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Trend bullish, but stretched; Consolidation would offer better buying opptys

May 26, 2016


2076-7, 2065, 2040-2, 2022-5, 2012       Support
2097-9, 2105-7, 2125-7                           Resistance

S&P Futures:  Upside limited on a 24-72 hour basis- Trend quite extended & likely will consolidate a bit (3-5 days) before moving to new high territory.  Hold off on initiating new S&P longs, & consider taking profits for at least a 30-40% pullback of recent 4-5 day bounce.   Area to buy lies at 2067 down to 2041 maximum, before trend turns back higher. Use extreme selectivity on longs the rest of the week

EuroSTOXX 50- Choppy trend overall since March as part of an overall downtrend.  SX5E is nowhere near as bullish as S&P and now the bounce in the last couple days shows the same symmetry as the move up into March, which could cause some stalling out.  Resistance lies at 3100-3150, but should take some time before immediately moving above 3150.

Hang Seng China Enterprise index- Neutral to mildly bullish- HSCEI has begun a mild rally, but remains in much weaker shape than US indices or SX5E.  Given the extent of the selling since April, it will take some time for HSCEI to bottom in a way that can allow a sharp rally.  For now, momentum has shifted to a bit more positive.

Equities-  Attractive Technical Risk/reward Longs

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

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

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


S&P is now stretched to levels that make pullbacks likely in the short run, with areas near 2097-2100 likely constituting max upside over the next few days,  while pullbacks could carry down to 2050-60 or even 2041.  Therefore, an extremely poor risk/reward for new longs given the extent of the recent runup since 5/19.  Careful selectivity is necessary in longs and pullbacks would afford much better buying opportunities.  However, much of this cautiousness is short-term in nature only, as the weekly breadth and momentum remains quite positive with the A/D having moved back to new high territory, and we've rallied in an environment where sentiment is less than optimistic.  If the outflows over the last 10 of 14 weeks are any guide, similar to January/February,  many missed the rally in the last few days, and remain in underperformance mode as they contemplate whether to chase the rally, or hope the global uncertainty can subside.

A few factors suggest that at,  the very least, a stalling out could be possible in the short run.  The sectors which gained the most over the last couple days, Materials, Energy Technology and Financials, have all embarked on solid uptrends, but the sectors that truly matter, compilation wise, Tech and Financials, representing over 1/3 of SPX, now lie near key trendlines on an absolute basis. As we'll show below though, Equal-weight financials has made steady progress that suggests dips should be bought, as this sectors has actually broken out relatively speaking in the near-term.

Looking outside the realm of equities the price action Wednesday failed to show much lift in Treasury yields, which might be a concern given the degree to which those have correlated positively with SPX in recent months.  However, the 2-year yield managed to breakout of its triangle consolidation that's held for most of the year.  This is something which has risen steadily just as Fed futures have fallen, predicting higher and higher likelihood for a June hike, which has gone from 4% to over 34% injust two weeks' time.  The US Dollar meanwhile has stalled out, while Gold and Silver have plummeted in recent days and WTI Crude has ripped to just under $50, a level thought unfathomable by the Bears just a few weeks ago.

Bottom line, the trend is bullish for US Equities, but looks to have moved a bit too far too quickly in the short run.  Those with 24-72 hour timeframes might find value in selling into futures or taking profits on some gains to consider buying back on pullbacks.  For most investors though with at least a 3-5 week time horizon, it remains right to stay long and buy dips, thinking that higher prices are to come into mid-June, and/or early July before any summer peak.

Charts and comments below


S&P hourly charts managed to follow-through dramatically on the breakout from Tuesday, gaining another 20 handles to make the total distance for S&P futures nearly 70 points from low to high in just the last four days.  For SPX cash, this level equates to around 50 points and more than 3%.  Hourly momentum is overbought, while daily momentum is nowhere near levels hit back in November.  Overall, it's likely technically that the market can move to new highs into the next month, but upside looks limited in the short run.  Buyers would benefit from pullbacks in the days ahead, but should use those to buy dips technically, as the medium-term trend remains constructive.


The NASDAQ vs SPX has reached areas in relative terms which constitute make-or-break territory to this entire downtrend from December.  A stalling out looks possible here for the first time since early May, and could allow for consolidation before additional gains ensue.


Equal-weight Financials vs SPX has broken out in the last week, which looks like a far different picture than when examining XLF on its own, or XLF vs SPX.  While this sector is stretched also on an absolute basis, further relative gains look likely for Financials which is important given this sector's weight in the SPX.  This group ordinarily benefits as yields rise, and lately has risen along with 2-year yields as the chance for a June hike becomes more likely. 


The Advance/Decline has recently moved back to new high territory which is seen as a bullish sign for stocks in general and should help indices move back to new high territory in the weeks ahead.  Similar to the NYSE stocks >50-day moving average moving up to 94% in late March which preceded a continued rise in stocks, it's rare to see stocks suffer any kind of meaningful peakout when the Advance/Decline is hitting new high territory (with potentially the lone exception being 1937) Overall, A/D and breadth indicators in general have continued to support buying this rally, and despite some settling in late April/May, that occurred from very high levels and shouldn't be construed as momentum weakening by any stretch.




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