August 30, 2016
S&P SEPT FUTURES (SPu6)
2167-9, 2157-9, 2139-41 Support
2190-1, 2200-2, 2208-10 Resistance
S&P Futures: (2-3 Days) Bullish- Until prices can get OVER 2186.75 in S&P futures, or last Friday's highs, the trend remains mixed. But Monday's action was quite constructive in US Equities with a meaningful rise which takes away much of the near-term negativity. Both US and Europe remain in good technical shape near-term. Pullbacks should be buyable in the next 1-2 days with thoughts that last Friday's lows should NOT be taken out before prices move OVER 2186.75.
SX5E-Bullish, with targets near 3100-3150 into late August- Nothing changed sufficiently with Thursday's minor pullback, which failed to even break down under Wednesday's lows, leaving the minor rally from late last week largely intact. Rallies up to 3100 look likely. Only bearish on move under 2890.
HSCEI- Bullish- Thursday's ability to hold up above Wednesday's lows and produce an "Inside day" should help prices start to turn back higher. Area at 9340-50 should be support to buy, while any close back up OVER 9640 would mean the move back to 10,000 is back underway.
Longs/Shorts for a 3-5 day period:
Technical Longs: CINF, MMC, AON, AIZ, GRUB, PAYC, EA, YUM,
Technical Shorts: NVDA, FE, PPL, SHLD, TER, TRIP
US Equity indices continue to show fairly amazing resilience in the wake of ongoing uncertainty about the speed and timing of Fed rate hikes along with more meaningful evidence of any sort of durable economic strength. While we entered this week a bit uncertain of the near-term direction on a short-term basis, it looks increasingly likely that stocks will push back up to new high territory before any meaningful top is in place. Monday's price action brought about above-average strength in Financials, Materials, as well as Defensive strength coming from Utilities, Telecomm and Energy. Breadth finished at around 2.5/1 positive, while volume flowed into Advancing issues by a nearly 5/1 margin. So over 80% of the volume flowed into "UP" vs "DOWN" stocks on Monday
When digging a bit deeper, Financials were the rare "bright" spot in trading on Monday, despite the fact that Yields fell and gave back some of last Friday's breakout attempt. Financials now have outperformed all other nine S&P GICS Level 1 groups for the month of August with two days remaining, with returns of 2.66% through 8/29/16. Banks, Brokers and Insurance all showed above-average gains, while Insurance stocks rose to new all-time highs, as per the S&P SPDR Insurance ETF, (KIE) While Property and Casualty has outperformed Life and Health stocks over the past few years, we saw some definite recovery in names like LNC, PFG, UNM which had been former underperformers, but have rebounded. While some stocks such as RGA, GNW, TMK have shown very sharp breakouts and strength of late, others like AFL, ICNF, MMC, AJG, AON, AIZ might be better technical risk/rewards given the intermediate-term strength coupled with near-term consolidation. Overall, the act of getting back over three prominent highs made in the last year in KIE as this hit new all-time high territory is seen as a bullish development for the intermediate-term, while lifting this up to short-term overbought levels. Given such success in breaking out over the last few days, any pullback likely should constitute an excellent opportunity for buying dips in these names.
Financials as a group have approached a fairly important area of make-or-break resistance when looking at either Equal-weighted Financials, or the XLF vs SPY, when graphed in relative terms. Whether or not the group can truly "Breakout" will likely depend on both a stronger than average "Jobs" report this coming Friday, along with Treasury yields continuing to press up at a slow pace into the FOMC report in mid-September. If the FOMC decides to hike rates, this in turn should help the US Dollar and Treasury yields to continue their most recent rally which in turn, should help the Financials. However, the failure to hike rates .25 bps if indeed the market factors this in as being "likely", then we'd likely see a sharp about face in the US Dollar and in Yields, which could plummet back to lows. This in turn would likely coincide with weakness in this group, which takes on particular significance given its 16% weighting in the SPX, the second largest group in the market. For now, the move higher in Treasury yields last week gave a bit back on Monday, whereas German and UK yields seem positioned to attempt their own short-term breakouts.
Given this ongoing sector rotation, with money flowing back into Financials, it seems absurd to bet against Stocks making new highs given that indices are 1% away, with little or no signs of material weakness with sectors like Financials starting to strengthen in meaningful fashion. Stay tuned.
Some charts and additional comments below
S&P moved back into its consolidation after failing to extend losses early in the week, and Financials strength helped to support indices and help carry prices higher. Near-term, the technical picture has improved froma few days ago, but remains largely locked in range-bound consolidation which hasn't really changed hardly at all from mid-July.
Financials vs S&P have turned sufficiently higher to suggest additional strength can occur ahead of next month's FOMC, but as this chart shows above of the Equal-weighted Financials (Guggenheim RYF) vs SPY, we haven't seen official breakouts of this sector yet that would warrant any type of intermediate-term overweight. Breakouts in the Financial sector likely can't happen without a similar breakout across the yield curve in Treasuries, but would serve to give some serious Tailwind to Equities in the typically bearish month of September. For now, Financials have led all other groups for the month of August, and look to continue a bit higher, but the real test awaits.
Insurance stocks, on the other hand, have strengthened sufficiently to suggest this sub-group has officially made an intermediate-term breakout, which has bullish implications for the weeks and/or months ahead. While near-term momentum has grown overbought, there remain several stocks, which were mentioned above, such as CINF, MMC, AON, AIZ, which have not yet broken out and appear like good risk/rewards for long investors for the weeks ahead. For now, this seems to be one of the bigger technical developments for Monday's trading which was a real positive.
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