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Dollar surge with Yield curve flattening leads to Financials strength, but little else

December 16, 2016


2245-6, 2240, 2232-4, 2220   Support
2272-5, 2286-8                       Resistance


S&P Futures: (2-3 Days)  No Change- Bearish-Until highs are exceeded on a close, it's still likely that post expiration could bring Lower prices in the very short run (2-3 days) and the price action could be bearish for a move down to 2232, with gains back over 2271 needed to think the worst is over and a rally to 2300 could happen into end of year. Over 2271 it's right to stick with the uptrend.

SX5E- EuroSTOXX 50-  Bearish- Pullback to 3100-50 likely in the next few days before rallies take hold.  Counter-trend sells are present which are also seen in SPX right now which could be confirmed and allow for minor backing and filling before a year-end rally.  For now, doubtful we see anything below 3050, with above 3300 being a stop for shorts.

HSCEI-  Bearish- Pullback down to Nov lows looks likely- 9250-69 area, which should then lead to stabilization and support before rallies take hold.

Longs/Shorts for a 3-5 day period:



Thursday was unconvincing that any type of weakness had run its course.  Momentum is waning, yet most indices are in the process of completing Exhaustion signals on Daily charts, per Demark indicators.  Prices made back around 60% of the prior day's losses, yet still didn't move back to new highs while being largely range-bound over the last couple days.  Breadth was lackluster, with barely more stocks advancing than declining, while Financials accounted for most of the gains, with barely most of the sectors "hugging the flat line."  Certainly not broad-based by any stretch.   While it pays to be wary of fighting the tape too much in the month of December, it pays to watch carefully which sectors are moving and which ones aren't as the market heads into December Quad-expiration today.   We saw further evidence of the US Dollar index accelerating substantially higher, as the Euro made a monumental breakdown vs USD, (which didn't go unnoticed) while Precious metals were hard hit, as both Gold and Silver fell 3 and 6% respectively. 

Sector-wise, Financials was the only sector to record gains over 1% on the day, and even in this rally we've seen a bit of slowing in the short run, which could lead to pullbacks in the weeks ahead once Treasury yields initial rise has run its course.  While the last two days cast doubt that we've arrived at that juncture just yet, the sentiment and waning momentum amidst a very steep uptrend give pause to trying to initiate new longs in this sector at present, and extreme selectivity is needed.  

Meanwhile, fixed income and FX continue to provide the majority of the excitement these days and tell most of the narrative of what's been happening in the market in December.  The Yield curve has steepened on the front end, yet flattened dramatically when looking at 5s/30s and 10s/30s curves, while the Dollar has accelerated in a near parabolic fashion. 



SPX has begun to wane in recent days, but this hasn't taken the form of any meaningful pullback, but rather some sideways consolidation which has caused momentum to drop off a bit after getting overbought.  Counter-trend Sells are present on daily charts, but not confirmed (Demark) while weekly remain quite premature and require another few weeks of upside before any meaningful signs of exhaustion.  Near-term, weakness still looks possible for a few days, but any pullback should be used to buy with 2200 likely being a floor before additional strength happens into year-end.


Monthly charts of the US Dollar index show the extent of the recent gains as they've risen to the highest levels since 2003.  While near-term overbought conditions exist, the broader chart looks quite constructive and should allow for further gains into 2017 which should result in the Euro dropping down to Parity and below vs the US Dollar.  For now, any weakness should prove to be a buying opportunity.


Momentum has begun to wane a bit on the Financials sector as its slowed, similar to the rise in Treasury yields, which has taken more of a sideways course of late vs moving straight higher in a steep line.  Counter-trend sells are near for the ratio of Financials vs SPX, and extreme selectivity is needed when buying stocks in this sector given the extent of the gains since early November.  For now, seeing momentum wane while Demark sells loom typically argues for profit-taking.  But until this ratio starts to show greater evidence of breaking down, by the ratio undercutting the 13 and 21 day moving averages, the trend remains positive, yet just a bit flatter than this time last month.



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