May 16, 2016
S&P JUNE FUTURES (SPM6)
2035-7, 2026-28, 2007-9 Support
2056-8, 2068-70, 2089-90, 2105-6 Resistance
In This Issue
Ongoing Equities pullback likely to hit support by end of week and turn higher
Treasury yields could lead the way, while US Dollar hits strong resistance
1) S&P trend bearish, but near support- High TRIN readings, bearish sentiment mean downside limited
2) US Dollar index nearing Important resistance, likely to peak out by Monday, Tuesday of this week
3) Commodity rally should continue a bit longer, with Precious, Base Metals, Ags, Energy participating
4) Value stocks should outperform growth over the next 3-5 weeks as Dollar pullback will hurt Growth
5) Consumer Discretionary still likely to lag Consumer Staples a bit longer; Favor XLP over XLY
6) TLT, TYD, TMF should be favored given Treasuries trending higher this week, along with RX (Bunds)
7) Emerging mkts close too support after giving up nearly 40% of Jan-April rally-Buy EEM ~31.50
8) Crude oil should continue its rally up to near 48-50 before any resistance, with maximum near 52
9) Defensive sectors like Utilities, Staples favored this week, but should be sold into strength ~3-4 days
10) Gold looks attractive near-term on absolute and relative basis vs US Stocks but Copper also looks to be near support after decline and should turn up this week
Given these takeaways, key longs and/or spreads to consider for this upcoming week are : SVX vs SGX, XLP vs XLY, IAU, GLD, SLV, USO, DBA, EUR/USD, RUSL, FAZ, EDZ (1-2 days) Shorts via ETF: XRT, FXI, TAN, TYO, TMV, RUSS, FAS, USD/RUB, EDC (1-2 days)
Short-term Thoughts: Mildly Bearish- The technical structure this week remains negative, but closing in on both time and price based support which should provide a bottom to this decline and allow for a counter-trend rally to unfold. For now, prices are right down near early May lows, which might be initially important. But a pullback down to 2030, or even 2007-9 can't be ruled out before lows are at hand, as there remains insufficient grounds for a technically bullish opinion based on lack of structural improvement in the short run. However, the combination of bearish sentiment with High TRIN readings, ongoing bullish weekly momentum and breadth with Ichimoku cloud support just below argues that recent weakness "shouldn't" be the start of a bigger pullback, and should provide a floor to indices just as prices near the anniversary of last year's all-time high territory directly following the birthday of the NYSE. Look to use any further weakness to buy dips and consider covering shorts or hedges thinking that a rally back to highs is right around the corner.
Intermediate-term Thoughts (2-3 months): Bullish- A move back to new high territory is expected before indices turn down to begin any larger correction. The extent of the bearishness looks to be a big deal, given factors like Revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year discord among voters. Certainly there's a lot to be concerned about; Yet, indices lie only 3% from all-time high territory and the Advance/Decline has recently moved back to new all-time high territory while weekly momentum remains bullish. The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week. The start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months. While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3.
Looking back at last week, overall, a very tough week to make money as SPX fell to its third straight weekly loss with groups like Consumer Discretionary Financials and Industrials each losing more than 1% while Utilities continued its dominance, the sole positive sector on the week of the major S&P GICS Level 1 groups. The rally in the US Dollar continued while Treasuries also rallied with Yields breaking down on the long side of the curve as the 2/10s curve flattened to the lowest levels since 2008. Emerging markets fell precipitously while commodities weakened a bit, albeit not too dramatically.
Many seem resigned to the fact that the Spring "top" is in with equities likely showing little to no appeal after the sharp rally to test last November's peaks. Bearishness from gauges like the Equity Put/call and AAII would seem to indicate a far higher level of disgruntlement than might be warranted with prices just 3% away from all-time highs. Momentum has given clues as to how the trends seem to be going against each other, with bearish daily and monthly momentum, as part of a bullish weekly pattern with Advance/Decline having recently moved back to new all-time highs. While the pattern since this time last year certainly has proven to be a lot more choppy than many expected, for both bull and bear campsalike, there remain precious few who are betting on upside breakouts between now and late August.
The one short-term factor that suggests waiting for stabilization before getting too aggressive in buying, however, concerns the degree to which Treasury yields are now breaking down, with yield curves flattening out dramatically. While assets like WTI Crude seem to have lost their positive correlation with Equities of late, both USDJPY and TNX still remain in bearish trends, and will need to show a bit more stabilization to argue that these can rise. Therefore, despite near-term oversold conditions, or signs of fear, or capitulation with TRIN readings in excess of 2.50 (the highest levels since February) it's best to let this selloff play out a bit more in the near-term until ample signs are present which suggest buying into this downtrend might be a bit better risk/reward. Short-term cycles which successfully pinpointed both mid-February troughs along with early May bottoms during the 5/4-5/6 area nowproject to 5/19-22 for a low, which would mean selloffs early this week likely find some type of floor and reverse course. For now, the near-term trend is bearish, and outside of commodities and Treasuries, it seems wise to be selective until additional evidence is there for Equity longs.
Charts & Writeups- Equities, Sectors, absolute, relative, and Commodity, currency thoughts
SPX index- Daily- As this daily chart shows above, S&P's decline might look menacing to some as a potential Head and Shoulders pattern in the making, but prices now lie right above strong Ichimoku cloud support which should hold on any additional weakness this coming week. Momentum is negatively sloped as per MACD , but weekly MACD remains positive and prices lie only roughly 3% from all-time highs. The combination of heightened concerns at a time when prices lie near support and evidence of former laggards like Technology improving would seem to be a good case for buying dips this coming week.
Bloomberg World Index- Similar to SPX, the near-term trend for the broader world index such as Bloomberg's (BWORLD) index has been trending lower over the last three weeks, yet the broader pattern has improved since early March with the breakout of the one-year downtrend from early 2015. Near-term, a bit more weakness looks possible this coming week, but should find strong support near 180 and provide an opportunity to buy dips for a lift back to highs into the Summer.
30-Year Treasury yields- Both 10 and 30-year Treasury yields have been testing key support from February in the last week, which now looks to be broken as of last Friday's close down at 2.553 for TYX. Additional weakness looks likely to 2.50 to test former swing lows, which if breached, would allow for a much more severe Treasury rally on the long end into early June. For now, given that equities have largely followed the movement in Treasury yields in recent months, it pays to wait until some evidence of turning happens with regards to yields before getting too aggressive in buying dips.
German Bund yields remain within striking distance of former April lows, and could very well get below 10 bps in the days and/or weeks ahead before a larger bottom occurs for yields. Counter-trend signals remain early to signal any type of bottom in Bund yields using either daily or weekly data, and last Friday's decline looks to have stripped most of Thursday's rally attempt away. For now, a bit more weakness looks possible in the short run.
Yield curves continue to flatten, and as this chart of the 2s/10s curve shows, this flattening has reached the lowest level on a weekly close, since 2008. For now, an extremely challenging environment for Banks when yield curves have flattened dramatically since early 2014.
Agricultural Commodities look poised to play "Catchup" with the movement seen in Energy and Metals recently if the rally in the the Powershares DB Agriculture Fund is any judge. This ETF has risen to the highest levels since last October, largely on the strength of Soybeans. This cup and handle breakout should be a positive for the entire Ag space, so rallies in Corn and Wheat could be expected also in the near-term, and help to lift DBA up to 22.50, potentially $23.50 right near last July's highs. Given that the US Dollar looks close to turning back lower early this week, this should prove to be a boost for Ags once USD begins its fall and help the Ag commodities to push higher.
Consumer Discretionary vs Consumer Staples- A graph shown earlier in the week showed how Staples were beginning to play catch-up with the Discretionary stocks, and much of this was due to Discretionary dropping off just as stocks like Gap Inc. Staples, Nordstrom, Macy's and Michael Kors, which have all fallen more than 20% in the last month. After a lengthy six year rally by Discretionary over Staples, the start of Discretionary falling off seems to suggest a structural change in the market which is becoming evident just as the former uptrend changed to sideways last year. In the short run, additional retail weakness looks likely, which could serve as a continued drag on the Discretionary sector.
NYSE Cumulative Advance/Decline line moving back to new highs was considered quite positive technically, and despite some churning in the last month as prices have begun to consolidate after testing November 2015 highs, a move back to new high territory is likely given the breadth improvement which is more probable than a move down under 1950-SPX. As opposed to 2007, when breadth fell back in the early Summer and failed to follow price to highs that October, breadth has taken the lead this time, whether when looking at the NYSE "All Stocks" or "All Securities" Advance/Decline line, both of which have moved up above November highs while SPX has not. This seems to suggest that price should follow breadth, which has happened consistently in the past, not vice versa.
McClellan Summation index confirms the weekly breadth improvement which was seen in March-April of this year when this cumulative summation of breadth moved to the highest levels since 2010. While prices in some sectors have gotten ahead of themselves and have consolidated this move in recent weeks, this seems to be yet another intermediate-term breadth gauge that's giving out far more reasons for optimism than what might be seen in common sentiment polls.
TRIN readings for last Friday registered above a 2.5 reading, showing a huge spike in volume into declining vs Advancing stocks which can often signal that stock market declines are nearing capitulatory lows as "the Bears" start to climb aboard, at precisely the wrong time. This reading was the highest since early February which was triggered within a few days of the lows which happened three months ago. Given that prices have fallen for the last three weeks,, we seem to be closer to lows, than to a time of downside acceleration, despite how ugly the near-term charts might appear.
Equity put/call readings have signaled that investors are not all that optimistic, despite prices being just 3% of All-time high territory. The 5-day moving average of the Put/call on Equities recently registered a reading near 0.90, or nearly equivalent amount of Puts being bought as calls, something which often signals a low is near. Given that this ratio is the highest seen since mid-February, equities look to be closer to lows than highs in the bigger scheme of things.
The ratio of Gold to SPX has begun to carve out a bullish base after the initial breakout in Gold into early March. This suggests that Gold in the weeks ahead likely could be a better bet than US Equities, and could outperform. For now, it's right to have a precious metals allocation technically, and both Gold and Silver look attractive from a risk/reward standpoint, while copper also looks to be close to forming a low.
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