July 6, 2016
S&P SEPT FUTURES (SPm6)
2068-73, 2056-7, 2043-5, 2027-30 Support
2104-6, 2119-20, 2132-5 Resistance
S&P Futures: (2-3 days)- Near-term bearish, looking to buy dips in the next few days down near 2057-9 or 2042-4, with movement back above 2104 needed to think this pullback has run its course and would lead to new all-time highs. For now, additional selling looks likely.
First signs of weakness after last week's sharp equity rally. As might be expected with US stocks, prices hit first support near 2073 and managed to rally well off the lows by the close, showing far less technical damage than Europe which continues to be a common theme. Global sovereign yields and the US Dollar seem to be key drivers of stocks in the short run, with the pullbacks in Bunds, Treasury notes and bonds and Gilts coinciding with equities following suit. Dollar/Yen and Pound Sterling vs USD also experienced weakness to new weekly lows, undercutting last week's range which is something many are watching carefully after the recent BREXIT vote saw extreme volatility in GBPUSD. One thing to note is that the weakness in USDJPY, Crude and Yields all at once has typically resulted in pullbacks in Equities, so we'll need to see some evidence of this ending to think stocks can rally.
Crude could be near trading lows after selling off to lows of its rangeMeanwhile WTI Crude fell to near the lows of the range, while Gold managed to extend gains, but commodities mostly showed very little overall technical deterioration. Crude looks to be near support which could give way to another rally towards recent highs, while the entire Metals complex has become stretched and looks vulnerable to some type of peakout in prices in the next couple days. Silver showed some mild evidence of this on Monday by pulling back towards the lows after sharp upside follow-through, and bearish options bets were evident in the metals stocks just at a time when exuberance in metals like Silver caused Daily Sentiment index (DSI) readings to register very bullish readings in the high 90s, which typically are seen near "tops" in price. While the technicals remain quite favorable, structurally speaking, in both Gold and Silver, the recent move looks well ahead of itself, particularly in Silver and could be due to "Back and Fill" starting in the next few days.
Short-term peak in Global Bond rally necessary to have confidence in Stocks turning back higher- The key asset class to concentrate on, however, for evidence of Equities starting to stabilize and turn back higher is the action in Global bond yields, which continue to plumb new depths, as the German Bund yield got down to -0.185 bps, with German 20 yr ylds hovering just above 0, at 0.08 bps while US 10 and 30-year yields both undercut former lows seen back in 2012 and 2015, respectively. US and European Financials have been quite weak as a result of this Yield weakness, and could continue to underperform following the move in SX7P back to multi-day lows, hovering right above 2011 lows. For now, US Equities need to see some evidence of some stabilization and a sharp bounce in yields before the market can be counted on to move back to highs, which for now, still seems a bit premature.
REITS Breakout to new all-time highs on Yield weakness- One area that does look appealing to buy breakouts to new all-time highs is the REITS, with VNQ, the Vanguard REIT ETF, having just moved back to new all-time high territory as of Monday 7/5/16. Shopping Centers have shown above-average outperformance of late, but Apartments and Healthcare have also shown some recent evidence of participation. On a relative basis to SPX, REITS also have turned sharply higher as might be expected, and look to be one bright spot which is benefiting from this global yield decline.
Charts and additional analysis below.
Near-term momentum remains negative from early morning on 7/5 when prices peaked out. S&P futures got down to initial support near 2073 before bouncing, but could still be vulnerable to retracing 38 or 50% of this prior move before stabilizing. Given this choppy technical picture over the last couple months, prices lie at a tough spot at 2084, and will need to either pullback into a better area of support to buy, or show evidence of climbing back above 2104.
Financials relative to SPX fell back to prior lows of this year relatively, and continue to show real signs of weakness, following suit on the extreme underperformance in Europe. Until yields can demonstrate some evidence of bottoming, this sector will continue to weaken. XLF vs SPX, as shown above, lies at an important area, and given Financials representation in the SPX, it's tough to expect any kind of real rally with this sector under severe pressure.
STOXX 600 Banks index, the proxy for European Financials, fell back to new multi-day lows on Monday, and exhaustion counts remain 2-4 days away from triggering any kind of counter-trend signal to buy dips. The technical pattern here suggests a move back to minor new low territory, which would likely test the lows from November 2011 near 115 from its current 120.63. For now, additional weakness seems likely in the next couple days, which likely will put European Equities under pressure yet again.
VNQ- the Vanguard REIT ETF, has moved back to new high territory, and is one sector that's benefitting technically from this severe dropoff in yields. The Shopping Center REITS such as WRI, BFS, REG, DDR, KIM have all been particularly strong in the last week, and despite looking overbought on daily charts, the weekly chart (not shown) details this long-term "cup and handle" pattern from back in February 2007 which has just been exceeded. Thus, this sector shows no imminent signs of reversing course and looks to be an area to consider in the short run, for those who prefer to avoid the Utilities.
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