March 14, 2016
S&P MAR FUTURES (SPh6)
2000-1, 1982-3, 1968-70, 1937-42 - Support
2035-7, 2040-2, 2046-8, 2074-6- Resistance
Bottom line- It's still very difficult to fade this rally in US Equities technically, and last week's surge back up above former Nov/Dec lows in SPX likely means that even further prices are likely this week before any trend reversal. The near-term trend remains bullish, and while early last week DID show some evidence of stalling out near resistance early on, the ability to get back above highs of the consolidation last Friday at 2008 on above-average breadth should lead to a further continuation up into and likely beyond this week's FOMC meeting.
Last week prices managed to extend the streak of gains to four straight weeks, with S&P recapturing its 50 and 200 day moving averages ("ma"), as the index rallied to recoup nearly 70% of the damage that has been done since last November. When looking at recent price action in the last few weeks, a few things stand out. Short covering has made up a large part of this move, with Materials and energy leading performance over the last month, as commodities have surged on US dollar weakness. In addition, laggard sectors like Transportation and even Small caps have recaptured former lows, and the recent outperformance here also should help to fuel some mean reversion to help fuel these groups for the weeks ahead. Only recently have Financials and Healthcare begun to show strength, while the short covering and defensive stocks have powered higher on decidedly light volume last week. This has given Bears plenty of ammunition to try to fade the rally, for good reason, except for one small fact...Price isn't moving lower..
The skeptics who were waiting for an opportunity for an oversold rally to sell into this move certainly haven't been shy about voicing their bearishness of late, which is also well documented in some of the more popular sentiment polls. Both Investors Intelligence as well as American Association of Individual Investors (AAII) surveys show just fractional differences between bulls and bears, hardly what one would expect after an 11% rally. AAII shows just a 14% percentage difference between Bulls and Bears, and despite having risen from Equal Number of Bulls and Bears three weeks ago, this is still nowhere near levels that would suggest Sentiment is optimistic. Furthermore, the equity Put/call ratio started last week around 0.90, while finishing last week at 0.60. While the 10-day m.a. has dropped to .66, this is still a far cry from levels that would suggest complacency.
Last week i relayed five factors which i felt were important and worth mentioning as to why this rally might continue in the weeks ahead. Given that some Subscribers might not have had the chance to read these, i will repeat below. First, Breadth has exploded in the last few weeks, with the breakout in McClellan's Summation index, McClellan Oscillator readings North of 94%) ,the percentage of Stocks trading above their 50-day MA doubling, while from a momentum standpoint, RSI has reached the highest levels on daily charts in nearly three years. Second, Pessimism still reigns supreme. When looking for extremes in Sentiment brought on by the 11% rally in three weeks, we see little to no evidence that this has affected market sentiment. AAII polls are just barely positive, with Bulls showing a 32% weighting vs Bears at 29.3%. Daily Sentiment index readings also hover in the mid-60s, a far cry from 90% + readings which typically mark tops. Third, Defensive participation looks to be waning, as seen by Utilities turning down this past week (Partly on Rising yield concerns) while Financials have started to gain more traction (along with sub-par groups like Energy and Materials following suit to the Commodity gains) Fourth, broad based indices that had broken down technically under prior lows such as the DJ Transportation Avg. and NY Composite have now reclaimed those former lows, while Russell 2k has reached its own key area. Additionally, European indices like STOXX 600 have broken out from downtrends and have reclaimed former lows, which is a positive. Fifth, seasonally this period remains strongly positive for equities, particularly in the March/April months following a Down January and February (S&P 500) According to Stock Traders Almanac, March tends to be positive, with average gains of 1.68% with April even better, at 1.95%. (However, the year as a whole is typically down an average of 3.63%)
On a personal level, I had a rare chance of escaping down to sunny Florida late last week for the annual AAPTA conference in Jupiter. It was an enjoyable experience for me, not only to escape from Connecticut to Florida during a normally dreary period as winter draws to a close, but a great chance to hear thoughts from fellow professionals like the Options guru Larry McMillan, and Swing trading pro Linda Raschke, along with legends like Walter Deemer who had gotten his start with Bob Farrell back in the 60's.. A true technical analysis pioneer and legend. While trading styles and time frames differed among this crowd, one thing stood true.. Almost all unanimously weighed in negative on the intermediate term prospects given the extent of deterioration that had been seen in the prior months. However, most also noted how sharply near term breadth had exploded higher in just four straight weeks, which looked to be a positive that could help further gains materialize before any pullback. .. According to Larry McMillans work, in the month of March already, Breadth has registered four of the top 20 readings in his proprietary oscillator reading since the 1970's, which i felt was a stunning revelation. So of all the top readings in breadth over the last 40 years, these last few weeks have been strong enough to register four separate readings, which have made the top 20.
In fact, my own studies agree with this sentiment 100%. Other breadth indices which despite being overbought, have moved to very high levels include the Advance/Decline, along with McClellan's Oscillator, and the Breakout in the Summation index, which was mentioned here a few weeks ago. Additionally, when looking at Percentage of stocks trading above their 50 and 200 day Moving averages, (charts shown below), we see that the Percentage trading above their 50-day ma has more than doubled since the January lows. These kind of readings very well could keep this market moving higher at a time when the Fundamental picture might not support it in an environment where many are quick to pull the trigger on selling into this move.
Short-term Thoughts (3-5 day) Bullish- Higher prices look likely into this weeks FOMC, with S&P very well having a chance to move back to and or exceed All time highs before any bear trend reasserts itself. Despite near term overbought conditions and ongoing signs of defensively led rallies, there's still no evidence that stocks look ready to immediately reverse course. Last week's consolidation proved brief before prices broke back out again to the upside to finish the week up more than 1%, the fourth straight week of gains. The recent surge in breadth has defied expectations for most market participants, and remains a stubborn reminder that despite the defensive bias and Laggard led recovery of late, it remains prudent to stay with this existing rally until some evidence arises to suggest prices are beginning to peak out again. While prices reached overbought territory on Hourly charts last week given the extent of Friday's move, pullbacks in the next few days likely shouldn't get down under 2000 and should be used to buy, thinking that damage should let prove minimal and upside to last November/December or even May 2015 highs can happen before any stall out occurs.. targets lie near 2135, still roughly 5% above current levels.
Intermediate-term Thoughts (6-8 Months): Bearish-Despite the improvements in breadth suggesting that rallies likely can take indices ever higher on a 2-3 month basis, it will be very difficult to erase the downturn in momentum which started over a year ago and has accelerated on the pullback into last August's lows as well as into February of this year. Indices like the Russell 2000 have not yet moved back up above former August lows, while the broader Bloomberg World index along with the NY Composite still show this rally to be a counter-trend bounce, structurally speaking. The selectivity of this market which caused Small-caps to turn down nearly two years ago followed by Mid-caps and then Large hasn't been dramatically reversed by the sharp rally of the past three weeks, and markets are still well overdue for a 20% correction which normally follows long bull markets which begin to rollover, similar to what we saw back in 2000 and 2007. Historically, drawdowns average 40-50% after lengthy rallies, like markets experienced from 2009-2015. Overall, given the extent of the momentum downturn, along with the structural weakness, gains into late Spring should be used to pare back longs with the idea that intermediate-term weakness between June-September/October remains very likely.
Below i'll highlight some of the charts that make up some of these very sharply positive breadth readings, along with the SPX, and some of the other assets which continue to correlate well with SPX such as USDJPY, WTI Crude, and 10-Year Treasury yields.
S&P's rally has now recouped about 70% of the prior Drawdown, while getting back above former lows which were thought to be important as resistance on the first retest. (See horizontal line above) While NDX lies below similar levels, it appears likely that additional gains can occur to 2040-3 area at a minimum, with an increasing likelihood of a test of November highs in the weeks/month ahead. Breaks of this uptrend, or at least a close beneath ifs 5-day ma, (currently at 1997) with last Thursday's intra-day lows of 1967 also being important. For now the breadth explosion coupled with the lack of stalling out near key levels likely can allow this move to continue.
S&P when viewed on an hourly basis since the end of February has continued upward in this steady pattern of higher highs and higher lows. While the consolidation last week was thought to have the potential to turn down, the pullback managed to hold the lower edge of the channel while moving back up to new highs. This makes the near-term a bit more positive in thinking higher prices are likely before this stalls out. The upper edge of this resistance intersects 2040, or nearly 100 points under all-time highs, and is thought to have some near-term importance.
US 10 Year Treasury Yields look to also keep extending gains, following a breakout back over prior August-October lows near 1.90%, which served to stop out Treasury bulls, arguing that yields should move higher. Key overhead resistance for this chart lies at 2.10-2.15%, which should serve to halt further Yield advances in the week ahead. For now, it still seems premature to consider buying Treasuries on this yield move, as the direction into the FOMC meeting still appears bearish for Treasuries (bullish yields)
One of the key currency crosses which has correlated quite strongly with SPX and appears to be stabilizing more and more of late is the USDJPY, or Dollar/Yen. Following the severe breakdown of a larger 18 month topwhich took it down to Support back in early February, we've seen the formation of a possible reverse Head and Shoulders pattern with neckline resistance near 114.50. This has been tested twice before since mid-February but the constructiveness of this pattern with higher lows of late seems to suggest an upcoming surge to test 114.50 again, which would allow for a breakout and move back to 116-116.50, which should be strong overhead resistance. However, a breakout in USDJPY should also add to conviction about the SPX moving higher in the near-term, as part of a larger bearish pattern, which is precisely what the USDJPY pattern reflects. Given a +0.65 correlation with USDJPY vs SPX over the last couple years, this relationship is really the one to watch given the positive movement with SPX, much more so than WTI Crude.
The NYSE Advance/Decline has shown such strength of late that it has moved to the highest levels since last Summer of 2015, completely surpassing prior November/December highs. While this version of Advance/Decline does comprise some Fixed income element, it's still quite a positive in the near-term to see the extent of this rise in the last few weeks
The "Common-Stocks Only" version of the Advance/Decline has regained prior lows that were broken of this Head and Shoulders pattern of market A/D which is also a positive, and has just regained its 40-week moving average for the first time since last August. This is less strong than the overall Advance/Decline in being under November/December highs, but still a bullish recovery and seemingly a failed breakdown, which is near-term positive and often can be stronger as a failed pattern, than the breakdown attempt itself.
Another confirming Technical breadth indicator which has just moved back to new highs is McClellan Oscillator, a commonly used Technical indicator for breadth that uses the difference of two exponentially smoothed moving averages for Advancing vs Declining issues, typically 10% and 5%. As the chart above shows, this extreme jump in breadthhas carried the Oscillator to very extreme levels, over 100, which hasn't been reached since early 2013. This is one reason to ignore the issue of defensive positioning in this rally thus far and expect that additional strength can likely carry indices higher into April. Pullbacks from an extended state would be used to buy dips, thinking that the uptrend from mid-February has been stronger than the decline from late January into mid-February.
Another useful indicator for breadth that showcases the market's direction and power is the Summation index, which is just a summed version of all the values of the McClellan oscillator which was already thought to be a smoothed version of Advance/Decline data. This has now risen to the highest levels since 2014, which is an amazing move over the last four weeks after having hit new yearly lows. So, as might be expected, this is a very positive development which suggests the upward thrust of this move likely will show some follow-through, and any chance to buy dips should be used to initiate new longs for a move which likely will retest November/December highs in the weeks ahead.
NYSE Percentage of stocks trading above their 200-day m.a. has just jumped to the highest levels since last July 2015 in the last week, eclipsing former peaks back in November, despite SPX prices still being 4% below those levels. While overbought, as per some momentum gauges like RSI, the breakout of former highs should help carry this ever higher for the next 1-2 weeks before even a short-term peak occurs.
The Equity put/call ratio lies at 0.60, down from early week 0.90 highs but still nowhere near prior levels that marked peaks in price in the past. Interestingly enough, the Equity put/call was actually at lower levels in early March when it registered both 1-day and 10-day moving average readings that were near 0.55. So despite being about 4% higher in price, the Equity put/call is actually higher at present, showing the attempts to sell into this move on recent signs of stalling out. Movement down near .475-.50 would be sufficient to expect peaks in price, along with a 10-day moving average level of near .55.
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