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Breakouts in Leading sectors like Semis, Transports a temporary positive despite FX/Rate volatility

May 28, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2700-2, 2654-6 , 2648, 2630-1  Support
2739-40, 2748-50, 2765-7         Resistance

 

S&P chart shows the Push/pull effect of recent sector rotation that's resulted in no net change in US equities for the last two weeks, despite some volatile sector swings.  In general, it's better to keep position sizes small, and look to "hit Singles" vs swinging for the Fences.  While Industrials and Transports remain in good shape, Financials and Energy are certainly not , and might continue to cause consternation. The key cycle date in mid-June which was thought to potentially lead Equities lower very well might turn out to be a high, not a low, but suggests that gains should be used to sell within two weeks for a possible drawdown, which might arrive from levels not too much higher than currently.  Overall, keeping a close eye on 2700 is important over the next week, as any violation of this would turn the trend lower;  Conversely, upside might contain prices just above 2740 this week.  Unfortunately this likely won't be very satisfying for bulls and bears alike, but some pattern resolution is required before adopting too bullish or bearish of a stance right now.

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Summary:   Sector rotation and diametrically opposing forces still should be likely to cause a push/pull effect on indices over the next couple weeks, with no strong directional bias for Equity indices.   Incredibly enough, the markets have shown very little net change despite quite a bit of potentially market moving events which have taken place.   Equities barely budged given the "On-again/Off-again" denuclearization meeting with North Korea, nor given the massive downside volatility in emerging market currencies in the last couple weeks which brought about 15-20% moves in currencies of countries like Venezuela, Argentina, and Turkey.  Now the failure of the Populist movement in Italy to form a government has resulted in a dramatic spike in its bond yields while Italian Banks have turned down sharply.   The spread between Italian and German bonds reached the highest level in over four years, and Italian political turmoil seemed at least partly responsible for sinking the recent European equity rally over the first few weeks of May.  Yet in the US, there remains relative levels of calm, with major US Stock gauges up between 0.15-0.31% for DJIA and SPX respectively, over the last week.

Overall, it's tough to have a lot of conviction on Equities in the short run with Financials and Energy moving lower while the S&P is trapped in a narrow sideways range. Last week saw Utilities and Real Estate outperform all other nine S&P Sectors.   The breakouts in Industrials, Transports seem to have had little overall effect on markets, and even the stabilization and upturn in Semiconductors has only provided a bit of strength to the Technology sector.  Yet, Tech indeed has been on better footing this past week, which is a minor positive.   However, the bond yield rally experienced a dramatic reversal over the last week (despite what was perceived as a very dovish Fed)  and rates plunged in both US and Germany, with Bund yields having been cut in half over the last few months.  Given the degree to which equities have followed the action in Treasury yields this year (bottoming in early April while making minor peaks in Mid-April and Mid-May) this should be something to keep an eye on.    Credit spreads have widened out a bit in recent weeks, and given the CDS showing some stress in EU Financials, this might also need to be watched carefully in the weeks ahead.  Having a strongly bullish thesis when European banks are plunging and sovereign yields are skyrocketing in Italy coinciding with EM currencies falling in parabolic fashion doesn't always go hand in hand.  For now, it's thought that Tech and Industrials could tilt the odds towards market gains this week vs losses. Until the currency and rate volatility begins to affect US equities more dramatically, it shouldn't pay to give this much concern.  However, any SPX decline under 2700 changes the thesis from bullish to bearish and would be respected in the weeks ahead. 


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2700)  It's thought that Technology's resilience along with Transports and Industrials strength might carry the market a bit longer, as Financials weakness really hasn't led to Equities moving lower in recent weeks.  Yet on any signs of Emerging market currency volatility leading to contagion in the US, or Financials, or geopolitical worries rising again in a way that lead S&P down under 2700, this would be thought to be important.  Overall, the expectations are for mild gains this week, led by Tech, and Industrials


Intermediate-term (3-5 months)-  Bearish-  Trends and momentum remain negative from late January at a time when currency and rates volatility are on the rise.  While the upswing in Tech and industrials are indeed important, equities really haven't shown all that much progress in recent weeks, and the seasonal bias remains negative for the months ahead.   Market cycles seem to suggest a downward bias into late July, and for now, this might materialize given that implied volatility generally has been very low while Equity Put/call ratios have been trending lower in recent weeks, despite the global volatility getting more pronounced.  Initially, selloffs that breach S&P 2700 would cause this pullback into July to get underway.  However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.   Intermediate-term support to buy lies from 2450-2550. 

Summary:   Sector rotation and diametrically opposing forces still should be likely to cause a push/pull effect on indices over the next couple weeks, with no strong directional bias for Equity indices.   Incredibly enough, the markets have shown very little net change despite quite a bit of potentially market moving events which have taken place.   Equities barely budged given the "On-again/Off-again" denuclearization meeting with North Korea, nor given the massive downside volatility in emerging market currencies in the last couple weeks which brought about 15-20% moves in currencies of countries like Venezuela, Argentina, and Turkey.  Now the failure of the Populist movement in Italy to form a government has resulted in a dramatic spike in its bond yields while Italian Banks have turned down sharply.   The spread between Italian and German bonds reached the highest level in over four years, and Italian political turmoil seemed at least partly responsible for sinking the recent European equity rally over the first few weeks of May.  Yet in the US, there remains relative levels of calm, with major US Stock gauges up between 0.15-0.31% for DJIA and SPX respectively, over the last week.

Overall, it's tough to have a lot of conviction on Equities in the short run with Financials and Energy moving lower while the S&P is trapped in a narrow sideways range. Last week saw Utilities and Real Estate outperform all other nine S&P Sectors.   The breakouts in Industrials, Transports seem to have had little overall effect on markets, and even the stabilization and upturn in Semiconductors has only provided a bit of strength to the Technology sector.  Yet, Tech indeed has been on better footing this past week, which is a minor positive.   However, the bond yield rally experienced a dramatic reversal over the last week (despite what was perceived as a very dovish Fed)  and rates plunged in both US and Germany, with Bund yields having been cut in half over the last few months.  Given the degree to which equities have followed the action in Treasury yields this year (bottoming in early April while making minor peaks in Mid-April and Mid-May) this should be something to keep an eye on.    Credit spreads have widened out a bit in recent weeks, and given the CDS showing some stress in EU Financials, this might also need to be watched carefully in the weeks ahead.  Having a strongly bullish thesis when European banks are plunging and sovereign yields are skyrocketing in Italy coinciding with EM currencies falling in parabolic fashion doesn't always go hand in hand.  For now, it's thought that Tech and Industrials could tilt the odds towards market gains this week vs losses. Until the currency and rate volatility begins to affect US equities more dramatically, it shouldn't pay to give this much concern.  However, any SPX decline under 2700 changes the thesis from bullish to bearish and would be respected in the weeks ahead. 


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2700)  It's thought that Technology's resilience along with Transports and Industrials strength might carry the market a bit longer, as Financials weakness really hasn't led to Equities moving lower in recent weeks.  Yet on any signs of Emerging market currency volatility leading to contagion in the US, or Financials, or geopolitical worries rising again in a way that lead S&P down under 2700, this would be thought to be important.  Overall, the expectations are for mild gains this week, led by Tech, and Industrials


Intermediate-term (3-5 months)-  Bearish-  Trends and momentum remain negative from late January at a time when currency and rates volatility are on the rise.  While the upswing in Tech and industrials are indeed important, equities really haven't shown all that much progress in recent weeks, and the seasonal bias remains negative for the months ahead.   Market cycles seem to suggest a downward bias into late July, and for now, this might materialize given that implied volatility generally has been very low while Equity Put/call ratios have been trending lower in recent weeks, despite the global volatility getting more pronounced.  Initially, selloffs that breach S&P 2700 would cause this pullback into July to get underway.  However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.   Intermediate-term support to buy lies from 2450-2550. 


Technical Analysis of some of the key index, sector, commodity, currency charts that are important for this coming week

This week we'll take a look at some charts of the sectors which are moving in opposite directions and largely are responsible for necessitating a tactical short-term view, vs thinking markets simply trend higher through the Summer. Until more sectors are lined up positively or negatively, the market indices seem to be very accurately depicting this push/pull effect with the overall net effect being no net change.   Some attractive Technical longs and shorts are listed below. 


20 TECHNICAL LONGS
IYT, ODFL, UNP, VEEV, TWTR, GRUB, ADBE, NOW, PANW, AKAM, WIX, MRK, BAX, LVS, WYNN, V, IBKR, KSS, M, ZUMZ

20 TECHNICAL SHORTS
XOP, LL, DISH, DKS, CHS, GES, BBBY, USB, CBOE, DB, MAS, ITW, AAL, BLL, R, OC, MMM, SWK, CMI, AYI




TNX-  US 10yr Treasury yields have pulled back dramatically in the last two weeks, & now near critical levels

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TY Yields nearing initial support- One of the bigger surprises in recent weeks has been the extent to which Treasury yields have pulled back sharply following the FOMC's recent dovish bent.  The thought that the Fed would be in no rush to hike rates, given economic strength ironically coincided with yields pulling back, not escalating.  The European spike in yields might have contributed to some demand for Treasuries, but not surprisingly, this coincided with a period of excessive bearishness (which still largely hasn't evaporated) not dissimilar from this time last year when Yields peaked out and turned lower for six months.    Bottom line, technically this area near 2.90-3 coincides with a meaningful uptrend in yields since last September along with April lows and an area near February highs in yield.  This is thought to likely coincide with at least a temporary bottom in 10-Year yields.  However, momentum has begun to turn lower and any failure to rally sharply off these levels which then turns lower to take out 2.90% would be thought to result in a more meaningful decline in yields in the months ahead.  Heading into the last week in May, one should look at fading the moves which have been successful in the last week, namely going against both Utilities and REITS and looking to buy TBT. 
 

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Transports Breakout should favor further strength in this sub-sector.   The breakout week in the DJ Transportation Avg. was seen as bullish technically, as this exceeded an area of four prior highs going back since February.  This followed a similar move in the XLI and generally is thought to be a positive near-term force for Equities at a time that other sectors are stalling out and/or underperforming.   Given its leading tendencies, a positive near-term Technical breakout like we've seen likely can help Stock indices to hold up in a very uncertain time heading into the month of June.  Stocks like UNP, CSX, FDX, EXPD, ODFL and DAL are thought to be outperformers within the Transport space, and can be favored for further gains.  

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Semis strengthening appears to be another positive in the short run-   PHLX Semiconductor index- (SOX) managed to exceed  the former highs from May last week, which bodes well for additional near-term strength at a time that many markets indices have begun to stall out.  Given the positive leading tendencies of Semi stocks, along with the Transports, both sectors look to show further strength in the near-term and could help to buoy this market.  Near-term strength up to 1425-30 looks likely in the days ahead, making SMH something to favor in a market that's become quickly more prone to violent sector rotation. Given the symmetry of this price action since last November, it would be meaningful if prices were to peak at lower levels than March highs, and this is something to watch for in mid-June.  
 

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Financials - Underperformers since February and ongoing headwind to Equity rally-  The Financials have continued lower in the last couple weeks, as US Treasury yield weakness has coincided with real weakness in this group, on a relative basis to SPX and to some extent on an absolute basis as well.  The demand for US Treasuries given the start of real escalation in yields throughout the European periphery has warranted a less than bullish stance on this group until it can begin to stabilize.  While various stocks within Financials are still attractive, like V, MA, AMTD, IBKR, others like CB, CNA, BX, GS, LYG, CBOE have been quite weak for some time.   This makes a selective stance on Financials necessary, and given the 14.46% weighting in SPX, goes a long way towards showing why the market has had a difficult time making further headway this year.  No immediate support looks to be present on relative charts of XLF v SPX, but could materialize after this ratio chart tests April lows.  

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Energy- The quick about-face in the Energy space doesn't yet look to be complete, and a bit more weakness appears possible into this final week of May and potentially early June before it stabilizes.  This has served to hurt the commodity space at a time when many commodities have turned higher like Coffee, Sugar and many of the Grains.  Overall, this sector still looks to weaken a bit further before finding support as momentum has turned bearish while trends have rolled over on the breakdown in the last few days.  One could utilize further drawdowns to buy Energy into the end of this week most likely, but this group will now lead to show some major leadership before thinking anything more than just a minor bounce is at hand.  

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Retail- Much improved, but yet selectivity still key, as sector remains ripe for Post earnings mean reversion-  Retail is another area which has improved quite a bit in the last six months technically speaking following a prior time of generally poor returns since 2015.   However, as Barron's reported this past weekend, many of the moves which have happened this earnings season have proven to be opposite of the prior direction, showing some real mean reversion.  Stocks like KSS, TGT, BBY which had all rallied this year thus far, all slumped post earnings.  Meanwhile others like TIF, LOW, LB which had suffered in YTD terms leading up to earnings, all reversed very sharply positive post earnings.  Given that 20 Retail stocks are due to report earnings this week, this trend could very well continue.  Stocks which look ripe to reverse course technically based on counter-trend indications of exhaustion and/or overbought/oversold readings that are present in the charts are as follows:   Technically bullish ahead of earnings for a bounce:  BIG, KORS, DG, & DLTR, while Negative for a possible selloff: LULU, ANF, GES, CHS, DKS.  Other names which might continue lower post earnings which remain technically quite weak and have not benefitted from a rally in the Retail space whatsoever in recent months:  GME, while from a trend following perspective, the bullish pick heading into this week is AEO.  
 

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Euro-Banks continue their slide- Something to watch carefully-  The dramatic movement in Italy's yields in recent days can't be overlooked, and seems to be coinciding with demand for both German Bunds and US Treasuries.  Another consequence has been the downturn in many Italian banks, and the Banking sector overall in Europe has acted very sub-par over the last few years, not enjoying nearly the extent of the rally seen in the US.   The selloff in the last few days has been particularly worrisome and the Europe 600 Banks index has fallen to the lowest levels since early April, but as of last week, managed to make the lowest weekly close of the year.  US Financials have certainly followed suit to some extent in the last two weeks, but still should be favored over their European counterparts.  Movement under April's 168.46 lows would likely result in a decline down to 156.85 to erase 50% of the prior rally.  Overall, the extent of the damage in European banks in the last couple months is definitely something to pay attention to, and it's important to watch for signs that this could metastasize into the US a bit more severely

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Credit spreads gradually widening when eyeing derivative Spreads to Treasuries-Above 3.60% could allow for upward acceleration/credit widening-  The Bloomberg Barclays Corporate High Yield Average OAS shows the Option Adjusted Spread to 5-Year Treasuries of a basket of High yield corporates, something watched to gain a feel if Credit is widening or tightening. While this represents just one piece of the puzzle in this regard, it would grow more worrisome if this starts to uptick in any serious fashion.  Technically speaking, this chart has grown more bullish despite showing this spread having remained under the intermediate-term downtrend since early last Spring.  The Spread has made a higher low and has turned up sharply in the last month.   Moving over 3.60% would constitute a breakout, allowing for this to begin trending higher, indicating a widening of the spread of High yield credit to Treasuries.  This will need to be monitored closely given the uptick of late.  

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Wheat looks to be the strongest of the Grains, and further strength likely.   The Teucrium Wheat ETF has managed to exceed an area of prior highs going back since early March.  This helps out its chart substantially, allowing for a further push up in the Grain complex at a time when the US Dollar rally looks vulnerable to reversing course.  One should favor further rallies in the grain complex over the next 2-3 weeks before this reverses lower to begin its seasonal June Swoon.  Technically the breakout of these two former hjghs is quite positive and should allow for a runup to at least $7.50 from its current $7.06 close before this reverses.   However the larger picture continues to improve and even on a minor pullback in late June, this should present buying opportunities for intermediate-term progress.  At present, Wheat should be overweighted the most, followed by Corn, with Soybeans lagging, given tariff concerns.  

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Bitcoin-  The Decline in many crypto-currencies which began again in early May doesn't yet seem over, yet Bitcoin appears to be close to an area of real importance to its support trend which coincided with lows this past February.  Weakness down to 6650-6850 should translate into an excellent buying opportunity for traders looking for support.  The combination of a meaningful prior low along with trendline support, oversold conditions, pessimistic sentiment,  and lack of interest these days by the modern media might help to put in a good trading low as the month of May comes to a close.  Movement back over 8,000 is necessary to expect that this recent one month downtrend could be complete, while any move back over 10,000 would be very bullish technically and also something to watch for in the months ahead that would propel this back higher to test highs made back last December, 2017.