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Yields, Dollar and Commodities all lifting, while Financials still struggling to keep up

October 4, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

SPX Cash index
SUPPORT-  2918-20, 2898-2900, 2883-5, 2864-5,  2835, 2817
RESISTANCE- 2940-5,  2848-50


LINK TO TECHNICAL WEBINAR from last Thursday:   https://www.youtube.com/watch?v=j9Qb4M6pMNc&feature=youtu.be     

 

SPX - (3-5 Days)- Late day pullback still not sufficient to call trend bearish and requires move UNDER 2917 at minimum, with under 2903(SPX) 2907 (ES) before weighing in that prices should move lower. Negative breadth and momentum are beginning to weigh on indices.   Targets are near 2950.

SX5E- EuroSTOXX 50- Neutral until prices get UNDER 3370 which would turn trend bearish- Trend pretty choppy over last 10 days and no real directional guidance.  Europe still more negative than SPX.   Resistance at 3450, then maximum to near 3475-3500.  Under 3370 should lead down quickly to 3300, a larger area of support. 

HSCEI-  Closed this week for Golden Week holiday.  Under 10769 is a green light to press shorts for a pullback to 10500.  

Trading Longs: ITT, MCS, OKTA, VZ, GDX, HAL, DNR, SM, CRC, XLE, LNG, TSS, PX, XLE, PX, ZTS, VNOM, NEP

Trading Shorts:  MHK, WHR, M, BBY, JWN, LB, FB, AAL, ALK, JBLU, WGO, THO, ADNT, PII, IAI, TCF, TCBI, UMPQ, PBCT, FITB, ZION, BKU, OZK, UPS, CMI, JCI, JD, R, CAR, RHT, MNK, WYNN, LVS, VMC, AMBA


TECHNICAL THOUGHTS


Yet again, we faced a situation where early gains stalled and by end of day, many of the strong moves had been reversed, while the NYSE showed negative breadth on the trading session.  Bottom line, it's very doubtful markets can continue up when more stocks are moving lower than higher which now has spanned nearly two weeks.  Many had high hopes on Financials improving dramatically as the yield rise progressed, and this simply has not materialized.  The early gains in Financials yesterday gave way to late pullbacks again, and many Asset managers remain near recent weekly lows, and simply aren't appealing technically. 

The yield move was certainly anticipated by many Speculators, as per CFTC data, which shows shorts near record lows, and unusual  to trend in the favor of such a large position, which often from a contrarian perspective are right to fade.  Near-term, the movement in both 5 and 30-year yields looks to continue, while 10-year yields are showing some evidence of exhaustion, Demark wise which has been important in the past.  Overall, this move should be trusted until/unless we see evidence of yields turning back lower, which might happen on an Equity pullback starting next week.  For now, this move still looks important, and a bit early to fade.

Commodities meanwhile look to be making progress in turning back higher, and this group should be favored for additional upside in the weeks ahead after a strong pullback in recent months.  The extent of the early year commodity lift helped momentum to turn up on the commodities space vs Stocks but as the Dollar rose this past Spring, most commodities experienced corrections.  Now Commodities are starting to rally again, despite the rising US Dollar, and we've seen evidence of Energy, Meats, Grains and Softs all start to show some evidence of stabilizing and turning higher.  The few which have not yet begun to rise, but which look particularly interesting from a risk/reward perspective are Cotton, Sugar and Frozen Orange Juice.  These all should be watched carefully for a change in trend.  

 

ACTION PLAN-  

Long XLB with stops at 57
Long XLE with targets at 79
Long XOP targeting 45.50
Short KBE based on Thursday's close, targeting 42.50
Short XLI targeting 76.50 with stops on a daily close over 81


 

Additional charts and thoughts below.

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Minor weakness into the close, and after hours, which took prices down to near Monday'slows.  While breadth has been abysmal lately, the late selling still isn't sufficient to think prices need to pullback.  S&P needs a move under this few week uptrend (in white) and for the most conviction, requires a pullback under late September lows.  If Financials and/or Technology start to lift into end of week/early next, this should result in yet another test of highs.  The next 5-7 trading days will be key and a couple minor cycles point to October 14.  At present, selloffs seem around the corner, but yet cannot be called imminent based on a lack of technical damage.
 

8.gif


Treasury yields staged a pretty important breakout in the last couple days, which happened in 5, 10 and 30 year yields, while Japanese JGB's, UK GIlts, and German Bunds also have been moving higher.   While sentiment has been very negative (expecting yields to rise) and has been correct, it's important to wait for evidence of this trend failing before stepping in to fight this move.  Counter-trend exhaustion signals look close for 10 year yields, yet remain 3-5 trading days away for both 5 year and 30-year yields.  Thus, additional Treasury weakness does in fact look likely into early next week before any stalling out. 

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Commodities have begun to lift in the last couple weeks, with CCI index rising to the highest levels since July.  Energy, Grains and softs have begun to make headway, and this bounce looks to continue in the month of October.  Interestingly enough, this latest lift has occurred with Dollar strength, which now looks to be nearing important overhead resistance.  Any pullback in the Dollar in the latter part of October would help Commodities to lift at a quicker pace.  At present, commodities seem to be rallying much more with Treasury yields lifting coinciding with Powell's hawkish speech, rather than paying attention to the Dollar.  Specific commodities which have been trending down, but are close to support and/or trend reversal are : Sugar, Cotton and Frozen Orange Juice.