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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.

 

 

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