December 8, 2016
S&P DEC FUTURES (SPz6)
2210-2, 2188-9, 2179, 2164-6 Support
2244-6, 2257-60 Resistance
S&P Futures: (2-3 Days) Bearish- S&P's move has run a bit too far, too quickly and some backing and filling is needed before we can climb much further. 2240-4 is important on the upside for Thursday/Friday to sell into, while pullbacks are likely contained near 2210-2.
SX5E- EuroSTOXX 50- Bearish- Stalling out likely after SX5E broke out of four-month consolidation range to the upside to test areas near April highs. While certainly a bullish move in the last couple days, similar to S&P, we've run too far, too quickly and some backing and filling is sorely needed. Look to buy dips at 3053-3075.
HSCEI- Bullish- Movement up to 10400 looks likely and should be favored for near-term outperformance. HSCEI broke the trend from September and has remained loyally above.
Longs/Shorts for a 3-5 day period:
Technical Longs: MRK, UNP, CONN, STML, MTSI, KOL, PAAS, SLV, UTX, TXT, EXP, ALGN
Technical Shorts: UUP, D, CMS, DTE, TRIP, TUP
Much of the excitement Wednesday revolved around the breakout in the DJ Transportation Avg, which vaulted over 9310 for the first time since November 2014, nearly an exact two-year anniversary of former highs, which failed to act like any real resistance. The S&P's rise to new highs, meanwhile, has still not been accompanied by any such more in the Nasdaq 100 in recent days, which remains down under key resistance at 4900. While sectors like Consumer Discretionary and Materials have begun to pick up some slack, the rally continues to be dominated by Financials outperformance in the short run, which along with Industrials, represent two of the only sectors which have shown meaningful performance in the last month, both showing returns of greater than 10%. In data through 12/6/16, S&P was higher by 1.1%, while seven S&P major GICS Level 1 sectors were down in the last week. While the TRAN and SPX move back to new highs are certainly positives, the rally thus far is not nearly as broad-based as might be expected given the lack of Tech strength. Near-term, the following continue to be important points worth monitoring
1) Italian and Spanish yields have broken support and have turned lower after peaking out in mid-November. Whether or not this leads to German Bund yields or US Treasury yields making a similar move, it should be monitored carefully in the days/weeks ahead.
2) European Banks ETF, the SX7P, provided the bulk of the outperformance which served to cause SXXP, SX5E to break out to new multi-week/month highs in the last couple days, exceeding key 3+ month trendlines. Europe is likely to outperform the US in the short run, but we still have a difficult time making the case for more substantial intermediate-term outperformance.
3) Tech remains a laggard. Despite IWM having moved back to new monthly highs, the NDX remains range-bound and most Technology gauges such as the MSH index, the Equal-weighted basket of 35 various Tech stocks from all different sectors, remains under pressure vs SPX and has not yet turned higher.
4) DJ Transportation Avg move back to new all-time highs confirms the move in Industrials from a Dow Theory perspective and after two years of lagging, this finally can join the other indices in unison back at new high territory, which is a definite positive. For now the ramp up in sentiment and lack of breadth are two negatives that might seem important, but given the seasonality any bearish price behavior at this point looks to be pushed off into January.
NASDAQ 100 index continues to lag and represents one of the main issues confronting this market right now which is holding back many breadth and momentum indicators from showing a much more positive picture. Technology has been the chief culprit, and this group has lagged performance for the last few months, turning in negative performance for the rolling 3-month period ending 12/6/16 with -0.7% returns vs SPX having moved higher by 1%. This chart might look ominous as a potential Head and Shoulders pattern, but only presents real danger if recent November lows are broken. Otherwise, this represents just consolidation that should lead back to new high territory into year end. Most weekly counts don't support the notion that we're at a peak right now just yet for NASDAQ, so this can afford to move North, but will need to show some evidence of technical progress in the days ahead.
The Morgan Stanley Technology index, the Equal-weighted index of 35 members of Technology from various sub-sectors, has been in a decline since mid-October and this chart above details the degree to which MSH has underperformed the SPX and has trended lower. Most weekly charts show the group to be close to bottoming, but it will need to breakout above downtrends to have some evidence that this can begin to work.
Italian and Spanish yields have both turned down in the last couple days, breaking under support which has held for the last month and could serve as a catalyst for Financials to consolidate recent gains which in turn might show up in the US in the near future. Most Treasury yields have held up in resilient fashion ahead of this month's FOMC meeting, but are vulnerable based on the combination of Sentiment, overbought conditions, and counter-trend signals of exhaustion that should make a continued rally in Yields along with the Financial sector, difficult without any kind of pullback. For now, it's important to watch 2.28% on the 10-year Treasury yield, which if violated, should lead down to near 2.15% or even 2.00% which would be an attractive risk/reward area to sell Treasuries.
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