December 12, 2016
S&P DEC FUTURES (SPZ6)
2144-6, 2218-20, 2200-279-81, 2164-6 Support
2270-2, 2288-3, 3k Resistance
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.
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