October 15, 2018
S&P 500 Cash Index
2729-31, 2710-1, 2690-2, 2633-5 Support
2775-7, 2825, 2852, 2940 Resistance
Summary: Equities remain trending down from mid-September as part of the intermediate-term uptrend from 2016 and 2009. While the downdraft was particularly severe last week, livng up to October's reputation as a volatile month, it failed to do much damage to the long-term trends. Thus, this is considered short-term only in nature as of now. Momentum, however, has seen some damage as a result of the recent pullback when looking at weekly charts, with MACD crossing the signal line and turning negative. Daily momentum meanwhile reached the lowest levels of oversold territory of the year and has started to diverge positively on hourly charts (a good signal for Bulls) Arguably, last week's pullback never really gave the old fashioned "fear-based" BUY signal, as markets witnessed no real evidence of volume capitulation on the downside, nor outsized Equity Put/call readings. Thus, it remains a tough market near-term to have much conviction that any low into mid-October is sustainable. Seasonality argues for a sharp rally into most mid-term Election periods in early November. Yet, seasonality this year has been remarkably unpredictable with better than average August and September performance while Q4 has gotten off to a much worse start than normal. Overall, there stands a good likelihood that we haven't seen the last of the volatilty this year, and it pays to monitor the sector rotation carefully for evidence that Technology and Financials can begin to make a more sustainable comeback after recent weakness. Bottom line, Long-term trends are fine, but some definite signs that markets could be entering a new stage, with momentum and growth rolling over as the search for new leadership has begun. Failure to mount a strong rally in the weeks ahead that turns down to challenge last week's lows would be a mild concern. Yet until the long-term trends are broken, this should remain a dip to buy into, as oversold conditions as part of long-term uptrends give way to opportunity near-term.
Overview: Has the Market peaked for the year? What are the risks? I think this week's Barron's sums up my feelings perfectly with the title "The Easy part is now Over for the stock market. I'm still of the opinion that stocks can likely make it back to new highs, even if the decline has a bit more to work out before bottoming. Historically, the combination of near-term oversold levels coinciding with intermediate-term uptrends typically presents a compelling risk/reward to try to buy dips. As mentioned above, however, the drop-off in weekly and monthly momentum presents a bit of a difficult scenario for how the future of this rally could play out. This is a crucial distinction which is often lost on most market participants which hear the media claim "oversold" and think that translates into a buy signal. Unfortunately this is often not the case, as oversold can stay oversold for quite some time, similar to how overbought conditions rarely lead to an immediate snapback. Putting the various timeframes into perspective makes this a bit easier to get a handle on. Looking at current markets, it's true that momentum has gotten oversold on daily and intra-day charts. However, weekly and monthly are nowhere near oversold (Very different being oversold here in October 2018 than being oversold in March 2009 when all time frames were oversold) Let's not forget that back in January, weekly and monthly momentum got to the highest overbought readings on those timeframes than we had seen in months, if not years. Thus, rampant near-term oversold conditions now might not be a positive for stocks, if the weekly and monthly momentum start to trend down sharply. They very likely could coincide with a breakdown which should give rise to selling opportunities in the weeks ahead. For now, the combination of negatively sloped momentum with an ongoing uptrend tend to still favor the uptrend vs trying to be bearish when prices are down near weekly uptrend line support. (But often this means it's necessary to rally sharply in a broad-based manner or else the bounce would be vulnerable to failing.) Overall, let's take a moment and review the recent technical warning signs that were in place coinciding with this market decline and then a list of what's present now.
Warning Signs- While many blamed Tariffs towards China for the decline, as earnings and economic data failed to show much disappointment, the push up in Treasury yields was the most direct technical catalyst that happened the day that stock indices broke down. While many were shocked at the degree of the pullback last week, this type of market weakness is quite common during most years (Losing 5% over a two-day period) But for those paying attention, there were ample signs that it was right to continue to be defensive heading into October. Some of these warning signs (which we've discussed in the Weekly Technical Perspective for the last two months) are mentioned below, for the benefit of new subscribers and to refresh one's memory as to truly what was happening technically that could have started this.
1) Market breadth peaked in late August- NYSE "All stocks" advance/decline along with Summation index both moved steadily lower throughout September
2) Divergences between US stocks and the rest of the world started to widen materially in August/September
3) Technology underperformance- This proved to be the true technical catalyst (25% of SPX) and peaked relatively in June and has lagged over the last few months with Semiconductor weakness particularly troublesome
4) Defensive outperformance - Looking back one month ago, Utilities had outperformed both Financials and industrials Year-to-date while showing better one-week performance vs Technology
5) Sentiment indicators like Investors Intelligence widened out to a Bull/Bear spread of +40 heading into September which largely persisted the entire month (Stock indices peaked 9/21)
6) Stocks hitting new 52-week highs began to steadily drop off, but became particularly pronounced right before the early October part of the Decline, with stocks hitting new 52-week lows expanding to a greater number than New highs.
7) Negative momentum divergence on daily charts of SPX, DJIA, NASDAQ- Prices had pushed back to new highs, yet momentum was lower and had failed to keep up pace
8) VIX diverged positively with the higher lows in September and early October failing to fall to new lows even as indices pushed higher
9) Demark's TD Sequential and TD Combo indicator had both signaled exhaustion signs right at the peak where stocks had topped out at 9/21, forming 9-13-9 patterns
10) Trend violation on 10/4. While many of the factors above were in place throughout September, prices had held up in resilient fashion up until 10/4 when S&P, NASDAQ and DJIA all violated three-month uptrends from late June. This was the first real warning sign that price was finally confirming what breadth and momentum had been suggesting for some time.
How do things look now? Let's take stock of where Stock indices are now and what might happen given the recent technical developments.
1) SPX, NASDAQ and DJIA have shown sufficient deterioration to bring about the most oversold conditions for 2018 thus far on Daily charts based on RSI, while Percentage of stocks >10-day moving average fell to 3%. While this isn't enough to suggest buying, it is notable and worth keeping on top of . Weekly and monthly obviously are nowhere near oversold.
2) Weekly, intermediate-term uptrends are intact for SPX, DJIA and NASDAQ- This is important, as the daily deterioration has not been sufficient thus far to violate the uptrend from 2016.
3) Momentum has rolled over to negative on weekly charts and is showing negative divergence on both a weekly and monthly basis- This is a larger concern, as MACD is negative and has rolled over at a lower level than where peaks were registered back in late January. Former market peaks in 2000 and 2007 both gave initial warning signs by flashing negative divergence as indices peaked out in these years. (But it took the actual long-term trend break before this really was confirmed and mattered)
4) Demark exhaustion is not yet present on the downside to signal a possible low (this is a potential factor that might limit the extent of the rally before a retest. Of course, these signals don't necessarily "need" to occur at bottoms, but they typically do on daily charts after prolonged weakness
5) No evidence of "fear" just yet- While sentiment polls like AAII now show more Bears than bulls (which from a contrarian standpoint is a "plus", we haven't seen Equity put/call ratio spike above 1, nor has the TRIN registered readings over 2, which would be suggestive of volume capitulation on the downside. Often near market bottoms, e see an abnormally high level of volume to the downside vs upside. (both early February and April showed high TRIN readings) (Meanwhile, right during the initial part of this month's decline, we saw abnormally LOW TRIN readings of .49 on 10/4, the day of the market break) while 10/8 showed .46, the lowest reading of the year)
6) VIX Backwardation- Normally markets will show SPOT VIX trading well above 2nd and 3rd month VIX when the Equity market is close to a bottom. This can often persist for a period of time, but important to note when this has begun.
6) Equal-weight Technology has broken down under two-year trendline support, indicating an important shift out of Technology, which at 25+% of the SPX, is troublesome. Some other sectors will need to rush to take the place of Tech if this market is going to make a bounce of any magnitude. Financials and Industrials have been weakening lately, not strengthening, but Healthcare could be up for the task.
7) Growth has shown evidence of rolling over vs Value which began in early October. The ratio of IVW to IVE, the Growth vs Value ETF, broke uptrend lines going back since April which looked to directly coincide with Technology rolling over in bigger fashion.
8) Small caps and Mid-cap stocks have both been weakening meaningfully since June which is right when Technology peaked out. Both the Russell 2000 and S&P Small-cap 600 index and Mid-Cap 400 index peaked out relatively vs SPX in June and have weakened to the lowest levels in the last two years. This might be the start of the splintering of this rally longer-term, as historically we see Small caps and mid-caps start to weaken ahead of larger market peaks, where the Large-caps are the last group to fall.
9) Treasury yields have officially broken out on the long end from long-term trend channels which have been in place for Bond yields since the mid-90s and have occurred globally, not just in the US. This looks like an important development. Whether or not Financials follows the move in Yields will be particularly significant in the months ahead.
10) The US Dollar seems to be turning back lower which has sparked a breakout in many commodities and should coincide with the start of a larger bounce in Emerging markets in the weeks ahead.
This last topic is the basis for this week's writeup on the Chinese Internet names, as many have sold off sharply, irrespective to the companies fundamentals, and many are just reaching areas of support that make their stocks interesting from a risk/reward basis for buying dips. Most of the stocks below exhibit the same pattern of having gotten very overbought, then correcting 30-50% off those highs to meaningful intermediate-term trendlines. Near-term these are oversold, but yet one can argue the stocks have held longer-term trends and this makes them attractive to consider.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Mildly bearish- It's thought that a bottoming process has begun, but still could allow for a minor pullback to new lows- 2690-5 area which might allow volume to show more capitulatory traits and allow Demark exhaustion to be completed before the rally gets underway. However, the drying up in negative breadth is a positive lately, so any pullback at this point should be a chance to cut shorts and consider putting on longs in small size for a rally into the mid-term elections. 2710 is important as Thursday's low and if broken would likely allow for q quick 10-15 points before stabilizing. Look to start adding longs and use any weakness this week to consider adding more longs, as this recent selloff likely should be nearly complete.
Intermediate-term (3-5 months)- Bullish- No change- Its thought for now that pullbacks should be buyable as no real intermediate-term weakness has occurred and momentum weakness is short-term only and has not affected the weekly charts. If trend channels from late April are broken (2775-80 in SPX) ahd happen in NASDAQ, DJIA, while weekly momentum starts to rollover, it would be right to expect a larger correction. (From last week: The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle. Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950. Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time. Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months. Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time. However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness. Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest. A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought. For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.
10 Charts of China, relative and absolute and 6 key names to consider within the space
China vs US- When looking at relative performance of China vs US, we see that ratio charts show this relationship to be closing in on what appears to be a very good risk/reward opportunity to be long China for the first time this year. While the breakout in 2017 helped to spark some outperformance, much of this was given back after this ratio peaked and consolidated these gains for most of this year (Indicating relative China weakness. Now momentum has gotten oversold and we've seen the start of some positive momentum divergence just in the last couple weeks for the first time all year. Additionally, Demark's counter-trend exhaustion indicators like TD Sequential and TD Combo are within 2-3 weeks of signaling "buys" which would help to lift this ratio chart and help it start to trend higher. Given that many of these stocks have gotten very oversold (not just like US oversold on daily, but weekly and monthly oversold with losses greater than 20%) it seems like an opportune time to revisit China, thinking that US Dollar weakness likely helps Emerging markets and in turn, helps China to outperform relatively which could be in place by early November.
FXI- The Ishares China Large-cap ETF, looks poised to begin a rally of its own after recent pullbacks in price were not met by similar movement in momentum. While the trend currently is undeniably negative, and breaking trends in the middle part of 2018 turned the trend bearish on this group technically, it looks wise to consider revisiting now given that many have gotten very oversold. Last week's ability to finish the week well up off the lows was a positive sign. Looking forward, regaining $43.63 would be a positive structurally, helping FXI to get back up above September highs. Additionally, this would also break the trendline which has kept this trend bearish most of this year.
Developed vs Emerging markets look to be peaking- Bodes well for EM- Emerging markets very well could be on the verge of a larger comeback if this relative chart of Developed v Emerging is any guide. The ratio chart of MXWO vs MXEF has shown evidence of stalling out right as prices near the highs made in the latter part of 2015. Counter-trend exhaustion is in place, per Demark which has signaled its first weekly TD Sequential sell since this rally got underway shortly following the US Election two years ago. Momentum got overbought, and now is gradually waning and shows RSI having dropped back down under 70 after nearly six months of overbought conditions. This likely can pave the way for Developed markets to give way to relative weakness vs Emerging and could be bullish for China if Emerging market equities and currencies start to lift in the weeks/months ahead. The recent rolling over in the US Dollar seems to be particularly important in coinciding with the recent lift in commodities which has occurred in the last couple weeks. Overall, while just one small piece of the puzzle, the combined warning signals on this ratio chart seem to favor Developed markets starting to pullback vs Emerging and could allow for a greater than normal bounce.
Alibaba (BABA-$147.29) Good risk reward now at trendline support after 35% drop. BABA looks poised to begin stabilizing after its recent 35% drop from highs made earlier this year. Technically speaking we've seen the stock retrace 50% of the prior gains from mid-2016 just in the last week while also reaching levels that line up with a larger area of trendline support. While the downtrend for BABA is very much ongoing on a weekly basis over the last six months, it's important to note that its two-year trend remains positive and the stock has just pulled back to test this area of significance, right near $135. While a serious rebound back over the red downtrend is vital to expecting that bounces turn into an intermediate-term rally and not just a short-lived rebound, it looks right to position long in small size given this confluence of support, looking to add in the weeks ahead on any test of last week's lows near $135, expecting that the stock should be near a formidable level of near-term support which could prove important in helping this establish a good bottom.
Tencent Holdings Ltd. (TCEHY- $37.87) Expect stabilization within this downtrend and a bounce to come. Similar to BABA, TCEHY has had a very tough road this year, falling nearly 43% from early year highs and giving up nearly 70% of the rally from late 2016. Weekly trends are certainly still very much bearish, but momentum has reached oversold levels and have started to show some positive divergence for the first time in nearly seven years. As weekly charts show, this area near where the stock bottomed last week also intersects an uptrend from early 2016 and looks to have provided support to the recent correction. Overall, this will take some time before the trend can truly start to shift from down to up on a weekly basis, but this appears like an excellent risk/reward area to take a stab technically, as the combination of oversold conditions coinciding with multi-year trendline support should help this start to bottom out in the weeks ahead. Movement back over $42 would signify that the rally has begun, and investors could consider adding to longs. On the downside, any pullback to the low $30s in getting back down to test last week's $34 level should be an excellent time to consider buying technically speaking, despite the ongoing downtrend.
Baidu (BIDU- $204.36) Recent drawdowns have taken BIDU down to levels coinciding with the trend from 2016, making this an interesting spot to consider initiating longs for an upcoming rebound. Last week's pullback managed to close up meaningfully off its lows, right near this trendline, while prices generally have given back a bit more than half of the rally from 2015. However, technically the stock's pattern is much more choppy and neutral in the last couple years than many names discussed here which have dropped 50-60% of the rally up from a few years ago. Thus, on rebounds, BIDU could potentially be stronger in its rally efforts. Overall, BIDU's key area of importance lies near 220, and when exceeded, one could add to existing longs, expecting that the downtrend is starting to give way to BIDU starting to trend back higher. On the downside, pullbacks under 190 would be near-term damaging to this trend, but momentum indicators like RSI show the drawdown to have taken this to near oversold territory for the first time since late 2015.
NetEase Inc. (NTES-$220.88) After giving back nearly 50% from its peak early this year, NTES finally looks to be closing in on levels that have importance and could help put in a tradable low for this stock in the weeks ahead. The violation of the steeper uptrend from 2016 caused the acceleration seen most of this year, (It's almost always important when yearly trends of support or resistance are broken) The retracement of recent months has caused this to give back roughly 50% of the prior rally from 2012, so both on an absolute and relative basis, one can make the case that the stock is growing closer to meaningful support. On the downside, it's important that any further weakness not violate 180 which would result in one final pullback down to near $150-5. On the upside, the ability to get over $240 would help this start to trend meaningfully higher, so this is the key area to watch which would exceed the intermediate-term downtrend.
Momo Inc. (MOMO- $37.65) MOMO looks attractive from a risk/reward standpointgiven its near 35% selloff from highs seen back this past Summer. In this case, the stock has held up quite a bit better than some of its peers, which should make this rebound in stronger fashion when this group starts to trend back higher. MOMO's weekly charts show the pullback from June which failed to break the uptrend from 2016 and now the stock looks to be trying to stabilize after last week managed to hold prior lows and rally up to the highs of its weekly range. Overall, a move back up to test highs seems very possible in the months ahead, and MOMO looks appealing to consider buying in small size here technically, with plans on adding on any further pullback to the low 30s. thinking that this is meaningful support which should not be violated anytime soon. Overall, this seems attractive as a risk/reward long given that the stock has held up better than many other Chinese Technology stocks as its held up in the upper quadrant of its range in the last couple years. Meaningful support lies near its uptrend from 2016, near 31.
YY Inc (YY- $73.02) -Minor evidence of stabilization after YY gave back 61.8% of the prior rally from 2016. YY trended sideways for nearly three years before its breakout in mid-2017. This resulted in nearly a quick doubling in price before giving back most of those gains into September. It did find good support near the 50% retracement level near $87 ,and then when broken, proceeded to drop down to the low 70's. Despite the recent pullback to new lows in Shanghai Composite, YY has trended sideways in the last six weeks, giving some indication that its beginning to act a bit better. Rallies back over $78 should help this test and then exceed the former lows broken near $87. Further gains up to $100-5 can't be ruled out, but it will take a move over $110 to think this has begun a new uptrend, as opposed to just bouncing from oversold levels. Weekly closes back under $67 would postpone the rally, and one should hold off on buying weakness, as this could lead down below $60 temporarily before this stabilizes. For now, the act of holding up while China has fallen in the last 2 months makes this one to consider buying into, expecting a snapback rally.