July 5, 2016
S&P SEPT FUTURES (SPU6)
2084-6, 2073, 2057-8, 2043 Support
2104-5, 2119-21, 2131-3 Resistance
V-shaped recoveries are notoriously difficult to profit from, as investors take down risk during declines only to miss the subsequent rally, which in this case has completely recouped the decline
Near-term pullback likely, but should be used to buy for move back to new highs. S&P's complete recovery has been nothing short of astounding as the post BREXIT rally managed to recoup all of the losses seen in those two days (6%) causing a V-shaped pattern that typically is very difficult to profit from. The four-day (5%) rally has left prices at the highest weekly closing levels since last July while putting prices yet again within striking distance of all-time high territory in the US. While near-term overbought conditions are present on intra-day charts of SPX, Advance/Decline on NYSE "All-Stocks" has moved back to new all-time highs, creating a difficult decision for those wishing to consider selling into this move to take anything more than short-term profits. Bottom line, the near-term view (3-5 days) suggests selling into this rally and allowing for consolidation, while the intermediate-term view (2-3 months) suggests holding longs for a move back to new all-time highs.
The bond market has largely ignored the equity move and plummeting rates in the US have followed Japan, Germany, Switzerland and others to new multi-month lows while the Economic situation hasn't changed too dramatically for the US. The 10-Year and German Bund yield both look to be close to bottoming, which could happen as early as this week given counter-trend signals based on Demark indicators. Moreover, any uptick in yields likely serves as a further positive force for equities given the tailwind for the Financial sector. For now, the near-term Treasury and Bund trends remain positive, but downside for yields here looks limited.
Gold and Silver broke back out to new weekly closing highs last week, while Sentiment in Silver has reached climactic levels of bullishness per Daily Sentiment index (DSI) that could allow for some backing and filing in this move in the metals starting mid-week. Technicals have turned more bullish on the Precious metals of late following the failed breakdown from 6/16-24 that immediately reversed back to highs. Yet CFTC data shows Speculative longs reaching levels that have coincided with peaks in price in the past. Near-term, the advance is extended, but might not peak out until end of week. Moreover, given the positive technical improvements, we'll need more evidence of technical damage before turning too bearish on an intermediate-term basis.
Utilities and Telecom showed better performance than all other sectors this week despite a sharp 3%+ rally, and given the ongoing Yield decline, still look to be able to make progress in moving higher this week. Once we have greater evidence of yields starting to turn up along with US Stock indices breaking back out to new high territory, it will be right to fade both of these groups.
Short-term Thoughts (3-5 days) : Upside should prove limited after S&P's 5%+ push in the last four days, with strong overhead resistance at 2119-20 in Futures and Cash index which remains an important area. However, the improvement in Healthcare and Industrials in the last week could help markets start to trend better, as NYSE "All stocks" advance/decline has moved back to new high territory.
Intermediate-term Thoughts (2-3 months): Bullish- (No change) -A move back to new high territory is expected before indices turn down to begin any larger correction. The BREXIT decision caused meaningful declines in most of the world, yet US indices failed to show much, if any structural deterioration, and the pickup in Bearish sentiment as seen by VIX move, Equity put/call spike to pessimistic levels while TRIN spiked over 2% and indices remain within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being. From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily for months. Now the BREXIT decision and plummeting interest rates have all but guaranteed that the FED will be on hold, despite any meaningful downshift in US Economic growth. The Advance/decline recently moved to new all-time highs and breadth and momentum remain on solid footing, all which suggest any decline in the near-term should be used to buy selectively, and with the start of positive sector rotation towards Technology Healthcare with any sign in yields holding and turning up being a real positive for Financials.
Last week's push back above 2100 helped the SPX close at the highest level since June of last year, and just barely a stone's throw from all-time high territory. For now, more reasons are bullish than bearish as to why stocks should move back to new all-time high territory, and pullbacks this coming week should be used to buy for movement to new highs into August.
US 10-Year Yields have now pulled back to test areas last hit back in mid-2012, which should be strong support to buy for a snapback rally in the weeks ahead. 3 reasons stand out as being important for why yields should bottom out, the first being this former area of key lows from four years ago. Second, signs of positive divergence are now present on daily charts, with the recent pullback to new lows in yield not being followed by a similar move in momentum. Third, sentiment is once again approaching Bullish levels, per DSI (Daily Sentiment index) as most investors have accepted as common fact that US Treasuries should be a common safehaven to own as global yields move rapidly towards negative territory. While intermediate-term trends remain firmly negative for yields, the near-term pattern suggests a greater than average trading bounce should be "right around the corner"
Junk bonds certainly haven't reflected any of this fear seen by most of the globe and very little sign of anything other than just a flattening out in JNK in the last few months. Given that prior selloffs in the past year were led down by High Yield, this resilience could lead up to near $36 before any peak arises.
Europe remains much worse than US Equity markets as viewed by the continued failure of SXXP to be able to mount any kind of rally that helps SXXP regain the trend which was broken while most European equity indices are trading 17+% off all-time highs vs just 1% for the US. For now, no meaningful signs of any kind of mean reversion that would suggest US should begin to trend lower, and the divergence seems to be widening of late.
Utilities have gotten stretched, but we still have insufficient reasons to sell into this trend, outside this trend, outside of 2-3 day overbought conditions that could lead to minor weakening in price. For now, prices are halfway home to the target near $54 which was talked about last month in the Weekly Technical Perspective, and it's likely that higher prices can happen , with pullbacks proving temporary this week.
WTI Crude oil's peak in early June led to some flattening out in the bull trend from early May, but really hasn't done much in terms of altering the bullish trend since January of this year and if anything this consolidation is beginning to look very choppy and overlapping in nature. Any move back over $50 should lead to new monthly highs, and allow for this uptrend in Crude to likely continue higher into mid-September before any real peak. Bottom line, it's tough fighting this uptrend in Crude and its increasingly looking like a challenge of this year's highs could be in store in the weeks ahead.
Gold, when viewed in multi-currency form, has broken out of the flag consolidation form that's been in place since February of this year. While prices are stretched near-term while sentiment is growing increasingly more bullish, the move in Gold and precious metals in general has been a real positive of late after a shakeout decline into mid-June failed to gain much traction. Gains to 1400 could occur, but would be used to sell and buy pullbacks over the next month.
Brazil's ETF, the Ishares MSCI Brazil Capped ETF, has broken out back to the highest levels since mid-2015. While prices are stretched after hitting new highs, any pullback in the days ahead should be buyable for continued strength given these technical improvements.
NYSE "All-Stocks" Advance/Decline, has moved back up to new all-time high territory on a weekly closing basis after testing initially into mid-June. This has bullish implications for Stocks given historical precedent, and breadth and momentum remain strong right now.
The Net number of New highs vs New lows has moved back to the highest levels since mid-2014 over two years ago as of last Friday's close. Given the ongoing uncertainty coupled with bullish breadth and momentum, it's likely that stocks move higher into August back to new all-time highs before any real pullback.
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