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Defensive rally, but tough to ignore price

May 11, 2016


2048-50, 2030-2,  2026-8, 2007-9     Support
2084-6,  2097, 2105-6                     Resistance



S&P Futures: Upside should prove limited on a 2-3 day basis given that S&P has rallied nearly 50 points in the last three trading sessions.  However, the larger move at this point should turn out to be a move back to new high territory, given ongoing bearish sentiment.  So Despite near-term overbought conditions suggesting a possible stallout and minor pullback, it's wise at this point to use movement down to 2055-60 as a chance to buy, thinking the selloff attempt is likely complete, for now.  

EuroSTOXX 50-  Bullish, with stops at 2880-Target 3100- EuroSTOXX looks to have made a short-term bottom with last Friday's close & Monday's upside follow-through

Hang Seng China Enterprise index- Bearish, but has stabilized a bit in recent days.  Watch for close over 8588 which would drive higher to 8700-8800.  Given bearish break two weeks ago, bounces should be sold.

Attractive Technical Risk/reward Longs

Bullish, but extended- Buy Pullbacks-  MO, CB, FISV, NOC, LLL, JEC, BGS, NSP, LMT, VMC, AMSC, FIS, MBT, AEM,TRXC, EBF, DG, CHD, OC, PM, MCD, SONC, POOL

Attractive Technical Risk/reward Shorts: FXI, SPLS, FOSL, AAP, VSLR, BBBY, PTEN, GT, GPS, HTZ, CF, SHLD, AWI, CIEN, SQ, ADS,MNK, RL,HOG

Bearish but extended- Sell Rallies- DDD, CROX, EFOI, TSLA, LC, KONA, CSIQ, FSLR, FIT, MYL

WHAT NOW??   This defensive market continues to amaze, and move in exactly the opposite way that most investors expect.  When looking at YTD Performance, Utilities remain the top performing sector, with Telecom and Staples rounding out the strong defensive leadership which has shown these three groups in the top 4 of 10 for total performance for 2016. The groups that many thought "should" be leading, given markets being just 2% from all-time highs, have lagged terribly for 2016 as Technology, Financials and Healthcare are all down on the year, with losses exceeding 2%. 

Signs of these laggards making a comeback was apparent as early as Monday, when the NASDAQ comp managed to log new multi-day closing highs along with Europe, and Financials, Technology and Healthcare outperformed.  Seeing these groups stabilize and turn back higher is indeed an encouraging sign.  Last week we noted that Aerospace and Defense was moving back to new high territory, helping to embolden the Industrials sector, which had lagged after testing former highs. Now we see Consumer Staples rallying aggressively back to new all-time high territory , which makes many scratch their heads given the distance that indices lie from all-time high territory.  Discretionary has lagged the Staples sector by nearly 300 bps Year-To-Date, but still insufficient reasoning to immediately expect mean reversion.  However, there are signs of this happening in Healthcare and Tech, and these are the two sectors to favor for the immediate future as indices make an attempt at breaking out to new high territory.

Three factors make it seem likely that this is possible:  1) Ongoing bearish sentiment- AAII polls taken on 5/5/16 showed Bears to outnumber Bulls by a 30 to 22% ratio.  Amazing considering that equities had rallied nearly 14% in the prior 12 weeks.  The recent Equity put/call data showed the 5-day moving average of Put/call logging its highest readings since February.  2) Weekly momentum and breadth remain impressive given the positively sloping gauges like MACD and when considering that Advance/Decline data recently moved back to new all-time highs. 3) Sector leadership is slowly starting to change.  Just in the last week we've seen Technology, Healthcare and Discretionary all appear in the top 5 for Sector performance in the rolling 5 day period ending 5/10/16.

Thus, given the foul political climate, ongoing angst regarding China, earnings, and Fed policy, the US Equity market has offered up one of the more hated and "unembraced" bounces off the February lows than has been seen in a long time. Despite the defensive positioning overall, it remains right to play for a move back to new highs over the summer, as this looks to be slowly changing.

Looking back, last week offered some promising signs that this selloff could be approaching its end, as various Fibonacci and Gann related cycles pinpointed a possible turn for 5/4-5/6 in May.  However, bond yields certainly didn't turn up too aggressively, which would be thought likely on a spike in equities given past correlation trends.  (German bund yields fall own under 11 bps in Tuesday's trading at one point, and could still reach 7-8 bps before finding lows into end of week)  The breakdown in Chinese equities was also a concern to many who have correctly noted that selloffs in China are often something that most pay attention to.  However, the early warning signs for the Bears that hibernation might be right around the corner seems to be something to listen to, loud and clear and Healthcare and Tech outperformance and particularly NASDAQ strengthening should be something to heed after a dismal few weeks.

As for the plan of action entering Wednesday.....Look to use any pullbacks in the days ahead to buy dips technically for a move back to new high territory.  Trading shorts were officially stopped out at a profit on Tuesday, and the final pullback that was expected never seemed to materialize.  Thus, given the surge in momentum quickly back to overbought territory and the factors mentioned above,  it's right to play for upside and look to buy dips when given the chance in upcoming days. 

Charts and comments below.


Prices have moved a bit too far too quickly as of Tuesday night, and could easily drop to 2058-60 without doing any damage to prices which should be starting to move back to new highs.  While a further rise to 2090 can't be totally ruled out, it seems unlikely right away and the risk/reward for trying to play for another 1/2-1% after this 2.5% 50 point rally is poor.    So a tentative/mildly bearish view for the next couple days makes sense, looking to buy dips when given the chance.

XLK looks to have bottomed out right where it needed to after a 50% pullback to the February -April rally.  After turning in the worst performance among all 10 S&P sectors in the rolling 30-days, this ability to stabilize and lift off the lows should be positive and bullish to the markets as a whole.  Tech should be a group to favor and particularly the Semis which should outperform Hardware given the recent multi-year breakout (See Weekly Technical Perspective from 5/1/16. )


Amazingly, Consumer Staples have just moved back to new all-time high territory as of Tuesday's 5/10 close back above $54.  This should further help this sector do well and particularly on any signs of weakness in the broader market in the days ahead, as this group'stechnical structure still make it the one to own of the defensive groups, vs Utilities or Telecom.


One issue that will eventually need to be resolved is the lack of selling in the Treasury market, which would benefit the Financial sector and provide an additional tailwind for this rally.  Given the past positive correlation trends, its thought that Yields should be close to turning back up.  However with equities overbought and stretched, a pullback could help yields remain compressed throughout this week before lifting.   The Ten-Year Treasury yield vs German bund is shown above, with the Bund yield having pulled back well below where Treasury yields have gone in recent weeks.  A move down to 7 bps would make Bunds good to sell yet again, and any further weakness in yields in the next couple weeks should constitute a good selling opportunity for Fixed income, thinking that yields are on the verge of rising.



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