May 2, 2016
S&P JUNE FUTURES (SPM6)
2058-60, 2048-9, 2026-30 Support
2071-4, 2089-90, 2105-6, 2123-5 Resistance
In This Issue
S&P trend turns negative for Short-term, but selling should prove short-lived 1-2% losses
Sector Focus on Technology & Semiconductors given last week's pullback
US Dollar nearing August 2015 lows should provide some stabilization
Summary: Near-term weakness looks possible this week given signs of the S&P breaking down under minor trendline support and joining the NASDAQ, which has already dropped more than 5% from mid-April highs. Factors such as minor negative divergence, Technology underperformance, global equity market unease, Election year seasonality, and short-term trend deterioration all argue that a 1-2% pullback can happen into early May. However, the intermediate-term rally still looks very much intact, and factors like bullish weekly momentum and breadth (Advance/Decline having recently moved back to new high territory) lackluster sentiment, and Treasury yields holding up are all positive factors which should be given more precedence at this time. Minor drawdowns should be used to buy in the next 1-2 weeks with S&P futures likely finding support near 2026-30 as maximum area of downside before a move back to test and exceed November 2015 highs on the way to new high territory.
Looking back, the month of April was remarkable in that equities had rallied nearly 14% up to near prior late 2015 peaks without as much as any real weakness, or given the outflows, any real participation from the investing public. Last week showed the first evidence of S&P moving below a prior week's lows while the US Dollar continued its downward descent, nearing the lowest levels since last August. Commodities, meanwhile, turned in their best month since 2010 as Metals and Energy showed above-average strength. Sector-wise, Energy and Materials both benefited from this move in the month of April, turning in the top performance for major S&P sectors, with Energy being sufficient to knock Utilities out of its 1st place ranking for the year. Financials and Healthcare also made comebacks to the tune of 3.67% and 2.57% respectively.
Now we enter the challenging month of May, which ranks poorly in Election years, #11 of 12 for both DJIA and S&P and 9th out of 12 for the NASDAQ. This month does bring about the start of the "Worst six month of the year" period according to Stock Traders Almanac, and studies from Bespoke show that May-October tends to be particularly worse if the first four months of the year have been relatively flat (Plus or minus 2%) which has happened 16 times since 1928 and averages -0.21%. While if the market is higher by more than 2% over the first four months, the subsequent six month stretch is +2.99%, while if worst then 2% down over the first four months, the average gain was 1.11%. So seasonally speaking, definitely reasons to heed the phrase "Sell in May and go Away" However, the sentiment already seems remarkably bearish, with AAII polls this past week showing a greater level of percentage "Bears" than "Bulls"
This week we concentrate on the Semiconductor sub-sector within Technology, April's worst performing sector, but with some interesting progress having been made from the Semis relatively speaking to Hardware given Apple's woes. Additionally, Semis are showing signs of bottoming out vs the Software group. The NASDAQ meanwhile has dropped down under February lows vs the S&P, which suggests its important to be selective here following NDX having given up 5% from mid-April. Overall, last Friday's drop was bearish for the SOX, but pullbacks should prove limited and provide some attractive buying opportunities in May for the Semi space, which looks likely to outperform vs both Hardware and Software (Based on the S&P groups S5TECH index, and S5SFTW index)
Charts & Writeups- SOX index, Semis vs Hardware, Semis vs Software, NASDAQ vs SPX, AVGO, NVDA, NXPI, IDCC, & TXN
Philadelphia Semiconductor Index (SOX-$645.33) SOX's break of former lows going back since mid-March looks more bearish than bullish technically, a clear break of a level that had held numerous times in the last two months before giving way last Friday. While additional near-term weakness looks likely to areas near 632-4 or 618, any drawdown should be used to buy dips given the improving relative picture(Seen in charts below). Momentum at present is not yet oversold, and levels that bulls should concentrate on for any rebound are 665, and then 685. A break of the former would put the SOX back up into its former range, while getting back over 685 would result in upside acceleration given that March/April highs were a test of November/December 2015 levels.
Semis vs Hardware- When looking at the relative relationship between the SOX index and Technology's Tech Hardware index, or S5TECH, we see a clear breakout of a pattern that had been steadily improving since last Summer. The move to new monthly highs managed to eclipse the early February peak, and while overbought at current levels, any pullback in the days or week(s) ahead would be a buying opportunity to favor the Semi space over Hardware. Apple's representation within Hardware certainly was a factor in the month of April, but other stocks weakness such as Seagate Technology, Western Digital, or NetApp, were equally as damning for Hardware. These last three all underperformed Apple during the month of April, showing that it was a widespread issue for Hardware weakness, not necessarily limited to Apple's woes.
Semis vs Hardware- Weekly- The weekly chart going back since 2007 presents a far more bullish picture for Semis in relative terms to Hardware, with the breakout of a base that extends back over nearly a 10-year span. The pattern might be termed a reverse Head and shoulders formation by some, whereas by others it merely resembles a long-term bullish base breakout. Regardless of the terminology, the act of having bottomed out in 2012 and moved sideways in symmetrical fashion before rising to new yearly highs last week is certainly a bullish factor to consider sticking with the Semi space within Technology, despite the absolute weakness last Friday.
Semis vs. Software- Semis also look promising when viewing the group vs the Software space, which dramatically outperformed Semiconductor stocks over the last year, with a sharp rally and outperformance (shown here as Semi underperformance) However, this group (SOX) recently triggered counter-trend TD Sequential buys right near 2012 lows vs the Software space, based on S5SFTW index, and the one-year underperformance in Semis makes this area look attractive to the likes of ORCL, YHOO, WU, EA, MSFT and others.
MSH vs SPX- When viewing Technology as a whole, this group's underperformance largely began at the beginning of the year , but remains a long-term outperformer vs SPX, and recent weakness should translate into a buying opportunity given the long-term uptrend from 2002. Near-term woes in Semiconductor stocks shouldn't be given as much merit given how they've outperformed hardware, and in general this space remains one to consider owning and buying on dips.
NASDAQ vs SPX- One thing to keep aware of, that will make owning the right stock increasingly important, is the degree that the NASDAQ has been breaking down relatively to SPX. Technology woes certainly contributed to this last month, but as the chart shows, NASDAQ has violated a three-year uptrend vs SPX and now the bounce looks to have failed in attempts to regain this uptrend line. Movement back down under February lows suggests a bit more weakness before this can bottom out unless we were to see a sudden large snapback over the next few trading days. Counter-trend TD Buy setups per Demark indicators are now in place in the NDX after its recent drawdown, but this deterioration in the relative line remains a negative when viewing NDX/SPX.
Broadcom (AVGO- $145.75) AVGO remains one of the better stocks to own within the Semi space and pullbacks down under $140 should be considered a good technical risk/reward to buy dips with thoughts of continued strength in the months to come. Last week's pullback makes buying dips here still look a bit premature, as the breakout attempt is now falling back into the prior base given the selling from last Thursday and Friday. However, anywhere from $130-$135 should be an excellent area to consider buying dips given the ongoing positive structure and momentum in this name.
NVIDIA (NVDA- $35.53) NVDA looks to be peaking in the short-run, and could allow for movement back down to the low $30's which would create a great risk/reward opportunity to buy this stock, technically speaking. The broader trend remains quite bullish with the stock having advanced in parabolic fashion in the last year, to levels right below prior peaks from 2007. While overbought and showing some evidence of minor negative divergence, NVDA remains the best performing stock in the Philadelphia Semiconductor index by a long shot, with gains of over 60% in the rolling 12-month period. This huge upward surge in momentum will be difficult to completely erase, so near-term weakness should still create excellent opportunities to buy dips with thoughts of NVDA getting back to near $40 in the months ahead.
NXP Semiconductors (NXPI- $85.28) NXPI's stalling out over the last couple weeks doesn't take away from its overall bullishness in getting back over the one-year trendline extending down from last Summer highs. Nearterm weakness down under $80 is a possibility, yet the degree to which NXPI has outperformed over the last 3, 6 month periods should make this one to continue owning, technically speaking. Movement back higher to $100 looks to be a possibility, with any dips in this group in the week ahead providing a good opportunity to buy dips.
Interdigital (IDCC- $56.98) IDCC is bullish on an intermediate-term basis, and movement back over $60 would help this stock to accelerate in climbing back to retest former highs from 2011. IDCC has outperformed all other Semi stocks within the SOX on a three-month basis, with returns of 26.51% through 4/29/16, and the bullish pattern on weekly chart should allow for continued dominance in the space, with positive momentum and a series of higher lows since 2012. Near-term, the stock has gotten stretched just shy of $60, but pullbacks to the low $50's would represent a good area to buy dips.
Texas Intruments (TXN- 57.04) TXN's slowdown over the last year can't be ruled the start of a larger decline given the extent to which prices remain near last year's highs. The churning near these tops is considered quite bullish technically, and should allow for an upcoming push back above $60 which would allow TXN to begin to outperform once again. In the short run, an engulfing pattern last Friday makes this temporarily vulnerable to pullbacks to the low-to-mid-$50's, but its technical structure argues for buying dips, given how resilient the stock has traded over the years. Weakness should prove minor and a chance for adding to existing technical longs for a chance of accelerating back over $60 in the weeks ahead.
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