held upward progress all year long, and now has made what appears to be the second unsuccessful stab to the upside of this triangle pattern.   Pullbacks in XLE vs OIH should be expected between now and mid-September, which translates into OIH outperformance.  Thus, when breaking down the subsectors and how to play Energy, XOP looks to be preferred initially, followed by OIH and then XLE as the relative laggard.

 

 

The Continuous Commodity index looks increasingly to be bottoming in the short run which looks to have directly coincided with the US Dollar turning back lower in recent weeks.  Energy has led this move higher while Precious Metals and grains have lagged in this regard. When looking at this chart, a couple things are clear.  The uptrend in Commodities from lows this past January doesn't seem to be complete.  Most of the churning in the last month has occurred right near key trendline support, but should lead to CCI lifting to at least challenge former highs from early July.   Unless there were to be a breakdown under 415 in the index, which looks unlikely with a declining US Dollar index, the trend in commodities continues to point higher, but has merely stalled in the last month, not dissimilar from precious metals.

 

 

Telecomm took a sharp downturn in the last couple weeks and now has fallen to the lowest levels since February of 2016 in relative terms to the SPX.  This move has been bearish near-term, but appears temporary given the bullish structure in intermediate-term weekly charts of T, VZ.  While another 1-2 weeks of undeperformance could happen, it's worth buying into this decline as the market approaches the month of September, as this relative decline is starting to get stretched now to the downside.

 

Long High Momentum and Short Low Momentum clearly hasn't worked in 2016, and particularly since early July.  This index above is the DJ US Thematic Market Neutral Momentum index (Bloomberg) which reflects the performance of a strategy of being LONG high momentum and short the low momentum names in the market. In the next 1-2 weeks this should be nearing this area of trendline support that would suggest fighting the trend that's been in place since early this year.  However, given the extent of the decline from early year highs and how this fits into the larger pattern, it's important to be on the lookout for a larger breakdown in this trend over the last few years.  For now, this appears unlikely right away, and between now and early September, this style index still shows long high momentum stocks/shorting low momentum stocks in actual practice to be an underperformer.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

DJIA joins SPX, NASDAQ at new highs while TY Yields, USD remain subdued

August 15, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2164-6, 2151-3, 2139-43, 2119-20        Support
2184-6, 2191-2, 2210                             Resistance

 

S&P experienced both downside and upside breakout attempts in the last couple weeks, but remains largely range-bound with a bullish bias.  Movement back to new highs appears likely early in the week before a stalling out, potentially led by a slowdown in Technology.

 

 

Key Takeaways

SPX trading range remains intact, albeit with increasing strength in various other Stock indices, such as DJIA, NASDAQ Composite which have now joined the SPX back at new all-time highs.  Many might express skepticism about the markets being in a trading range, but how else can one explain the SPX closing last Friday, 8/13 within two points from the exact same levels as hit the prior Friday, 8/5, at 2182.87.  In fact, in the last month, SPX has been only 0.008% higher, at 2184.05 vs 2163.75 from 7/14.  So increasingly the large cap move in July has now been joined by mid-cap and Small-cap stocks, but the move in Large-caps looks to have largely stalled out over the last month.

This isn't 1999 all over again, but if anything 2016 looks to be weaker in many ways.  We've heard countless chatter about this being the first occasion all three major indices have hit new highs in unison since 1999.  While this is certainly a constructive move back to new highs in recent weeks, and this can be confirmed by Advance/Decline at new highs while Momentum remains positively sloped, 2016 is a far different market than that seen in 1999, and if anything, is in technically worse shape.  Indices like Transportation Avg, Russell 2000 index remain far off highs seen back in 2014/15, while SPX has diverged substantially from most of the developed and Emerging markets world in the last eight months.  Monthly momentum indicators such as MACD were bearish over hte last year up until last week, but still should have much difficulty in reclaiming highs, something that looks to be the beginning of possible bearish divergence on monthly charts for SPX.  While it's right to favor US Large Caps (SPX) given that US has clearly led in this outperformance and there's no discernible evidence of immediate mean reversion), at some point, given the history of SPX tracking global index tendencies, there should be an attempt either for SPX to peak out in the weeks ahead, or for global stocks to begin closing the gap on the US.

Technology looks to be reaching near-term areas of upside exhaustion, which might cause the broader market to face headwinds, given Technology's 20% weighting in the SPX, the index's largest component.   Most of this thinking comes from the presence of Demark's 9-13-9 pattern, which could be complete early this week in NDX, NASDAQ Composite, along with XLK.  Any slowdown in Technology would likely translate into the market becoming much more selective heading into a bearish seasonal time, and signs of trend reversals are a must for both XLK and the NASDAQ.  For now, the next 2-3 days seem to be important in this regard for signs of exhaustion to appear when using TD Sequential and TD Combo indicators.  This could provide short-term signs of stalling out and consolidation on stocks like FB and GOOGL which have made steady progress in recent weeks, and both of these look like poor near-term risk/rewards, along with MSFT after their gains of late.  For the next couple days, there should be one final attempt to push back to new highs, but then would expect some stalling out in Tech.  Overall, until these signals are in place and show some signs of working, the near-term trends remain positive.   It remains tough just yet in fading equities based on a stretched positive trend with no completed 9-13-9 in place for the NASDAQ.

The Decline in Treasury yields and USDJPY certainly haven't been reflective of a genuine shift towards risk assets and despite US indices having moved back to new highs, we've seen some definite divergence in Treasuries also rising recently along with stocks, while the US Dollar has fallen off vs the Yen.   This obviously hasn't just been a US phenomenon, as globally, interest rates continue to plummet towards new lows.  However, one supportive factor important to keep an eye on his how well the High yield market seems to have rebounded.  The Junk Bond ETF JNK continues to press up to new highs, and if anything, it's proper to await signs of this starting to breakdown before adopting too much of a bearish tone for stocks.    Commodities have stabilized somewhat, in the last week given US Dollar weakness, but still very little evidence of much technical damage in stocks.


Sector rotation in the last week was nearly the opposite of what had played out in the last month but generally the shift towards constructive sectors such as Consumer Discretionary, technology, Financials and Healthcare have been positive forces for Equities.   Financials, for now, remains the sole "down" sectorin YTD Performance, and stalled out last week, while having outperformed all other sectors outside of Technology in the rolling 30 days.   However, this sectors gains have occurred despite a pullback in treasury yields in the last couple months.


Short-term Thoughts (3-5 days) :  Bullish-  The So-called breakout in SPX last week failed to gain much traction, though also failed to reverse meaningfully from 2183-5 highs in Futures, and prices largely remain range-bound near levels that were hit over a week ago.  Movement back up towards highs looks likely again early in the week, and still very difficult not to expect new highs with Advance/decline at new highs and most US indices now having broken out to join SPX in the last couple weeks.  While counter-trend signals look close to appearing on intraday charts of SPX along with QQQ, XLK, the patterns still largely look constructive for a push back up to new highs.


Intermediate-term Thoughts (2-3 months): Bearish-  The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.



Absolute charts of SPX, NDX, TNX, DXY, JNK and relative charts of Utilities and Margin Debt with SPX vs SX5E shown.

 


S&P Cash index has shown enough momentum in the last six months to help monthly MACD turn back positive, something which is a minor bullish development allowing weekly and monthly MACD to now align positive for the first time in nearly two years.  Structurally, prices remain bullish, but the extent of the consolidation since last May has caused sufficient deterioration in momentum to think that any rise in prices would definitely take some time before MACD started to lift back higher.  For now, it's doubtful that MACD could get back to new highs and in general, marks the beginning of monthly negative divergence which might prove bearish 12 months down the line if not resolved.

 

 


NASDAQ 100 index along with NASDAQ Composite and XLK look to record counter-trend signs of exhaustion per Demark indicators on daily charts for the first time since "buys" were recorded right at the lows this past winter in January/February.  While NDX would need to show actual evidence of confirming this signal sometime in the days ahead with a daily close under the close from four days prior, it is a minor warning sign of possible upcoming stalling out in price in otherwise what might be viewed as a very bullish chart configuration.

 

 

The "Fang" index, or a compilation index made up of Facebook, Amazon, Netflix, and Google (Alphabet) has just triggered daily sells per counter-trend indicators that also line up with what's being shown in the NASDAQ for this coming week.  The last meaningful signal occurred as a buy back in February, while sells occurred in late November/December of last year, both proving quite important as turns.  While other indices don't yet reflect any type of sell given recent strength, it will be important if this starts to stall out and turn back lower in the days ahead.  FB, and GOOGL both look to be near key areas on the upside in the short run, given the acceleration in both, while AMZN is quite close.  Technically the basket as a whole remains quite bullish after having broken out to new high territory on an intermediate-term basis, but is just overbought near-term after this rise and now reflecting a few signals which could allow for a stalling out between now and late September.

 

 

SPX has diverged substantially with most of Europe in the last eight months, with S&P having risen back to new high territory, while the SX5E, or EuroSTOXX 50 remains still 5% away from areas of its breakout and over 20% off highs made last Spring.  While Europe has begun to trend up in a bit quicker pace in the last month, it remains well off the highs and is something to consider carefully when making bullish bets on the SPX given the degree that this has already risen.

 

 

Ten-Year Treasury yields remain trending lower, and have not enjoyed the same degree of upside as has been seen in Equities in recent weeks.  While TNX and SPX had enjoyed a fairly positive degree of correlation in the past, (and did both bottom in January from extreme lows) TNX has failed to make any real headway in its recent bounce.   Movement back to new low territory looks likely for TNX, as US TY yields get below 1.35% in the next couple months before any serious bottom in yields is in place.  This should bode well for TLT longs, and/or TBT shorts.

 

 

US Dollar index fell sharply last week, but managed to still close above late July lows, which keeps the trend choppy, but mildly negative at best.  Pullbacks to test 94 look possible before this shows any kind of sense of bottoming out, and for now the near-term trend remains negative for DXY.  Movement under July lows would being about a further upside acceleration for the metals, and in general should be a net positive for Commodities into the Fall.

 

 

 

Utilities showed some definite weakness over the last month, and despite the choppiness of indices themselves, the Defensive sectors have had a difficult time, underperforming despite yields remaining low.  The trend of Utilities vs SPX broke a trend from April lows and remains under pressure in the short run, as an underperformer, while maintaining a move positive trend on an intermediate-term basis given the rise into late June/early July. For now, this break doesn't look to have bottomed, and additional weakness looks likely for the Utilities.

 

 

The High Yield ETF, JNK, looks to be just exceeding a key downtrend which has been intact for the Junk ETF since the middle part of 2014.  This is an important area given the failure in mid-2015 and ability to clear 36.50 should enable this to continue to improve over the next couple months. Given that most equity downturns tend to be led by weakness in High Yield, we'd need to see some degree of weakness here in the weeks ahead before turning too negative on the equity market, based on prior history.  

 

 

Consumer Discretionary has begun to show much better signs of outperformance vs the Staples which goes hand in hand with the fallout in the Defensive sectors overall since mid-July.  This breakout of the downtrend since 2015 should allow for a bit more strength in Discretionary which has largely been led by Retail names in the past month.  For now, this looks to continue after a severe period of underperformance.

 

 

The SPX looks to be diverging recently vs Margin Debt on NYSE, something which historically has shown fairly tight level of correlation.  Margin debt mostly has risen and fallen along with US Equities in the last 20 years with a distinct top in both 2000 and 2007 that coincided with Equity peaks.  For now the divergence in S&P not following Margin debt likely gets resolved sometime in the next couple months, but for now, is something to keep an eye on.  Margin debt peaked in 2007 a good three months ahead of the larger equity top, and for now has fallen since mid-2015, coinciding with the larger top in Equities that was seen globally and since has been erased by SPXs move back to new highs as this index ignores much of the near-term global weakness.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Financials could outperform short-term, as Yields rise

August 8, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2164-6, 2151-3, 2139-43, 2119-20        Support
2184-6, 2191-2, 2210                             Resistance

 

S&P made a solid close back at new highs last Friday which on hourly charts appears to be near the highs of the consolidation that have held this pattern range-bound since mid-July.  For now, the area at 2183-5 could have some near-term importance,  but a rise up to and slightly over 2200 can't be ruled out into late August before any broader market reversal

 

 

Key Takeaways

US Equity breakout in the SPX, NDX looks to be constructive structurally and should be joined by NASDAQ Composite and DJIA into mid-to-late August before any broader market peak is in place.   The S&P Large cap breakout has now been followed by similar moves in both the S&P Mid-cap index (MID) and Small-cap index (SML) which had been lacking before.  Advance/Decline is back at new all-time high territory, while Financials have surged to show strong outperformance along with Technology in the last week, while Defensive sectors like Utilities, Staples and Telecomm have finally begun to wane.   While volume is seasonally light, and signs of "Jumping onboard" this rally have happened quickly, as the Equity Put/call ratio has fallen to the lows last seen in early July, we'll need to see evidence of this rally failing before adopting any sort of cautious tone.  For now, the move looks constructive and is being led by the "right" sectors which wasn't the case back in March.

Financials have demonstrated a sharp rally back to new monthly highs, which managed to breakout in absolute and relative terms just in the last few days.   Stocks like DFS, OZRK, BANC,JPM, TCB, KEY, FINL all look attractive, while Brokerage stocks like GS, MS are on the verge of larger trendline breakouts.   Regional banks look slightly more attractive at present than some of the larger Money Center Banks - BAC, C, which are now nearing important upside resistance.  The Brokerages all look to follow through higher in the next 1-2 weeks after their own recent outperformance, which in the case of GS, MS, is now testing important trendline resistance. 

Much of this relative strength in Financials has come about due to the Global Bond selloff in the last week which has seen the US 10-year yield start to turn up a bit more meaningfully after testing 1.45%.  Rallying near-term up to 1.75-1.78% wouldn't be an abnormal technical improvement for TNX, but rather, just a bounce within an existing downtrend from late last year along with the mild pattern of lower highs in place just since this past March.   Movement back over 1.80% is necessary to expect this pattern could be giving way.  In the next 2-3 weeks though, a further bond selloff along with gains in Financials looks quite likely.

Seasonally speaking, equities are entering a bearish period which starts with the month of August.  While this month is not as negative as September going back over the last 50-100 years, it HAS been the worst month in the last two decades, averaging -1.3%, far surpassing September's -0.7% drawdown.  Given that S&P finished July on a particularly strong note, higher by 2.8% while sentiment has improved, understandably, this combination of Divergences among the indices at new highs with lofty sentiment heading into a seasonally weak time is worth being a bit more selective and keeping stops tight.  Swinging for the fences is no longer apropos, and hitting singles makes more sense entering August.


Short-term Thoughts (3-5 days) :  Bullish-  S&P made a definitive breakout on a closing basis, yet futures lie just shy of prior intra-day peaks from last week and also just below the initial resistance zone targets mentioned recently at 2183-5.  The fact that Financials are participating in this move gives pause as to trying to sell into it so quickly.  Many intermediate-term breakouts are now occurring in many Financials indices and ETFs on an absolute basis, and Financials remains the second largest sector as part of the SPX.  In the next few days, a move up to test 2183-5 looks possible while any pullback early week should be used to buy given the structure

Intermediate-term Thoughts (2-3 months): Bearish-  The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.

 



Absolute and relative charts of SPX, NASDAQ Comp, SML, TNX, Equity Put/call and many of the charts of the Financial sector, both relative and

 


S&P Cash index made a clean breakout above the highs registered over the past 16 trading days since mid-July which is a bullish development, and suggests additional gains in the days ahead.  Demark counter-trend signs of exhaustion per TD Sequential and/or TD Combo remain premature by at least 6-7 trading days while weekly counts look to be three weeks away from possible weekly exhaustion.  For now, given the strength in Financials, pullbacks should be buying opportunities for further gains into late August. 
 


NASDAQ Composite made a new weekly all-time closing high last week, but remains shy of intra-day all-time highs made back in late July which are just 10 points above at 5231.94.  Gains seem likely here as well in the NASDAQ with weekly charts still premature in signaling exhaustion, while prices have pushed up to multi-year closing highs as of last week's close at 5221.12.   Within three weeks the NASDAQ Comp would signal evidence of exhaustion, lining up nearly perfectly with the SPX into late August.  For now, it remains premature.  
 

 

S&P Small-cap index just joined the move in S&P 500 Large Cap index and Mid-cap index as of the last week, as prices failed to reverse at former resistance, but pushed ever higher.  So just in the last month, we've seen Large, mid-and small cap indices all move back to new highs while Advance/Decline has surged ever higher to new highs.  Sentiment has followed this move unfortunately while volume remains light and the VIX curve is steepening in a way that suggests caution over the next few months.  For now, no signs of any reversal and its right to stick with this move and buy dips, if given the chance in the next few weeks.
 

 

US 10year Treasury yields look to have made minor trendline breakouts as of last Friday which are important and bullish for yields in the days to come.  Technically speaking, the move back above early August is a real positive along with successfully exceeding the entire downtrend drawn from early June highs which should drive yields up to 1.68-1.72 before any stalling out with a possibility of yields hitting 1.77-1.78%.  For now, this is a short-term bullish development only for yields, but should have important implications for how Financials trade in the near-term which should be far more constructive than ordinarily might be the case in the bearish month of August.

 

The S&P Financial index has just moved to new highs for 2016, a fairly important move technically given the amount of consolidation at recent highs since mid-April.  This exceeds the entire downtrend from 2015 and suggests further gains and likely outperformance from the Financial sector which is directly coinciding with yields starting to turn higher.  For now, until 10yr yields get above 1.80%, the rally could prove short-lived.  However, this does appear to be one of the more significant technical developments in the last week and is seen as constructive for this sector and for the broader market in the near-term.

 

 

Financials vs SPX has made sufficient progress in relative terms to SPX to think that further near-term gains can happen when looking at both S&P Financials and XLF vs the SPX.  The broader downtrend from last year still hits a bit above current levels, so its important to note that last week's outperformance sets the stage for short-term strength only, with a move back above this long-term downtrend necessary for a larger move.  For now, Financials should be overweighted between now and early September as a result of last week's advance.

 

 

The SPDR S&P Banks ETF, or KBE, made a similar breakout as the S&P Financials in exceeding the entire downtrend from 2015 which had already been tested once before nearly three months ago.  The act of getting above both July highs as well as the minor downtrend from late last year is seen as a positive and should allow KBE to continue up to $34 to test prior month's highs, if not exceed this level. 

 

The ratio of KRE to KBE looks to be stabilizing after its breakout above late November/December highs followed by consolidation in the last month.  The act of holding losses right near prior peaks is seen as a good sign, and now KRE has shown initial signs of trying to move back higher.  Given the bullish structure in this ratio since late last year, one should still consider Regionals as a good technical bet vs the Banks ETF, and favor this group for relative outperformance within the Financial sector.

 

 

Broker Dealer stocks have made sharp gains relative to the broader XLF in recent weeks breaking above the initial downtrend from last year and look poised to show further outperformance at this point which could challenge the trend from last June.  For now, stocks like GS, and MS both look poised to accelerate in the weeks ahead, and are challenging areas of resistance that likely will give way given the recent action in the XLF, KBE, KRE and IAI. 

 

 

Equity Put/call ratio is one of the few things suggesting a cautionary stance when considering "chasing" this rally back to new highs, as this ratio is testing lows of the year and beginning to show evidence of real complacency.  At .52,  we're seeing nearly 2 calls being bought for every put in the Equity space and the move back down to extremes of the year is a little discomforting from a sentiment perspective when considering that most are witnessing this rise to new highs and are taking it much more seriously than what was seen a few months ago.  From a contrarian perspective, this move back to new lows is a minor concern, for now.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Equities avoid Treasury yield, US Dollar selloff, for now

August 1, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2151-3, 2139-43, 2119-20, 2096    Support
2175-6, 2183-5                               Resistance

 

S&P has pushed back to the highs of its consolidation since mid-July and given that other indices like MID have just broken out, this very well could hit new highs early this week before any peak

 

Key Takeaways

US Equity consolidation looks to give way to one final thrust higher into mid-to-late August before seasonally bearish tendencies take hold.  Last week brought about a few more new highs in US indices, while others still lie near key resistance and have not made this same move.  The S&P 500's advance to new highs last month was just joined by the S&P Mid-cap index last week, while the Bloomberg World index moved to its highest levels of the year, up to previous highs hit last November/December.  Yet the NASDAQ has not yet moved to new highs, and similar to European indices, have just reached prior peaks, which suggests consolidation as opposed to imminent acceleration.  Meanwhile the DJ Transports and Russell remain well below all-time high territory.  Near-term, the SPX cash and Futures have been consolidating for 10-12 days, but have pushed back to the highs of this range yet have not officially broken out like what happened to the Mid-caps last week, which made a more bullish technical move.   Bottom line, given a choice between being bullish or bearish for this coming week, the bullish view seems correct given the breakouts in the World index and Mid-caps while momentum and breadth remain in relatively good shape.

Breadth and momentum remain supportive of stocks, along with the fact that bond yields continue to fall, making equities relatively more attractive.  The Advance/Decline remains at new all-time highs, while McClellan's Summation index has not fallen meaningfully from highs registered at/around 7/22.  Momentum indicators like MACD still reflect positively sloping trends on daily and weekly charts, while there remain nearly 75% of stocks above their 50-day moving average. This 10-day consolidation in SPX prices has seen momentum consolidate a bit, but breadth has not dropped off too sharply.  Seeing the Percentage of stocks trading above their 10-day moving average drop off from the mid-90s to mid-50s while the percentage trading above their 50-day has remained high is seen as a good sign, as near-term overbought conditions have lessened in the past two weeks.

Sector-wise, we've seen a lot more evidence of rotation than the broader indices might suggest.  Semiconductors broke out to the highest levels in over 15 years as Technology enjoyed stellar performance for July.  Additionally, the falling yields helped the Real Estate ETF, VNQ, break out to new all-time highs.  Small caps also have fared relatively well over the past couple months, as relative charts of RTY vs SPX have moved back to new highs for the year.  All three of this year's worst sectors heading into July have improved their standing considerably as Technology, Healthcare and Materials have popped while even groups like Financials and Consumer Discretionary have made some progress.  Meanwhile WTI Crude's decline has had a detrimental effect on Energy, with July proving to be the worst month outside of February for this sector, dragging down performance for the year to the 3rd best, given July's -1.12% return.  Overall, some definite evidence of mean reversion at work, with the largely defensive rally from February into May giving way to some definite stellar performance in some risk-on sectors.

Bonds have begun to trend higher along with stocks over the last few days.  The near-term breakout in 10s, 30s which mirrored some European gains (Bunds) failed to help the Defensive Utilities make a stand, which along with Telecomm and Staples, were some of the worst groups performance wise, outside of Energy.  Treasuries still look to have upside which could bring 10year yields back down to 1.35-6 in the days ahead.  The 1.45% level had been picked out previously as being possible, but given that yields have trended down this sharply in recent days, this target was reached too quickly, while time does not yet seem to have lined up for a low in Yields.  Thus, additional downward pressure should happen this coming week, which should help TLT, to the detriment of TBT, and Financials should be eyed carefully for signs of rolling over.

Seasonally speaking, equities are entering a bearish period which starts with the month of August.  While this month is not as negative as September going back over the last 50-100 years, it HAS been the worst month in the last two decades, averaging -1.3%, far surpassing September's -0.7% drawdown.  Given that S&P finished July on a particularly strong note, higher by 2.8% while sentiment has improved, understandably, this combination of Divergences among the indices at new highs with lofty sentiment heading into a seasonally weak time is worth being a bit more selective and keeping stops tight.  Swinging for the fences is no longer apropos, and hitting singles makes more sense entering August.


Short-term Thoughts (3-5 days) :  Bullish-  Still tough to make that much of a case for outsized gains between now and the end of August, but over the next few days, the action in Mid-caps moving back to new high territory along with Bloomberg World index making a minor breakout to new 2016 highs could help the S&P to extend its gains up to 2183-5 area while NASDAQ tests last July's highs at 5231, just around 1.3% higher before stalling out.  For this week, gains in Gold stocks, Technology, Consumer Discretionary and Healthcare are favored over the Defensive groups.  For S&P, Until 2159 is breached in SPX cash, 2152 for September Futures, it's more likely that this consolidation in SPX leads higher initially.


Intermediate-term Thoughts (2-3 months): Bearish-  The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.

 



Absolute and relative charts of SPX, MID, TNX, BWORLD, USDJPY, Gold, DXY, VIX, OIH/SPX, XLY/XLP, MSH/SPX and VNQ.  Some of these when looked at together provide an excellent framework for piecing together some of the recent volatility and what could be in store.

 


S&P Mid-cap index-  The push back to new all-time highs is a bullish development which should help Mid-caps make some progress that Large-caps achieved back in early July with the move to new all-time highs in SPX.  While the S&P Small-cap index has not yet made a similar move, this move in mid-Caps likely delays any impending market correction as former resistance from last year has now been exceeded in both Large-caps and Mid-caps as of late last week.
 


Bloomberg World index, (when shown in multi-currency terms, and removing the US Dollar index as the sole currency, ) has moved above longer-term trendline resistance extending back from mid-2015 that looks to be a positive development, given that prices have hit the highest levels since last year.  Last week's move to multi-month highs, along with the Mid-cap index hitting new all-time highs, both seem bullish for the near-term technical picture.


 

 

Ten-year Treasury yields made a much more pronounced move last week than anything seen in Equities, with Yields snapping initial support and pulling back to initial support near 1.45%.  The near-term trend is bearish for Yields, (bullish for Treasuries) and any backup attempt into late Monday/Tuesday should be used to buy Treasuries, thinking that yields pullback further, and have the potential to reach 1.35 before things stabilize.
 

 

DXY- The US Dollar index also fell hard last week, similar to Treasury yields, as the Fed meeting failed to instill much confidence on the prospects of US growth.  The BOJ, meanwhile, restrained itself from following through on taking rates even more negative, something that many later proclaimed as wise following signs of inaction by both ECB and BOE lately.  This Dollar weakness served to spur on Emerging markets and helped precious metals rally last week.  While the near-term trend has turned down for the US Dollar index after a failed breakout attempt, weakness shouldn't prove too extreme before this turns back higher with maximum support down near 94.

 

 

The Japanese Yen spike vs US Dollar, when shown in USDJPY terms above, highlights the failed rally above 107.50 which turned down post BOJ meeting last week, keeping the idea of Yen weakness still very much on the back burner, for now.  This surge in the Yen thus far has failed to take stocks lower, but is something to keep an eye on carefully given that prior spikes in Treasuries, Yen, while WTI Crude is falling have been detrimental to equities pushing higher.  Downside in this case is likely limited to near 100 before this turns back up.  Any move back over 107.50 would be seen as a huge positive for this USDJPY chart. 

 

 

Gold looks attractive technically given its failed breakdown attempt from 1375 which got down as low as 1312 near this trend from late May before turning back higher.  For now the bias is for Gold to push up further to test 1375, which if surpassed, would allow for a sharp move back to 1485-1500 into this Fall.  Conversely, any decline back under 1312 would postpone the rally and suggest a far more bearish picture for Gold in the months ahead, which would likely involve the US Dollar embarking on a sharp move higher.  For now, with US Dollar having broken down over the last two weeks, the precious metals have regained some life, and the path of least resistance heading into a strong seasonal time for the Metals, is higher.

 

 

The CBOE Volatility Index, or VIX still looks likely to pullback to new low territory for the year given various breakouts happening in indices such as the SPX, MID while others are getting very close to new all-time highs.   For those searching for a move higher in implied volatility, it's tough to break down under mid-July lows without expecting a possible move down to 10, which would be an excellent area to buy Vol for the next few months.  We've begun to see a steepening in VIX futures when going out 3-6 months on the curve, but VIX at just under 12 hasn't signaled enough to think that lows in implied volatility is here.

 

 

The REITS, as shown by VNQ, have moved back to new all-time high territory in the last few weeks given Treasury yields pulling back hard to 1.45 (TNX).  While the REIT complex is made up of several very different areas, the VNQ moving back to new highs after having consolidated for over a year is definitely seen as bullish technically.  The move to test 2007 highs failed initially in 2015 before leading to nearly a year of sideways motion until last month's surge back to new highs.  This "Cup and Handle" pattern traditionally can lead to follow-through higher, and looks relatively more attractive to own than the Utilities.

 

 

Technology  vs SPX has advanced back to new monthly highs in the month of July, surpassing early June highs and breaking out above a longer-term downtrend in the process.  Semiconductors were a key part of this rally, as the SOX reached the highest levels since 2000 while AAPL made a sharp rally back to near 105 just in the last couple weeks.  This goes a long way towards showing the degree that Technology is starting to outpace the broader market.  Furthermore, when looking in relative terms, the pullback into early July proved to be a key time to buy dips in Tech given relative charts vs SPX getting down to make-or-break levels.

 

 

Consumer Discretionary vs Consumer Staples-  Another interesting development in recent weeks concerns the degree to which XLY has moved back up above trendline resistance vs XLP, which had to do with both Retail outperformance in Discretionary, along with Food/Beverage and Tobacco names starting to underperform last week. This ratio just exceeded its important downtrend from last November 2015 highs, which is a key part of the equation to demonstrate how many Defensive sectors are now falling by the wayside as "risk-on" sectors like Technology, Consumer Discretionary and Healthcare start to work.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Energy turning back lower relatively speaking after early year outperformance

July 25, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2139-43, 2119-20, 2096, 2075-7    Support
2175-6, 2183-5                  Resistance

 

S&P remains in near-term consolidation mode following its steep run-up from late June.  The minor flag pattern thus far argues for a bit more strength into early next week before reversing.

 

Key Takeaways

US Equity Rally has given way to consolidation- Final upward thrust possible to SP-2185, but upside looks limited.   Still no evidence of near-term technical deterioration that would argue for a short directional bias, but the sideways range over the last seven trading days has caused some flattening in momentum from severe overbought levels and still suggests that upside gains from here should prove limited.    S&P's gains from mid-June have consolidated now for nearly two weeks after the initial steep run-up, which has helped to alleviate some of the severe overbought conditions, while not really showing much evidence of any pullback.  This move back to new all-time high territory for S&P, and DJIA has still not been followed by the NDX, nor the Small and Mid-cap indices, as gauged by SML, MID still resting near prior all-time highs.  NDX remains near prior highs from last year, while other laggard indices like the DJ Transportation Avg, or Russell 2000 index remain far off these highs to the tune of 10-15%.    At present, S&P remains nearly 2 standard deviations above its 50-day moving average, while more than 86% of SPX stocks are trading above that same 50-day moving average. Traditional momentum gauges such as RSI have neared overbought territory on daily charts, while weekly and monthly charts are showing RSI readings in the high 60's.

Bond yields and USD/JPY, which BOTH rallied along with Stocks, now stalling out.  Important to watch-    Bond yields and USDJPY both rallied during the same last few weeks as Equities, and both have shown evidence of stalling out in the near-term at areas of key trendline resistance.  Given that bond yields turned down sharply in a manner that led to equities following suit, and then rallied in the last couple weeks while Equities also bounced, it's noteworthy that bond yields both in US and in Germany look to be near key resistance.   Given the historical positive correlations between both TNX, USDJPY and SPX, a pullback in the next week could coincide with equities weakening as well.  For now, patterns in most Equity indices show evidence of slowing down at or near prior highs (NDX, CCMP, SML, MID, while Equity ETFs like XLI, XLY, XLE, XLB all encountered resistance near prior peaks of some sort. )  While this doesn't necessitate a strong reversal to give back all of the recent gains, it does suggest consolidation and/or a good possibility of a minor reversal in the week ahead, which would create a noticeable headwind for Equities.  In addition, pullbacks in TNX would be detrimental for the Financial space, which could give back some of its recent gains, both in the US and in Europe.

Sentiment has quickly turned from bearish to bullish in the last month.  Gauges like DSI (Daily sentiment index) now show readings in the high 80's, CNN's Fear and Greed index also show the high 80s' (Extreme Greed) while Investors Intelligence and AAII polls have continued to widen out in their percentages of Bulls vs Bears.  Finally , Equity put/call readings dropped down from over 1 back in late June to under 0.60 last week, while the 10-day moving average of the Equity put/call remains under 0.60 which represents the lowest readings since last Spring, directly proceeding the market peak. VIX readings at 12 are an additional concern, given that not too much has happened to erase the uncertainty that was present a month ago, outside of a small improvement in Economic data.  (Certainly very little changed in most Macro data, and not enough to suggest a 50% drop in implied volatility in the thick of earnings season.)  VIX futures data shows a fairly steep curve right now between front month and 3-6 month VIX futures, and often pinpoints times when Spot Implied volatility is too low.

Sector-wise, the improvements in Technology, Healthcare and Consumer Discretionary last week were certainly constructive, while Energy continued to lag all other nine S&P sectors given the drop in WTI Crude oil.   Just in the last couple days, a few meaningful developments in that Utilities and Telecom began to show strength, despite any significant pullback in either Equities or Treasury yields, while Transportation index declines in Airlines weighed down Industrials, and Energy showed further signs of breaking down.   With regards to Utilities, this group looks ripe to bounce in the weeks ahead technically speaking when viewing this sector relative to the SPX

This week's report will concentrate on the recent woes in Energy, a group which has lagged all other nine sectors over the past month, and which showed evidence of weakening further last Friday given the breakdown in Crude oil under $45, while OIH violated key trendline support vs the SPX in relative terms.  Given that the US Dollar's gains look likely to continue in the short run technically, (which has already begun to adversely affect commodities) further near-term weakness looks possible for Energy as WTI Crude continues its recent pullback, and underweighting the Oil Services and Exploration and Production stocks looks right in the short run.

Within Energy, there are a few points to remember technically speaking.  First, despite there having been minimal damage to the trend from January lows in the rally in either XLE, or OIH, the intermediate-term trend from 2014 highs remains very much broken with the rally in the last six months barely having made a dent in the decline over the last couple years.  In the case of OIH, our six month bounce recouped less than 30% of the prior decline.  Additionally, the breakdown which occurred was relative in nature vs the SPX, which occurred last week on a violation of key trendline support vs SPX.  Often these can lead to declines on an absolute basis of the trend, and are worth monitoring.  In the case of Energy, it's been the third best sector on a YTD basis, with 14.36% gains, while the worst performing sector over the last month, returning a paltry 1.06% (S&P 500 Energy index) vs S&P gains of nearly 4.5%.  Even on a three month basis, this has lagged all other sectors except Financials.  This goes a long way towards showing how the majority of this year's outperformance really happened between late January and May.

Oil Service stocks look to have begun to deteriorate on a much quicker basis than Integrated and E&P names, which might be expected.  However, Equipment and Service names still are showing much better strength than the Refiners, and that looks to last another 2-3 months before this reverses time-wise.  The Refiners have underperformed nearly all other parts of energy this year, and thus far, while now getting stretched to the downside, don't yet appear to be at lows.  Shorting these names looks like a poor risk/reward, but buying also looks a bit premature.  With regards to E&Ps, Exploration and Production stocks have shown signs of weakening vs the broader energy space right near when Crude turned down in June.  For now, these also should underperform within Energy as this underperformance continues.  The Drilling group also looks quite weak and never made sufficient progress as a sub-sector to warrant favoring these stocks for anything more than a bounce. 

Comparing Energy to other sectors, technicals show that most of the sectors are preferred over Energy, with Healthcare and Technology turning up sharply in recent weeks, and even Utilities looks like a better bet.  Overall, while this sector had experienced a nice bounce into the Spring, it's important to be more selective than ever within Energy, and while it ranks third out of all sectors for 2016 performance, Energy still looks very much like a laggard vs many of the other top sectors, and has just turned down vs the broader market as a whole in the last couple weeks.


Short-term Thoughts (3-5 days) :  Neutral- While upside might prove limited with nearly 90% of issues now above their 50-day ma, the pattern on a short-term basis still isn't all that negative, and resembles a flag formation on E-mini S&P charts which could give way to one final push up to 2180-5.  However, the neutral ranking for the next week concerns many of the other indices, such as the S&P Mid-cap and Small-cap index, both of which are pinned near former highs, while NDX is also right up near prior highs now.  It's doubtful that indices breakout en-masse and show a huge upside acceleration given sentiment levels combined with near-term overbought conditions. Extreme selectivity looks to be required over the next few weeks, using rallies to take profits and concentrate on stocks with attractive technical patterns while utilizing tight stops.

Intermediate-term Thoughts (2-3 months): Bullish- Last Week's breakout to new high territory for SPX likely should soon be followed by other indices such as DJIA while NDX, CCMP should push up to test former all-time highs from last year.   While the ongoing lagging in Transports and Small caps is a concern, as these remain 10-15% from all-time highs and similarly, most of the world remains well off all-time highs, it's right to stick with US stocks until some evidence of counter-trend sells arise or breadth starts to falter meaningfully in a way that would lead to a top in stocks.  Both daily and weekly momentum as per MACD are positively sloped, while monthly is sloping upward and close to turning back positive for the first time since early 2015.  Bottom line, with Advance/Decline at new highs, it's difficult to fade the market, and the lagging sectors have all started to bounce in a way that should lead to some mean reversion in these sectors.  Key cycle dates for trend change lie in late August, and very well could lead to a peak in stocks, but for now, it's right to stick with this trend on an intermediate-term basis until ample signs of weakness arise.  The other concern is that given the degree of deterioration in momentum last year into those August lows, even this push to new highs won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks probable with key targets at 2180-5 and then 2250.

 


Energy-  Sector Charts on Absolute/relative Basis, along with 3 Stocks to avoid/short.    The early year outperformance in Energy looks to have run its course-  Extreme selectivity needed for the months ahead.
 

 

 

 


WTI Crude- Bearish down to 42.75 near-term-  Last week's pullback slipped back under early June as well as May lows, violating the 38.2% retracement that had held Crude intact over the last month, not to mention its 200-day moving average.   While it was possible to make the case that Crude really hadn't shown too much technical damage from its January lows, last week changed that with the decline back under $45.  Given the bearish inventory data and the near-term downward acceleration in price, it's likely that WTI experiences a bit more downside to the 50% retracement of its January-June rally, or near 42.75.
 

Energy relative to the SPX, as seen by ratio charts of OIH to SPX, has just broken down under the entire uptrend line since January as of the last week.  Energy had already been the weakest sector over the last month, and this violation of the uptrend likely could cause this underperformance to grow larger in the next few weeks.   Just as WTI Crude should have some good support down near $42.75, or around $1 lower, Energy looks to show further near-term underperformance between now and mid-August.  So for now, this sector should be avoided and extreme selectivity is needed when buying into Energy.  

 

Oil Services index (OIH- $28.58)  While the relative trend has broken down, the actual OIH trend in absolute terms remains intact at this time, but should be watched carefully for signs of trend violation.   Violations of $28 should lead to a test of June lows at $27.15, with little under that level until $25.50.  Breaks of June lows would be a larger signal that a much deeper retracement could happen to this rally from January.  On the ability of OIH to get back over $30.15, made on 7/12, that would go along ways towards thinking pullbacks should be postponed.  For now, the relative price action is a distinct warning to a breakdown of OIH on an absolute basis.
 

 

XLE/OIH-  XLE favored over OIH-  While some Integrated stocks like XOM have shown very good outperformance already in the last few months, its the deterioration in Drillers and other service stocks that have caused this ratio to turn up more sharply in recent weeks.  After last week's breakout to new multi-week highs in XLE to OIH, it's likely that this ratio continues showing good near-term strength, which favors XLE vs OIH, the latter which broke down in bigger fashion vs the broader market given last week's decline in ESV, RDC, DO, NBL, RIG, and HP all of which declined more than 5% on the week.

 

EQUPVREF.gif

Equipment & Service Stocks Relative to Refiners-     Equipment and Services continues to look attractive vs the Refiners, which have lagged all year and continue to show huge underperformance vs the rest of Energy.  Two of the top refining stocks, TSO and VLO, are this year's worst performing issues within the XLE, down 29.46% and 28.04% respectively in data through 7/22/16.  While Refiners have now gotten stretched to the downside, it's premature to try to buy dips in these, and for now, this ratio of Equipment and Services remains upward sloping.  A trend violation in the relative chart of Equipment & Services vs Refiners would argue to exit OIH in favor of stocks like TSO and VLO for energy exposure, which for now, still looks premature.

 

The Exploration and Production stocks made a sharp bounce vs all of Energy into around May of this year, before turning down in the last month.  As this chart shows, this bounce barely recouped any of the prior decline and still looks like it needs to pullback in the weeks ahead after just brief progress.  The weekly chart of E&Ps vs all of Energy remains in poor technical shape, with the bounce barely recouping 40% of the prior decline.  The rollover over the last couple weeks has helped to turn the intermediate-term trend back to negative, and should result in another 3-4 weeks of underperformance out of this sub-sector before any kind of stabilization.  The XOP ETF therefore likely should be underweighted vs all of Energy until this relative chart begins to show better signs of strength and true bottoming out.

 

Healthcare vs Energyhas made encouraging progress in relative terms as might be expected with Crude turning lower and Energy lagging all other sectors in the last month.  The relative chart of XLV vs XLE shows a stellar technical rounding bottom pattern in place since early this year, suggesting that Healthcare should continue to be a better relative area to show outperformance vs Energy.  This ratio has just hit the highest levels since early April, but this bottoming formation is likely to result in better outperformance in the months ahead for Healthcare vs Energy.

 

National Oilwell Varco (NOV- $32.25) The multiple stabs higher in NOV which have failed over the last few months are telling as to the ongoing weak structure of this stock.  Each of the rally attempts since February resulted in only minor gains before a deep retracement, which has been far more damaging than constructive when thinking this stock could be bottoming.  Movement back down under this mild uptrend is likely in the months ahead, which would get a jumpstart after testing and breaching June lows, just north of $30.  Overall, NOV has been a chronic underperformer since Energy bottomed in January and remains one of the worst performing stocks with YTD performance of -3.70%, putting this in the bottom tier of performance.  Overall, given the breakdown in WTI of late, it's likely this should continue to lag, and likely breakdown to support near $28.50 in the months ahead before any serious attempt at bottoming.

 

 

Diamond Offshore Drilling Inc (DO- $23.52) DO has begun to drop off noticeably over the last month, one of the worst performing stocks in all of Energy with a -7.84% in the rolling 30-day period through 7/22/16.  The break of the uptrend from January gave way to some sideways trading over the last few months before last week's breakdown to the lowest levels since Spring.  Technically speaking, DO peaked out right at the edge of its Weekly Ichimoku Cloud in the last month, a strong area of upside resistance.  While the stock has already given up $3 since mid-July, or over 10% in the last couple weeks, the pattern suggests that DO is rolling over after its near 80% rally from January lows.  Any bounce attempt in the next 1-2 weeks should be an opportunity to take profits on longs, or consider shorts for aggressive traders for a technical move down to near $20.25 in the months ahead.  For now, this recent momentum downturn along with structural weakness look to be key reasons to avoid this stock technically, despite the extent of the recent weakness.

 

Murphy Oil Corp. (MUR- $29.02) MUR has begun to show increasing signs of underperformance which began nearly three months ago and has continued in recent weeks.  It ranks the third worst performer of any of the Energy names through 7/22 on a one-month basis with -8.08% returns, and is likely to retrace at least half of its rally from January lows, which would target $25.89.  Some might view this pattern as being more of a consolidation type structure from April peaks, but last week's decline should allow for at least a test of the bottom of this range, which would allow for a pullback down to $27.31.  Weekly charts show MUR stalling right near the declining Ichimoku Cloud which was also present as a source of resistance for DO, above.  For now, this remains a huge near-term laggard, and Crude's breakdown is not likely to suggest any stabilization in the short run.  Additional underperformance looks likely, and this should be avoided until/unless it can manage to reclaim $33.35, which looks unlikely for now.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.