June 4 2018
S&P 500 SPDR ETF Trust- SPY
267.75, 264.46, 262.14, 259.29 Support
274.08, 276.61, 280.41 Resistance
Heading into June, the NASDAQ remains the strongest of the major US Equity indices, fueled by Technology, and returned over 5% for the month of May. As of end of last week, price had pushed up above the highs of the recent range to make the highest close since mid-March, putting this in much better shape than either the SPX, or the DJIA. Upside resistance could challenge this Tech rally once XLK reaches former March peaks, and this is something to watch carefully for in the upcoming 1-2 weeks (evidence of Tech slowdown) Heading into the first week of June, it's thought that Discretionary and Financials might play catchup a bit to tech, but markets will need to show real strength to show sufficient broad-based participation to allow markets to rally. Even with Tech's strength last month and in the last few weeks in particular, the net progress for equities has been largely NIL, and lots of sideways consolidation lately. So while breadth slowly improving would be thought to be good, the lack of broad-based sector participation continues to leave the larger structure in consolidation from late January.
Summary: Overall, still a difficult Equity market to have much conviction in, and despite the multiple 1% up and down days over this past holiday shortened week, this see-saw trading really hasn't accomplished all that much technically. Last Friday's close left prices within 3 ticks of SPX levels hit back on May 14 So, still very much range-bound for most of the last three weeks, and under highs made back in March and also back in January. None of the trade drama, or emerging market currency woes seem to have affected US stocks too dramatically, and even the near-parabolic drop in rates hasn't spooked many sectors outside of Financials. On the other hand, reports of unemployment dipping down under 4% and better than expected earnings haven't affected stocks all that positively either. The bond yield drop does seem to have some importance though for the weeks ahead, as does the spike in Italian Yields which hasn't been taken too seriously thus far by Equities. (Credit , meanwhile, is a whole different story)
For now, heading into the month of June, it should be noted that this remains a challenging time seasonally for stocks, as S&P and DJIA tend to turn in negative returns on average for Mid-term election year Junes , with -1.7% and -1.9% returns going back to 1950. (courtesy of Stock Traders Almanac) Small-caps have begun to outperform meaningfully in recent months, while Growth has shown far better returns than Value, and outperformed meaningfully during the entire month of May. S&P's returns of 2.67% for the month of May have helped the index move back to positive territory for the year, though the DJIA is still negative, showing a -0.34% return. The Russell 2k's surge back to new highs certainly has not been matched by either the SPX, nor DJIA, and broad-based indices like the NY Composite remains down more than 1000 points from its late January highs, which equates to -7.3%. So a real lack of strength has been seen in recent months, despite how good we're told earnings have been, or how confident the Fed is on the economy, or the fact that potential Tariffs lie on the horizon, Despite being told that these are just grounds for negotiation. The geopolitical backdrop tends to be ever-changing but the bond market in particular hasn't really given a sound vote of confidence with rates pulling back moderately from the former 3.11% peaks down under 2.85 recently. The market has rapidly dialed back expectations for further increases and the futures market is now just pricing in one more rate hike post the one expected at this month's FOMC meeting on June 12-13.
Technically speaking, stocks remain muddled, as Technology strength has been diametrically opposed by Financials weakness. So while most FANG stocks are near 52-week highs and resilient, the European bank decline looks to be specifically hurting US Banks over the last couple weeks. Financials were the worst performing sector last week of the major S&P LEVEL 1 groups, down more than 1.72%. While there has been some encouraging movement lately in Industrials, and Transports specifically, these remain well off 2018 highs, and many of the other large sectors which make up SPX have treaded water in recent weeks. This makes for a difficult environment, and despite Advance/Decline being back to new all-time highs, the broader Equity index tape has shown all sorts of divergences and anything but broad-based participation. SPX still only shows about 55% of all stocks above their 10-day moving average while the options market shows about 2 Calls being bought for every put as of last Friday, despite the ongoing uncertainty of a possible trade war and no conclusive evidence that the Trump/North Korea Summit will prove all that constructive. Popular technical gauges of momentum like MACD are still negatively sloped on both daily and weekly charts, so to say it's been a tough market lately has been an understatement. Rapid Sector rotation necessitates climbing onboard at just the right time and being quick to change if trends begin to turn.
At present, it's though that last week's late week surge might be able to carry prices higher into mid-month, just like we've seen in the last few months. Each of March, April and May showed distinct patterns of stocks rising from early month and topping mid-month, then decidedly weaker trading into end of month. Given the breakouts lately in Industrials and ongoing Tech outperformance, it looks like this pattern very well could continue for the month of June also. Some of the key technical developments to watch are shown below, along with 10 bullish opportunities heading into June which look technically appealing, despite the above-average chance of a June Swoon in the latter part of the month.
10 Important Developments to watch for in the month of June
1) Credit spreads widening further- Last week saw a meaningful breakout in the High Yield derivative OAS Spread which shows the spread of High yield credit over Treasuries by means of the derivatives market. The current 3.56% spread of High Yield to 5-Year Treasuries did successfully break out of a long-term downtrend, which suggests that this FX and rate volatility might be a bigger deal than the market is pricing in. So to some extent, this move was akin to "warning Bells" going off to suggest that credit is widening, (Always something to pay attention to given the past relationship of credit turning down prior to equities)
2) Signs of Yields continuing lower for US Treasuries and Bunds. The breakdown in the US 10year Treasury yield looked serious and damaging technically early last week, violating a level that had held since yields bottomed last September. While Yields did in fact bounce late week which coincided with equities following suit, it's important to watch Treasury yields given that yields seem to have led Stocks in recent months
3) Signs that Financials either mean revert and start rallying to join Technology, or fall further, both would be important. Charts of XLF show daily charts to have TD Sequential 13-Buy Countdown signals for the first time all year. This could be helpful in coinciding with the Banks starting to strengthen again after the meaningful weakness we've seen (Note- while confirmation of this signal would be a positive, there does stand a chance of Weekly charts reflecting TD Sells if SPX runs up over 2786.24, so this is a level to keep in mind and watch carefully, if 2741 is broken and then 2760. ) XLF daily chart could possibly confirm TD Sequential buys as early as today, Monday 6/4, with a close over 26.92. This would be a huge positive given the negative developments in this group breaking down in recent weeks, and could coincide with XLF rallying up to 28.50
4) Sentiment needs to be watched carefully in June, as both Investors Intelligence and AAII have begun to widen out again in showing the spread between Bulls and bears. Additionally, we've seen the Equity put/call data dive to the low 50s last week, so this is clearly a concerning sign when expecting that Equities should be able to pull it together and rally back to new highs to join Small-caps
5) The US Dollar index (DXY) has broken its trend from mid-April last week, so an upcoming Dollar decline could be important in causing a relief rally in some of the Emerging market currencies that had gotten hard-hit, and oversold bounces look likely for both EURUSD and GBPUSD. Note, the Bloomberg Dollar index which has half the exposure vs Euro as the DXY, failed to get up above last Fall's highs and shows a similar picture to the DXY. So it's likely that the Dollar rally runs out of steam this month.
6) Some evidence of Consumer Discretionary breaking out makes this sector one to watch in early June. While the Equal-weight Discretionary ETF has lagged badly since 2015, near-term progress in AMZN, NFLX and CMG, HD should be particularly helpful to XLY, and help this climb back to near 109.
7) Small-caps vs the broader market in ratio form has broken the downtrend from 2014 and now challenging highs seen since the Election. This has been ongoing since February and is thought to be a positive for the market, which had been diverging lower in recent years. Whether one sees this as a sign of a broader rally with Small-caps participating, or that Small-caps are the last part of the market to rally to mark the end of an economic cycle, it's worth noticing, and near-term does look to extend further.
8) The Developed market outperformance vs Emerging markets could be set to reverse if the Dollar turns down in the weeks ahead. This has shown pretty dramatic EM lagging since late March, but weekly charts show this ratio to have arrived at levels where reversals could take place. this should mean that for now, the European volatility seen in rates and FX should not have an effect on the US. EEM could be due to snapback, and it's thought that any rally back over $47 would be bullish and lead to EM outperformance
9) Commodities have been showing some meaningful signs of rallying lately, with breakouts in the Grains, while Coffee and Sugar have both seen above-average strength lately. Precious metals still haven't shown above-average strength, but this looks to be right around the corner. So despite Crude oil having begun to pullback lately, the move in commodities as a group has been impressive, lifting the CCI index to its highest levels since 2015. This should continue to be watched, and could offer better signs of strength than Equities between now and the Fall.
10) Market cycles tied to both March highs and mid-December both pinpoint mid-June as being important for a change in trend. It's also thought that the ongoing trend of bottoming early in the month and rallying into mid-month before a peak occurs, could persist, so technically i'm on the lookout for a possible stalling out into the Fed meeting and trend reversal.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- (With Stop and Reverse on any move under 2685) Last week's Tech resilience still looks to have further upside, while Financials have begun to stabilize, so the combination of these very well would send S&P up to near 2741 and then higher to 2760 into mid-month before any stalling out and/or reversal. Industrials, Discretionary and Healthcare all look to pick up the slack for Financials, but its thought that the next week can still turn out positive. Movement back down under 2685 would postpone the rally.
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 10 Attractive stocks which look to trend higher over the next few weeks, and look like appealing technical longs
TD Ameritrade- Move to mid-to-high $60's looks likely
TD Ameritrade (AMTD- $60.13) Bullish, expecting a test and breakout of resistance highs near $63 which could carry prices into the high $60's. The late week upswing in AMTD helped its near-term structure improve at a critical area of support near its intermediate-term trend. This neutral churning over the last couple months is thought to be constructive base-building that can lead back to new high territory. So while most of the FInancials space has been hard hit in the last couple weeks, AMTD has held its ground in resilient fashion, and should be well positioned to gain ground in the next couple weeks.
Five Below (FIVE- $71.39) FIVE looks technically well positioned to continue its rally that started last Summer post the Breakout above its four-year bullish base. The last couple weeks have seen FIVE pullback after nearly getting to $80, but the weakness since that time has proven minimal and has shown signs of trying to stabilize near its intermediate-term trend. Given this near 10% pullback within its longer-term uptrend, this looks particularly well positioned to turn back up to the high $70's in the weeks ahead. Long positions look attractive here, with trading stops under $69, expecting a move back to the high $70s/low $80s, making this a good technical risk/reward.
Grubhub ($107.77) - Bullish for move back to new highs- GRUB's ability to make a weekly close up at the highest since mid-March creates a very bullish technical profile that should result in this continuing higher back to new all-time highs into mid-June. The act of consolidating its gains from $110 in the last couple months failed to show any meaningful technical damage, and in the last few weeks this has been able to push right back up to near former highs. This technical pattern remains quite constructive, and weekly counter-trend exhaustion looks premature by at least 2-3 weeks. Thus, last week's success in pushing higher should actually be seen as a chance to buy, with targets up between $115-$120 before this stalls out.
HCA- Bullish, with upside targets near $120. HCA's breakout late last year managed to exceed highs going back since mid-2015. This was a bullish development, but left the shares overbought and prone to consolidation in the short run. This looked to have happened and now HCA has pushed back up o test these former peaks from back in March. Given last week's move back to new all-time highs on a weekly close, this is quite bullish technically and further gains look likely to technical targets near $110 and possibly $115 before this reaches any type of resistance. This remains one of the more bullish charts within the group given its long-term structure and recent bullish progress back higher.
Merck (MRK- $60.56) Last week's bullish breakout of the downtrend that's held MRK intact for most of 2018 is a very positive development, and should lead to this pushing higher to test former highs made in the early part of 2017 and higher. The stock maintains a bullish uptrend from 2009 but as the larger long-term chart shows, it's bullish base from the early 2000's makes it even more attractive from a long-term basis as this starts to turn higher to challenge former highs in the mid-$60's. Initially, MRK could stall out in the mid-$60's, but its long-term prognosis remains quite bright technically given this structure. Now the near-term breakout should serve as a technical catalyst for this to trend up sooner than later, and Technical longs are recommended.
Union Pacific (UNP- $146.92) UNP is quite bullish within the Rail space, but not as overbought as CSX, making this technically more attractive near-term. The reasons for short-term optimism center on UNP's breakout late last year above the highs near $125 that had held this since mid-2015. This largely required consolidation in the last couple months but has just broken back out to new all-time highs. This should allow for additional near-term outperformance and gains which should reach $155 without too much trouble before encountering resistance. Long positions recommended, looking to add on weakness down to $140-2.
Veeva Systems (VEEV- $79.78) Bullish, with upside targets near $90 before this stalls. VEEV has engineered a very bullish structure with its early year breakout which was consolidated in the last couple months. The last couple weeks have seen this push back up to new all-time highs, and signs of exhaustion remain premature. The act of getting back to new highs after consolidation following a very sharp advance typically bodes well for the stock to continue moving at a quick pace higher, and this still looks right to buy into with targets about $10-15% higher given its technical structure.
Progressive Corp - (PGR- $62.43) Bullish Reverse Head and Shoulders pattern should allow for an upcoming push back to new all-time highs which can result in PGR moving back to the high $60's. This structure has been largely range-bound since mid-March, yet this neutral churning has been making higher lows since early May. Now in the last couple weeks, prices have pushed back up to challenge this level near former highs, and is thought to be quite constructive for an upcoming breakout. It looks wise to be long here, buying dips for the push higher whih would happen on any daily close back up above $63.50 and likely lead this up to the high 60s without much trouble.
Kohl's - (KSS- $68.37) KSS has just begun to turn higher again after its first breakout from late last year helped the stock to regain nearly 60% of the prior decline. The last couple weeks has seen the stock push back up to challenge former highs near $70, and should be exceeded, allowing for further progress up to the high $70's. Overall, this is seen as one of the more bullish structures within the Retail space given its push back to new 52-week highs, and additional upside here looks likely in the weeks ahead. One should buy in small size, using any dips back to 66-67 to add fr a move up to $73-74 and then to near 80.
NRG Energy (NRG- $33.91) NRG's consolidation over the last few weeks following its bullish run looks right to buy into, as the stock has minimal upside resistance until this gets to near $38, which lies about 10% above current levels. Given the momentum acceleration in the last six months, this remains one of the stronger stocks within its sector and should be able to push higher into late June/early July before facing too much resistance. Longs are recommended here technically, looking to buy dips