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Consumer Discretionary strengthening vs Consumer Staples

July 28, 2016


2150-3, 2139-41, 2130-2      Support
2172-4, 2182-4                     Resistance



S&P Futures: (2-3 Days)   Neutral stance continues.  Prices got down to near key support at 2150-2 and held and managed to bounce into closing just marginally negative onthe day.  For now, nothing to suggest stocks have to follow bond yields down right away and the trend remains neutral until we see evidence of daily closes down under 2151.  On the upside, it's tough to rule out a move up to 2180-5.  Under 2151 on a close likely would bring about declines to 2120.  .


Amazingly enough, Wednesday's close resulted in S&P Futures closing within 3 points of closing levels back on July 14, which occurred nine trading days ago.   In fact, most of the trading in the last two weeks has occurred within the price action of the low to high range from this exact day on July 14, when S&P got down as low as 2142.75 and reached highs of 2168.  This neutral trading hasn't just occurred in the US, however, but most of Europe also shows similar neutral consolidation along with the bond markets of both US and Europe.  The US Dollar index also has been largely range-bound for most of July, outside of the pullback in the last couple days, which also seems to have taken place in bond yields as well.    Overall, with regards to equities, whether or not prices follow suit to what's happened in the bond market will need to be watched carefully in the days ahead, but much depends on prices actually beginning to break down under areas of support.  For now, this hasn't happened, and still very difficult to assume a bearish stance until it does.

A few important developments to take note of:

Outside of leading groups like Semiconductors having broken out in recent days, we're also seeing a steep advance in groups like Consumer Discretionary vs the safer Consumer Staples group, which has dropped off in relative terms.  Much of this was due to strength in the Retailing sector of late, (which we mentioned last week, with JCP, KMX, GPS, DKS, ANF all having rallied more than 20% in the last month)  However, in the last few days, we've also begun to see a notable dropoff in many of the Staples.  Weakness in stocks like TAP, CPB, RAI, KO, CVS accounted for some of this deterioration in the Staples group, as these fell greater than 4% in the last week.  This shift is important to some extent, as the market has witnessed a rotation just recently back into Technology and Healthcare, and now we're seeing some outperformance in Discretionary over Staples which had underperformed by more than 500 bp in YTD performance up until mid-July.

Bond yields did in fact break down after yesterday's FOMC meeting results after all, so while the trend in Equities remains largely resilient, we've now seen the trend in 10, 30 year Treasuries start to turn back higher with yields breaking down to mimic what had occurred recently in German Bund yields.  This is important given how Equities can often follow suit to Treasury yields while Financials typically underperform as yields drop.   Initial targets for TNX lie down near 1.45%.

The trend in Crude oil continues to weaken, and Wednesday's fall below 42 keeps the near-term downtrend intact with targets near $40.43 into mid-August.  While this had attempted to rally after breaching 42.50 on Tuesday, the 50% ratio of the entire January-June advance, time factors seem to suggest rallies are premature, and never quite lined up in a fashion that would make price and time align to help prices stabilize.  In other words, Technically speaking, given that the Jan-June rally lasted exactly 140 calendar days, or 20 weeks (100 trading days), we would expect that this subsequent decline likely shouldn't bottom out ahead of the first Major Fibonacci ratio of the prior advance or (38.2% of 140) 63 calendar days from 6/8 which could produce a turn at/or on 8/10, just as price is near the 50 or 61.8% Retracement of the prior advance.  When time factors line up along with price retracements, we can often have a higher probability of a turn.  For now, a major stabilization and turn back higher seems clearly premature. 



Treasuries showed some meaningful improvement Wednesday, at just a time when it appeared this trading range was beginning to look a lot like the Equity consolidation.  Yields broke down across the curve while the curve has flattened out fairly substantially in the last week.  10-year yields breaching 1.535 should allow for movement back down to 1.45 with 1.356 also standing out as a possible near-term technical target for yields.  Until yields can get back above the area of Wednesday's breakdown, this move is seen as bullish for Treasuries (bearish for yields) and likely to see further dropoff in yields in the days ahead.


Consumer Discretionary vs Consumer Staples made a meaningful breakout in relative terms, which favors XLY over XLP in the days and weeks ahead.  As described above, much of this was due to strengthening in the Retail sector while some deterioration across the Food and Beverage area in Staples.   After a 500 bp outperformance in Staples over Discretionary this year amidst a positive equity market, some mean reversion looks to be underway.



Apple (AAPL- 102.95) AAPL managed to stage a dramatic 7% rally up to key trendline resistance on Wednesday, an area which had held prior rally attempts both in April of this year along with last November which both produced fairly substantial reversals.  The trend remains negative for AAPL since last Spring, and until we see evidence of this stock improving in a way that would help the stock exceed this downtrend, it's right to use this bounce to sell this rally.   The range has been getting narrower since last Spring, and until AAPL can show weekly closes back over $106 which would arguably point to higher prices as the structure would begin to improve, the larger trend remains negative.  Movement back under $96.42, while not expected in the immediate future, would be a huge negative for this stock, leading back to the mid-$80's.  For now, traders can sell AAPL above $103, and anticipate a probable "backing and filling" down to $101, or even $99 in the days ahead, which would be a far more appealing area to attempt to buy this stock.  For now, the near-term trend continues to show a bounce which has gotten overdone within a declining trend.




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