July 29, 2016
S&P SEPT FUTURES (SPm6)
2150-3, 2139-41, 2130-2 Support
2172-4, 2182-4 Resistance
S&P Futures: (2-3 Days) Neutral stance ahead of highly anticipated BOJ results with US GDP on deck for Friday morning. With prices having closed within 1 point of mid-July's 2167 close on 7/14, we've seen a huge contraction of absolute volatility in the last few weeks. For now, we'll need to demonstrate signs of either breaking out to the upside above 2172 (which would lead to (2183-5), or breaching 2150 to the downside and it doesn't pay to "frontrun" this breakout.
Friday brings about one of the more eagerly anticipated decisions all year for Japan, and all eyes will be on Kuroda to see whether the record stimulus program will be expanded yet again, which is what most expect. With 32 out of 41 analysts forecasting an increase in stimulus, we're likely to experience some real volatility in the days ahead, which could take place in currency markets but also Fixed income and equity (as stocks breakout of their recent range. Given that Kuroda has had a track record of surprising markets, and policy action might have implications for Central bank easing elsewhere, it will be important to keep track of how Friday's outcome serves to either meet, exceed, or disappoint vs expectations, while what kind of movement the Yen makes vs the US Dollar.
Outside of S&P range-bound price action, the action in Treasury yields continues to be something to monitor closely, as bonds have begun to turn up in recent days as economic data has disappointed, with yields pulling back globally. European equities seem to have hit important resistance and started to turn down (as seen with SX5E), but similar to the S&P, it's more of a case of near-term range-bound action than any real weakness. Meanwhile Emerging markets look to be stalling out again, which was evident Thursday with the downturn in Brazil and Mexican equity indices, while EEM (Ishares S&P ETF) is showing signs of turning down.
Overall, with one more day left in the week, we've seen positives in our early July rally not giving way to weakness but consolidating, something which has helped to alleviate the near-term overbought conditions (Percentage of stocks trading above their 10-day ma has declined to 48.7%, which is half the level which was present on 7/8). S&P still has 75% of stocks above its 50-day moving average, but the near-term parabolic state from late June into 7/8 has given way to sideways action, which very well could lead to another move back to new highs. Another positive has to do with sector rotation back into bullish sectors like Healthcare, Financials, and most importantly, Technology. These three were among the worst performing sectors all year until July, so our formerly defensive rally finally has spread out to include some of the stronger "risk-on" sectors which count for much more in this rally. Additionally, breadth and momentum at present remain quite strong, with positively sloping MACD on daily and weekly charts for SPX. The negatives have to do with bullish sentiment having risen rapidly in recent weeks to near exuberant levels, while many indices still haven't truly "broken out" in the true sense of the word. the S&P Mid-Cap and Small-cap index still lie near former highs, while DJ Transports have been trending down since late 2014 and still have some work to do in exceeding resistance at 8150. Seasonal factors will start to exert a negative bias for stocks also in mid-August, and given our 10% pop in the last month with little or no consolidation heading into a seasonally poor time with lofty sentiment, it will pay to be somewhat selective in what to own and consider using any further gains into next month to take profits, in thinking that a seasonal pullback is very likely this year from mid-August into October.
Some charts and additional comments below
The recent consolidation has kept S&P incredibly range-bound since mid-July with Thursday's close in the S&P futures coming within 1 point of the close from July 14th. In addition, this near 20 point range from July 14th itself has contained much of the consolidation over the last couple weeks. For now, there remain both positive and negatives which could be made suggesting the direction of the next move. It's important to let the S&P decide this next move in how this will be resolved and not get overly bullish or bearish until this happens. However, given the rise from January/February and from late June, the intermediate-term trend will remain bullish and the odds favor that this could temporarily be decided by an upside breakout. For now, 2150 is support, while 2175-80 is resistance.
Europe has hit an area of resistance just above 3000 that has held price action since April highs. The move in most European indices is nowhere near as strong as the US, and this divergence at some point is suggestive that the exuberance seen in US stocks likely could mean revert at some point. For now, pullbacks in European equities look likely given a combination of Demark intra-day sells and structural concerns. Upon a correction down to near 2900 near the first early July high, one should look to buy into this pullback for trading purposes.
Japanese Yen vs US Dollar, as seen in USDJPY charts above, have consolidated in recent days after hitting resistance right near 107.50. The recent selloff has proven somewhat benign however and it's important to watch for signs of this downtrend being exceeded in the next few days on any extraordinary stimulus that the market views as favorable. For now, Speculative Yen longs are down from Spring peaks, but still as high as we've seen in the last few years, arguing that the next big move could be to the upside in the US Dollar vs Yen. Daily closes back over 106.50 should help spark a huge selloff in the Yen, which could fall to 110 or higher vs the US Dollar in the months ahead.
Brasilian Ibovespa- (IBOV) Brazilian equity index IBOV now looks to be near key upside resistance which has held this six-year downtrend intact since the 2010 highs. In the days ahead, prices could consolidate recent gains given Thursday's close at new multi-day lows followed by overbought conditions right at important six-year resistance trendlines. Movement over 57500 would be a decidedly positive gain for intermediate-term purposes, but would still likely require some consolidation before thinking prices could extend too much higher. At present, pullbacks to near 52500-53000 should constitute good levels to cover index shorts.
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