May 21, 2018
S&P JUN FUTURES (SPM8)
2700-2, 2654-6 , 2648, 2630-1 Support
2739-40, 2748-50, 2765-7 Resistance
A daily S&P Futures chart shows prices pushing up above the highs of the last few trading days as per Sunday evening. Given that the last week was lower, but not meaningfully so, and grinded sideways as opposed to showing real technical damage, this move Sunday in Futures is bullish, and unless immediately erased Monday morning, likely paves the way for a push back to 2750 and then potentially the larger 1x1 price/time angle off the January 2018 highs. It was right to come in bearish last week, but we just didn't see enough technical damage with indices. Overall, the bears require a move down under 2700 for June futures for the negative trend to gain traction.
Summary: Stocks have largely remained resilient, not showing much pullback after having peaked again in mid-month, similar to what's been happening over the last few months. The breakout in Industrials while Advance/Decline pushes up to new all-time highs are thought to be positive factors which might keep prices afloat a bit longer, but its still not unreasonable to think weakness can happen into end of month, which is what happened in February, March and April. Bond yields broke out in bigger fashion last week, so stocks very well could follow yields in the short run. The Dollar meanwhile has not yet turned lower but is getting very close from both a price and time perspective. Given that Tech and Financials were both lower by 1% last week, this remains a market that has to be watched carefully in the short run. While trends from early April still seem positive (along with Sunday evening's Futures gains) some evidence of upward thrust in breadth and momentum is going to be necessary along with Tech turning higher and Financials showing breakouts above the key XLF- 29 level to have real conviction about the quality of this advance. Small-cap breakouts along don't guarantee a broad based move back to new all-time highs for the indices during a seasonally weak period.
Given that the price action was largely unchanged for most of the week, with SPX closing down just a few ticks from levels hit last week, it's important to see what exactly happened "under the hood" and whether this was a reason for more optimism, or more negativity. As has been the case in recent weeks, it's not terribly lopsided and compelling interesting arguments can be made on either side. Let's start with the positives:
1) Small-caps broke back out to new high territory, with Russell 2000 joining the move seen in the Small-cap 600 index while Small-cap advance/decline also hit new highs. Small-caps and Mid-caps have now outperformed the broader market since February, after a lengthy pullback.
2) Industrials Sector SPDR ETF, XLI, broke out meaningfully above key trendline resistance. Stocks within the Rail sector like CSX and UNP outperformed, while the Aerospace and Defense group, led by BA, also snapped back in strong fashion. GE has now managed to lift to $15, and plays a large part of XLI given its weighting at 5%..
3) Advance/Decline has pushed back up to new all-time highs when watching "All-stocks" A/D. It's been rare to see a broader market peak when Advance/Decline is back at new highs. For the intermediate-term Bears, , it's worth noting that both 2000 and 2007 peaks were prefaced by a meaningful dropoff in longer-term breadth of at least six months, and in the case of 2000, this started two years prior.
4) The consolidation over the last week has helped to work off some of the divergences, while prices largely didn't go anywhere. To see a downturn, prices will need to start to turn down into end of month fairly quickly. While this could be put off this week, one would expect a bearish bias into end of month. Note, the last four months have all begun from lower prices where stocks bottomed out in the first part of the month and rallied into mid-month. This happened in February, March, April and now May. (Though the decline thus far from May peaks has proven brief. )
5. Europe has been trending higher along with many Asian indices without much stalling out and it's important to see when the rest of the world has been moving higher, and analyze price action globally vs just the US to gain some perspective as to when indices start to peak out in unison like what happened back in late January. At present, peaks in other indices like SX5E, and NKY still look a bit early.
6. Demark counts had an imperfected Setup last week, which as practitioners know, creates less than an ideal "top" when bar 7 is the highest bar of the Sell Setup as opposed to bar 8 or 9 of the Sell setup. This could invite further gains until TD Sequential and/or TD Combo 13 countdowns are in place before this peaks.
1) Breadth remains sub-par on this rally.from early April and from early February, when looking at smoothed breadth gauges like McClellan's Summation index which is roughly half the level it was back last October. The Percentage of stocks trading above their 50-day moving average is 58, certainly not in the 80's like last year. Momentum has been negatively sloped per MACD since early February.
2) Both Financials and Technology were down over 1% this past week and for leading sector participation, we saw Energy and Materials. While it's refreshing to see rallies in these sectors, they don't account for much of the market, while XLF was down 5 of the last 6 days, and Technology showed clear signs of rolling over this past week, and NDX has stalled out below its own all-time highs. Charts of the SOX have been under pressure
3) Interest rates spiked up sufficiently to breakout of long-term downtrends in yields stretching back since the 1990's. Given that there remain ongoing concerns regarding Productivity and wage growth, seeing short term yields escalate rapidly while the FOMC doesn't talk down plans of continuing to hike rates, a rapid move up in rates which could happen into early June given these breakouts this past week could put pressure on High yield again at a time when LIBOR-OIS has pulled back to attractive near-term support.
4) Cyclical concerns remain an issue for markets, and similar to mid-April, Mid-March and Mid-February, equities have reached areas where the rally from early month seems to have stalled out and could face downward pressure. The 20-week cycle seems to be nearing a time when it should exert downward pressure on indices. If we don't turn down into end of month, like what's occurred over the last few months, then its possible that the rally could prolong into mid-June (which was initially thought to be a bottom for stocks) But then a likely sharp pullback down into late July would be likely.
5) Equity put/call ratios were showing readings in the 50s for most of this week, not typically the area where large rallies back to highs begin. When two calls are being bought for every one Put,
6) Seasonality suggests that this time should be particularly Sub-par during mid-term election years from now til October. While there could prove to be a choppy time and overall no serious declines until September into October, it would completely go against the grain of most seasonal studies to see sharp rallies during this time of year in the 2nd term of of a presidential cycle.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- (With Stop and Reverse on any move under 2700) Last week's bearish stance provided little to no real overall deterioration in the market, and while prices were lower by week's end, this turned out to be more of a grinding sideways than any true setback. Additionally, the Advance/Decline pushed back up to new highs, which is thought to be constructive. Industrials broke out , as per XLI's move late last week, and Demark's Sell Setup never truly registered a proper TD Sell Setup sign. Movement back over 2732 would create a short-term bullish scenario which could led up to 2750. The key concerns revolve around Tech and Financials starting to show more strength, and both sectors were down 1%+ last week, so this is important. However overall, the stalling out last week didn't lead to pullbacks thus far, and momentum and breadth have improved a bit in the short run. While not necessarily leading to a move back to new highs, it is a short-term positive development.
Intermediate-term (3-5 months)- Bearish- Trends and momentum remain negative and markets are entering a seasonally bearish period for mid-term election years that normally sees trends turn lower into September/October before late year strength. While Technology is indeed a positive, other sectors like Financials, industrials and Healthcare have all been dragging substantially and are a problem for a market desperately seeking leadership. The lack of breadth and market momentum suggest this market still could be vulnerable to a late Spring "shock" given that sentiment isn't all that pessimistic while the participation and trends remain in less than optimal shape. Movement down under 2550 would be a concern for a test of 2450, but this likely proves to be appealing initial support to buy into on any correction over the next couple months.
TECHNICAL ANALYSIS of INDUSTRIAL SECTOR- What's driving the XLI Breakout?
This week we'll take a look at some charts of the Industrials sector as XLI has broken out per last week, yet many stocks remain under pressure, and sub-sectors like the Airlines certainly haven't matched the bullish structure of stocks within the Rail space. Additionally, Aerospace and Defense has begun to trend higher again, but yet not all these stocks are all that positive from a structural perspective. Key to note, the top 5 stocks within the XLI make up about 25% of the ETF: BA, GE, MMM, UNP and HON. Of these, BA and UNP appear best technically, while MMM remains under pressure, as does GE on an intermediate-term basis, despite its rally over the last month. Also it's important to point out that from an Equal-weighted perspective, Industrials have not matched the breakout seen in XLI, necessitating a more selective stance vs thinking the entire group is bullish. Below i'll run through some of the popular Sub-sector charts and then go over some of the charts of the stocks that are driving this rally, ones that still look to have upside and that investors should consider. I'm skeptical that a broad-based rally is occurring, however, so thinking that mean reversion should work might not pay off. At present, it looks best to stick with the leaders
LONGS within Industrials
Rails: CSX, UNP
Aerospace/Defense: BA, COL, TXT
Electrical Components: ETN, ROK, EMN
Industrial Conglomerates: HON
Air Freight & Logistics: FDX, EXPD(Long small, & buy weakness)
Machinery: CAT, DE
Construction & Engineering: JEC
SHORTS within Industrials
MAS, ITW, AAL, BLL, R, OC, MMM, SWK, CMI, AYI
XLI - Industrials ETF broke out, and further progress here looks likely
XLI- Industrials Sector ETF-$75.33- Bullish Breakout bodes well for further gains- It's thought that last week's breakout of the downtrend from January highs is a positive development for this sector that's been under pressure over the last few months. While stocks like GE have accounted for a good part of the rally since early May (and remain trending down overall and not bullish) stocks like BA, CSX have also led this higher and still look to make further upward progress. Until/unless this is given back right away, XLI should be overweighted, and this move is considered bullish and should lead higher to $76.50-$77 in the near-term.
Equal-weighted Industrials vs SPX looks far less bullish than SPX- This relative chart of the Equal-weighted XLI relative to SPX broke down hard in April which took Industrials to the lowest levels relatively of the year. While this has bounced in the last couple weeks coinciding with the market pushing higher, it needs more progress to think this bearish breakout has been negated. While a certain amount of stocks within this group certainly are quite positive, others look far less bullish and should be ones to concentrate on avoiding and/or shorting this week on rallies as this ratio chart reaches the prior uptrend from the downside.
S&P 500 Rails index- Rails breaking back out to new highs bodes well for this group to strengthen further. While this index contains just four of the prominent Rail stocks, CSX, UNP, NSC and KSU, the breakout back to new highs should allow for further strength out of this sub-sector, and is thought to be constructive. Specifically, one should look at CSX and UNP should outperform and are the most bullish within this group. However, stocks like KSU and NSC have not shown the same degree of performance and technically are sub-par when compared to the first two.
DJ Transportation Avg. Push back to highs of its three-month range bears watching closely- The Transports as a group have not shown the same degree of breakout as might be expected when viewing the Rails and some of this can be explained by Airline weakness. Currently, prices will need to break out above April highs near 10900 before thinking this can join in the Bullishness like what's being seen in XLI and the Rails. Overall, any strong reversal from here would be important, as would a breakout above this upper trend. But this bears watching closely as the markets finish May, as the leading tendencies of this group are widely known.
Aerospace & Defense ETF- (ITA- $199.10) Last week's Friday breakout makes this group bullish near-term, suggesting further upside for this Aerospace and Defense stocks. Bottom line, the Aerospace and Defense stocks have shown mixed performance since January, and despite two different tests of highs, have failed to make meaningful upside since late January. Weakness into early May proved to be buyable, coinciding with TD Buy Setups a couple weeks ago, and last Friday's ability to clear early May highs is quite positive technically. Further gains look likely up to 202-205 in the next 1-2 weeks, and Aerospace/Defense should be overweighted for additional upside. Stocks like BA, COL and TXT in particular are quite bullish technically, and should be owned technically, looking to buy dips.
Boeing (BA- $351.22) BA's advance above the highs from the last month is quite positive technically and makes for a bullish case for this to rally further in the next few weeks above $360 to targets near $370-$375 to test prior highs. Momentum has been positively sloped for the last couple weeks and the broader pattern from late February resembles a giant bullish base which could lead to these highs from a couple months ago being tested. Overall, long positions are recommended, unless/until this gets down under 339 near last Wednesday/Thursday's lows. Breaks of this level would postpone gains, but for now are not expected right away.
CSX Corp (CSX- $63.76) CSX is bullish and counter-trend counts are premature to think any peak is at hand. While the daily charts are nearing overbought territory, the structure of the weekly chart is very constructive given the breakout of the sideways consolidation stretching back since last Spring in 2017. Movement up to $67.50-$70 looks likely before this stalls out, as the pattern breakout means more than the near-term overbought conditions, and bodes well for further gains. CSX remains one of the best within the Rails and should be overweighted in the weeks ahead.
Union Pacific (UNP- $143.185) UNP's structure is quite positive technically and bodes well for further gains to near 150-155 in the weeks ahead. Looking back, the breakout of the highs from Spring 2015 was a big positive development for UNP which happened late last year. The stock consolidated this breakout and has now rallied back to test these prior highs at $143-4. This pattern is quite bullish to own UNP here and add on the ability of this to get over the highs made into early 2018. Overall, along with CSX, remains a very bullish stock to consider owning within the Rails and one of the better patterns within Industrials.
Fed-Ex Corp. (FDX- $248.37) FDX is an attractive risk/reward given the consolidation since February while near-term structure shows higher lows since late March. Rallies back to 257-9 looks likely in the short run and moving above this level argues for a larger rally. FDX has taken backseat to UPS in the last few weeks, but has a more bullish longer-term relative uptrend and is thought to be the better of the two to own. Buying here at $248 given the breakout in the XLI, expecting a move up to test and break out above monthly highs looks likely in the weeks ahead, and it looks attractive to position long here ahead of the move.
Emerson Electric (EMR- $73.14) Similar to UNP, this stock managed to breakout above a high made a few years ago and has recently been consolidating gains. Now a push back higher to test former highs is ongoing and near-term progress up to $75 looks likely which could be important as near-term resistance. However, the larger structure for EMR is quite positive and movement over $75 is anticipated on an intermediate-term basis which could allow for a quick move up to $80. Structurally this looks quite appealing within the Electrical Equipment stock group, and should show further gains in the weeks ahead.