July 27, 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 ahead of FOMC- This continues to be a very lackluster tape for the broader Equity indices though one that's producing an increasing amount of important sub-sector developments which are worth monitoring. As said yesterday, until we see evidence of daily closes down under 2151 at a minimum, last week's lows, the trend is neutral and can't rule out a move up to 2180-5. Under 2151 on a close likely would bring about declines to 2120. .
Yet again, early pullback attempts proved to be short-lived and indices ground higher to close just fractionally positive but very much still locked in range-bound consolidation that has lasted nearly 10 trading days in most indices. To reiterate prior comments, it simply doesn't pay to take big bets until this range is violated in either direction. For now, these are the important developments to monitor:
Increasing amount of resistance in broader market near prior highs- While the SPX has found resistance near 2175, that level doesn't seem to mean much to most people who might casually glance at charts. However, when viewing the Bloomberg World index, or the DJ Transportation Avg, or the S&P Mid-cap or Small-cap index, not to mention the NASDAQ Composite, ALL of these indices are AT, or near key levels of importance based on prior highs and/or significant trendlines that should result in a stalling out in this move. Important to reiterate that this range-bound trading certainly doesn't have to lead to declines and has successfully alleviated at least some of the recent overbought status in indices. However, we still have nearly 84% of the market trading above its respective 50-day moving average , and our idea of a pullback last week ended up turning into merely range-bound consolidation.
Semiconductor stocks have broken out to new high territory. This is an important sector development that's not immediately apparent when looking at the NDX, or NASDAQ Composite, or even MSH index, the Morgan Stanley Technology index. While Tech as a group has made great strides in recent weeks, it's the action of the Semis that deserves real attention, as this group has broken out vs the Hardware stocks along with Software, making it the top area in Technology to overweight.
Bond yields have not really pulled back as dramatically in the US as we've seen in Germany or the UK and US yields remain by and large, range-bound on the long-end, with the 2-Yr yield having moved up substantially ahead of today's FOMC results. Important to note here; Bond yields have largely mirrored the move seen in equity indices of late and no saying at this point that a strong GDP number on Friday, or a bullish stimulus plan by Kuroda in the BOJ meeting couldn't cause an acceleration higher in yields.
10-straight days of consolidation in S&P, while many indices remain at prior highs, such as the MID and SML index, not to mention the Bloomberg World index resting near April highs. This SPX Futures chart is highlighted to show the extent of this range ahead of the FOMC outcome in the event of a breakout. Pullbacks require a move under last week's 2151 for any type of signal while upside should be capped at 2172-5 with an outside chance of 2183-5. For now, it's wise to trade the range.
The Philadelphia Semiconductor index (SOX) looks to be off to a better start than the Democratic convention in Philadelphia :), and worth noting that Tuesday's surge puts this back at the highest levels since 2000, thanks to TXN, MRVL, LLTC, MU, QCOM, which have all risen nearly 10% or greater in the last five trading days. Semiconductor stocks continue to be the area to favor within Technology, and this breakout in the absence of a similar move in the underlying indices, is a very good sign of relative strength for this sector. Dips should be use to buy in days ahead and long positions are favored, with upside targets near 825, and then intermediate-term levels found at 905
Semis as a group remain a huge source of outperformance over the Hardware group, as this breakout in relative terms of the SOX vs S&P Tech Hardware index shows above. Part of this outperformance is based on SOX strength, while the pullbacks last year and into early this year in STX, WDC and AAPL were all instrumental. AAPL at the time of writing is higher by $7 over its closing price of $96.67, or nearly 7%. Any meaningful outperformance by the Hardware stocks should represent a chance to overweight Semiconductors given this near 7 year breakout in the space vs Hardware last year.
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