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Major Sector Review- 04/19/16

April 19, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2058-60, 2026-7, 2000-1, 1982-3       Support
2083-4, 2100-2105, 2130-3   Resistance

In This Issue

Sector view: Healthcare, Materials breaking out, following recent Financials move

Shift out of Defensive sectors adds credibility to the rally

SPX resilient at a time when most expected to fall

Technical Sector Summary: 4-6 Week timeframe is basis for grouping-  Calls are made based on thoughts of the groups going forward between now and the end of 2Q, vs how much the sectors have trended up in the past.

Bullish

Healthcare- Short-term bullish- Intermediate-term bullish- Healthcare is just starting to emerge again after breaking out 4/18 from its downtrend from last summer (XLV) and showing evidence that its relative chart has also broken out vs the broader market and now turning back to the upside- XLV should rally up to challenge 72.90 from its current 70.67-  Most attractive Trend Following: UNH, JNJ, BCR, BDX, SYK, WAT.  Most attractive risk/rewards: MDT, BSX, GILD, CELG, ALXN, REGN, XRAY--Consider XLV, VHT, IYH, IHI, IHF, XBI, DRG

Financials- Short-term bullish, Intermediate-term Neutral- The recent breakout in XLF vs SPX has helped this sector to rebound at the right time and provide the market with some much needed participation, with above-average gains in banks, broker dealer stocks, insurance and the REITS.  Short-term momentum has turned positive on XLF, while relative charts of XLF vs SPX have broken out above former lows and mild downtrends that make this sector one to overweight for the weeks ahead.  Unfortunately, given the long-term Neutral pattern present in this group, only near-term strength can be recommended at this time.  If and when this sector begins to show signs of a larger breakout, this would add to the bullishness of this group on a long-term timeframe.  Most attractive trend following names:  Most attractive Technical risk/rewards : GS, SLM, BLK, V, MA, JPM, ETFC, AMTD, NDAQ, ICE

Materials- Short-term bullish Interestingly enough, one of this year's best performing sectors Year to Date is also one of the laggards on a six-month basis which incorporates the last two months of 2015.  This sector has been steadily improving given the weakness in the US Dollar which has helped the Mining sector along with Chemicals.  XLB has just broken out above highs seen back in March, along with last November/December, which puts this at the highest levels since last July.  Given the ongoing pullback in USD, further strength looks likely for Materials in Q2.  Most attractive risk/reward names: WM, FAST, DOW, AA, NEM, IFF, IP, VMC.

Energy- Short-term bullish, Intermediate-term bearish, and additional progress is necessary before thinking this sector can simply continue higher without facing real challenges.  For now, a bullish call is based on the period between now and late May, where Energy still looks to outperform.  However, technically, gains into the next month would call for profit-taking in most stocks and extreme selectivity given the run that this sector has enjoyed over the last couple months.- Gains likely up to challenge last year's 70.78 highs from its current 64.59.  Given that Crude has survived the Doha scare with no real technical damage given complete inaction on the part of OPEC but thoughts turning to June, this sector could show real outperformance inn the next couple months before any peakout, seasonally speaking.  XLE has just exceeded trendline resistance from last year, and has just surpassed its 200-day moving average for the first time in the last three attempts since last Spring.  Momentum indicatorslike MACD are positively sloped and trending higher-  Most attractive Trend following:  HES, APA, NFX, XOM, CVX

TechnologyShort-term, intermediate-term Bullish-  Minor slowing of late near former highs should present good opportunity to buy for 1-2 months of outperformance before any Summer slowdown begins.  XLK has been consolidating right near former highs but slightly above, while relative charts vs SPX haven't declined substantially enough to expect a meaningful slowdown.  This minor relative weakness in the last few weeks appears to be down near key trendlines which should result in this sector beginning to lift back higher.  Most attractive risk/reward names: ADBE, AVGO, TXN, SGMS, NXPI, NVDA, GOOGL, MSFT, A, TXN


Neutral

Consumer DiscretionaryShort-term bullish on absolute basis, while relative charts vs SPX are more neutral.  Given Monday's breakout above late March highs, XLY likely finds strong resistance near 81.23, former highs, which lie just above current levels, while relative charts have been flat and range-bound for the last few months.   While it's tough to argue the strength in this sector since mid-February, the risk/reward doesn't look as appealing in the short run, particularly given the relative churning in the relative line given that price lies $1 from former highs while momentum has waned a bit in the last month.  Most attractive risk/reward names : NKE, SBUX, ORLY, UA, DG, MCD, HD

Industrials- Upside might prove limited near-term given price being right under former highs- Similar to Discretionary, noone can argue the near-term strength or outperformance, but XLI lies right near former highs within .75c and relative charts have flattened a bit given the churning in the last month.  The ability to breakout back to new all-time highs would encourage following this sector and overweighting yet again, but given the move its had, it's important to be a bit more selective given that prices remain within striking distance of highs from early last year.  Most attractive risk/reward names: RTN, COL, ROK, MMM,  TEX, BLL, LMT, MMM, DOV, MLM, FISV, ADP, TDG


Bearish

Utilities-  Stretched and additional mean reversion, pullbacks likely for Utilities after move to new alltime highsOutsized outperformance this year now starting to wane as indices near highs and Yields beginning to stabilize- Expect underperformance between now and June as indices breakout to new high territory and yields move North.  Most attractive for a risk/reward basis: NI, WEC, PPL, PNM

Consumer Staples- Near-term underperformance likely-  This sector has gotten stretched, while the relative strength has slowly begun to turn down over the last month as evidence of Sector rotation took hold and flows out of Defensive sectors started to occur.  Most attractive for a risk/reward basis include: CPB, RAI, CAG, CLX, KO, PM, WMT, DG, and TAP.

 



Sector Thoughts- Charts and additional analysis of the major SPDR Sector ETFs

 

Healthcare- (XLV)- Healthcare is just starting to emerge again after breaking out 4/18 from its downtrend from last summer (XLV) and showing evidence that its relative chart has also broken out vs the broader market and now turning back to the upside- XLV should rally up to challenge 72.90 from its current 70.67.  Overall, this sector appears to be just turning back higher after a lengthy six month period of consolidation, and appears like a much better risk/reward than most stocks within Industrials, Cons. Discretionary, or the Financial sector, mostly based on its short-term correction within the larger bullish base.

 

Energy-(XLE)-Energy looks to be just starting to make more meaningful progress that could allow for additional gains ahead of the next big meeting in Doha in June.  For now, a bullish call is short-term in nature only, where gains into the next month would call for profit-taking in most stocks and extreme selectivity given the run that this sector has enjoyed over the last couple months.- Gains likely up to challenge last year's 70.78 highs from its current 64.59.  Given that Crude has survived the Doha scare with no real technical damage given complete inaction on the part of OPEC but thoughts turning to June, this sector could show real outperformance inn the next couple months before any peakout, seasonally speaking.  XLE has just exceeded trendline resistance from last year, and has just surpassed its 200-day moving average for the first time in the last three attempts since last Spring.  Momentum indicatorslike MACD are positively sloped and trending higher Yet the larger pattern continues to suggest caution on an intermediate-term timeframe, so for now, near-term strength is likely and we'll see the extent of the outperformance and be on the lookout for signs of stalling out in May/June.
 

Financials -(XLF)- The recent breakout in XLF vs SPX has helped this sector to rebound at the right time and provide the market with some much needed participation, with above-average gains in banks, broker dealer stocks, insurance and the REITS.  Short-term momentum has turned positive on XLF, while relative charts of XLF vs SPX have broken out above former lows and mild downtrends that make this sector one to overweight for the weeks ahead.  Unfortunately, given the long-term Neutral pattern present in this group, only near-term strength can be recommended at this time.  If and when this sector begins to show signs of a larger breakout, this would add to the bullishness of this group on a long-term timeframe
 

Materials- (XLB)- Interestingly enough, one of this year's best performing sectors Year to Date is also one of the laggards on a six-month basis which incorporates the last two months of 2015.  This sector has been steadily improving given the weakness in the US Dollar which has helped the Mining sector along with Chemicals.  XLB has just broken out above highs seen back in March, along with last November/December, which puts this at the highest levels since last July.  Given the ongoing pullback in USD, further strength looks likely for Materials in Q2.
 

Technology (XLK)- Minor slowing of late near former highs should present good opportunity to buy for 1-2 months of outperformance before any Summer slowdown begins.  XLK has been consolidating right near former highs but slightly above, while relative charts vs SPX haven't declined substantially enough to expect a meaningful slowdown.  This minor relative weakness in the last few weeks appears to be down near key trendlines which should result in this sector beginning to lift back higher.  Most attractive

Industrials (XLI)- Upside might prove limited near-term given price being right under former highs- Similar to Discretionary, noone can argue the near-term strength or outperformance, but XLI lies right near former highs within .75c and relative charts have flattened a bit given the churning in the last month.  The ability to breakout back to new all-time highs would encourage following this sector and overweighting yet again, but given the move its had, it's important to be a bit more selective given that prices remain within striking distance of highs from early last year.

Consumer Discretionary (XLY)- Short-term bullish on absolute basis, while relative charts vs SPX are more neutral.  Given Monday's breakout above late March highs, XLY likely finds strong resistance near 81.23, former highs, which lie just above current levels, while relative charts have been flat and range-bound for the last few months.   While it's tough to argue the strength in this sector since mid-February, the risk/reward doesn't look as appealing in the short run, particularly given the relative churning in the relative line given that price lies $1 from former highs while momentum has waned a bit in the last month.

Utilities (XLU)- Stretched and additional mean reversion, pullbacks likely for Utilities in the short-run. Intermediate-term bullishOutsized outperformance this year now starting to wane as indices near highs and Yields beginning to stabilize- Expect underperformance between now and June as indices breakout to new high territory and yields move North.  While the broader technical pattern on Utilities remains in very good shape, momentum has gotten stretched and we've seen some evidence of near-term underperformance which could very well last another 1-2 months in this group as Treasury yields attempt to rally a bit more into June.  For now, this group is near-term unattractive, but intermediate-term bullish given the structural progress.

 

Consumer Staples (XLP)  Near-term underperformance likely-  This sector has gotten stretched, while the relative strength has slowly begun to turn down over the last month as evidence of Sector rotation took hold and flows out of Defensive sectors started to occur.  Most attractive for a risk/reward basis include: CPB, RAI, CAG, CLX, KO, PM, WMT, and TAP.

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

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