February 27, 2017
S&P MAR FUTURES (SPH7)
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.
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