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Defensives look close to turning back higher; XOP should work well within Energy

August 19, 2016


2165-6, 2160, 2139-41, 2125-6      Support
2190-1, 2200-2, 2208-10                Resistance



S&P Futures: (2-3 Days)  Bullish-  Rally over Monday's 2190 highs is expected, which should allow S&P to close out the week on a high note, and lead to 2210-2220 in the next couple weeks before signs of topping arise.  Unless 2167 is breached on a close, it's right to buy dips and expect 2189-91 to be tested and taken out in the days ahead.

SX5E-Bullish, with targets near 3100-3150 into late August-  Wednesday's fourth straight down day failed to do much technical damage, and similar to the DAX, brought prices down right to the area of last week's breakout.  This should be a chance to buy dips with thoughts that 3100 and then 3150 can be tested in the weeks ahead prior to any real top.  Only bearish on move under 2890.

HSCEI- Bearish on a 2-3 day basis after Wednesday's close fell under the prior day's lows and formed what looked to be near-term reversal pattern.  Pullbacks down to near 9450 look possible but should be used to buy dips for a move back up to near 10,000.

Longs/Shorts for a 3-5 day period:

Technical Longs: (NEW)- EA, QCOM, PCLN, YUM, CHK, OLED, SN- Older, still attractive, though less timely- PX, CME, FLT, APD, PXD
Technical Shorts: RCL, TRIP, GOOGL (769 tgt), PM, MO, COH


Technical trends for US indices remain marginally bullish in the near-term, with the range since mid-July still showing incremental signs of pushing higher with one day left in the week.  While the low volume trading and below average volatility seems normal for this time of year, and most view this market as simply a Dog-Days of Summer type trading range, S&P as of today, Friday 8/19 will still have managed to achieve eight straight weeks with higher highs and higher closes since the end of June.   While equities seem quite boring for most investors, we continue to have pretty rampant signs of sector rotation and mean reversion that under the surface, makes the Equity market far more appealing than watching US Treasuries these days.

One particular trend that's been ongoing concerns the move out of Defensive stocks in the last few weeks.  While Sectors like Energy and Utilities worked well on Thursday, outperforming all other major S&P sectors and showing the kind of relative strength that's made these two sectors leaders thus far in YTD performance, the last month has been anything but kind towards the "Defensives".  This has occurred primarily due to both interest rates inching up from late June, along with the prospect of Rate hikes in September (which might make Utilities and Telecomm less attractive).  The other half of this deals with the "Risk-on" mentality that transpires once the rally start to show more compelling evidence of broadening out.  While this move has been constructive overall in how many investors view this market (as many expect Defensives to underperform during above-average periods of Index strength), it's also served to embolden the investing public since June, as evidenced by several popular polls widening out substantially in their ratio of "Bulls to Bears"  (AAII, Investors Intelligence, and DSI, to name a few) 

While this trend out of Defensives still might follow-through further between now and Year-end, particularly if Treasury yields start to accelerate higher, the daily charts are starting to show evidence that this trend might have run its course for the-term. Two factors argue for a possible mean reversion.  First, the "Vanda Cyclicals-Defensives" index is now displaying counter-trend signals based on Demark indicators on daily charts for the first time since late June.  Second, Telecom stocks like T, VZ, along with Utilities and REITS are all showing evidence of near-term stabilization for the first time in two months.  While this might take some time to play out, it's worth taking a strong look at these Defensive sectors given how dramatically Implied volatility has fallen ahead of the seasonally bearish month of September, while not much has changed fundamentally with how the world looks now compared to a few months ago.  On evidence of a more severe breakdown in the Defensives, it would be technically right to continue to avoid these groups.  From a technical trading perspective though, a few factors suggest they might have pulled back too far, too quickly in the near-term.

One sector which continues to gain strength is Energy.   Following the incessant ongoing rise in WTI Crude which has many investors fooled as to the extent of its recent rise, Energy sector ETFs like XOP and OIH have begun to show impressive momentum of late.  Given that XOP, the Exploration and Production ETF remains more than 60% off highs made back in 2014 while near-term momentum has grown more positive, it's right to view many of these stocks as attractive risk/rewards.  Chart of the XOP is shown below, which follows an earlier report sent out Thursday afternoon on the five stocks to consider within this sub-sector of Energy (Let me know if you didn't receive, and would like to)  For now, given the ongoing decline in the US Dollar, and global sovereign yields continuing to "tread water" and/or decline across the globe, Commodities have begun to show some evidence of lifting after their minor pullback.  Furthermore, Energy and materials both look like interesting risk/rewards to own for Q3, given that both of these sectors have underperformed since June, but have begun to pick up relative strength in recent weeks.

Some charts and additional comments below



S&P's trading range in the last month has caused some consternation for bulls and bears alike.  However, it's worth noting that as of 8/19's close over 2184.05, SPX will have made eight consecutive weekly higher highs and higher closes, something which certainly keeps the weekly trend quite bullish at a time of ongoing uncertainty about the course of FOMC interest rate hikes.  Movement slightly above 2210 looks possible into late August before various cycles and counter-trend signals come together to suggest a possible near-term peak.



The Vanda Cyclicals-Defensives index is insightful for how it illustrates the degree to which Cyclicals have outperformed the Defensive sector since late June.  While this outperformance has been sporadic and largely difficult to come by this year, the two specific rallies happened from Mid-February into early May and then late June until present.  In the short run, there are now signals coming together which suggest this run of outperformance by the Cyclicals yet again might be facing resistance and be prone to reversing course, just as most have begun to jump onboard.  (TD Sequential and TD Combo indicators by Tom Demark are both nearly in alignment to show "Sells" for this minor 45 day trend, similar to how they lined up as "BUYS" right at the lows in mid-February)  For now, it's worth considering buying dips in some of the Telecoms, Utilties and REITS which have pulled back within existing uptrends.



XOP- THE SPDR Oil and Gas Exploration and Production ETF, has just made new closing highs for 2016 after a largely choppy trading range in the last four months.  The technical pattern appears constructive to suggest further gains could be likely given the recent uptick in momentum and bullish formation in place ( Low, Lower low, and Low) which some might refer to as a reverse Head and Shoulders pattern.  Thursday represented the first evidence of this resistance trend being exceeded, and weekly closes will add to the conviction of this move getting underway.  For now, it looks appealing to consider the XOP (ETF for the E&P sub-sector of Energy), with stocks such as CHK, SN, SM, LPI, and WPX set to potentially continue their recent trend of outperformance.  In the weeks ahead, given the steadily advancing WTI Crude trend, XOP should outperform both OIH and XLE, and should be favored as a vehicle of choice for those seeking technical ETF's to play this trend in Energy.




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