LINK TO TECHNICAL WEBINAR from last Thursday-2/1/18 -https://stme.in/O6nldL8sI
SPX - (2-3 Days)- Bearish for Friday and potentially Monday, but feel that stabilization is more likely than a crash. One thing to note, SPX cash has broken early week lows, while Futures have held above which i view as positive divergence that suggests the lows could be nearing within 2-3 days. Look to cover shorts and buy near prior Futures lows of 2529, with undercuts likely proving minor on this first go-around.
SX5E- EuroSTOXX 50- Neutral- SX5E seems likely to stabilize near prior lwos
S&P's late day pullback likely means that Europe also takes some time before moving higher and could muddle around the lows for a few days before stabilizing. Near-term range possible at 3363-3500.
HSCEI- Bearish- While the Dollar's advance continues on a 2-3 day basis, Emerging markets and China likely underperform. While this should prove to be a great buying opportunity next week likely, for now, the correction could continue with USD strength. Expect some stabilization near 12500-50 and then a turn back higher which should test and exceed highs.
Trading Longs: ALGN, TWTR, ALXN, PFE, HAS, FXE, UVE, MRTX, WING, MDGL, GM, GILD, BMY
Trading Shorts: STX, XLNX, D, DOC, AHT, DUK, MNK, INCY, SHPGF, DLTR, EAT, USG, EXP
Retest of Monday's lows looks likely for S&P futures but could hold while SPX cash has already undercut. Look to buy this pullback in equities into next week, thinking that the area near 2500 should hold and allow for prices to turn back higher.
The Defensive sectors have failed to offer much protection even in the face of market weakness, and some of this in the last week has had directly to do with rates rising. The break of near-term support in Utilities and REITS, Telecom very well might lead to additional near-term weakness until yields can find a ceiling and stall out. For now, these groups might not offer the same degree of safety as usual during market declines.
Sell Treasuries, Bunds, Gilts as the recent rally in rates does not look complete and a push back to new monthly highs for yields in bonds globally looks to occur.
Long Euro vs USD should be postponed for now until Friday, as we've seen some consolidation in this trade as well. The Euro still maintains a decent uptrend vs the Dollar, but this trade could likely go against us for another 1-2 days before hitting levels where this turns back higher.
A hugely negative day yesterday for US equities as US indices showed signs of a complete retest of Monday lows was likely and happened in the case of the SPX. Volume picked up in trading vs the last few days, while breadth came in nearly 9/1 negative. SPX cash index breached Monday's lows, while S&P futures held above, which could be a sign of possible positive divergence. It's important in the days ahead that volume begin to wane on the downside, or else show real capitulation in heavy downside volume similar to what was seen this past Monday. If breadth starts to turn in less negative showings on Friday and/or Monday, that would give a positive sign that the near-term oversold conditions should lead to an upcoming bounce. At present, as of yesterday, it didn't seem like the decline was making investors all that fearful as no real demand for puts was seen. In the media, many made the case that earnings and economic growth was solid, hence the need to buy dips. This reluctance to pay attention to a decline that reached nearly 10% in the last two weeks is a issue sentiment wise that will likely need to be addressed before any serious bounce back can occur. Thus far the positive correlation in bonds and stocks seems to be ongoing.
Overall, yesterday gave ample signs that this pullback was not yet complete, and indices have largely given back 10% from highs in very short order for the first time in the last few years. It was tough to blame the move solely on Volatlity ETF's or inflation or the uptick in bond yields as many warning signs were given back in late January that a top should occur (See the Morning Technical Comment - 5 Signs that a correction is imminent from 1/29/18) Overall, yields still look to be moving higher while the US Dollar index has shown evidence of reaching resistance and could turn back lower in the days ahead. With regards to equities, its proper to be defensive until some positive divergence starts to occur.
Additional charts and thoughts below.
S&P's pullback has now neared the long-term uptrend line from 2016 which on Monday had only been reached by Futures. This area from 2500-2550 should help to contain price on this initial dip and given the near-term oversold conditions, the possible TD Buy Setup(Demark exhaustion) that should arise on Futures in the next 2-3 days, and the long-term uptrend that's still very much intact. While a retest was thought by many to be unlikely, now that its occurred it will be proper to look for signs of breath divergence and fewer stocks hitting new low territory.
Even with US indices down nearly 10%, Fear is not as high, as per Equity put/call ratio as was seen last year, when the pullback was far less severe. It's thought that the lack of demand for puts when indices are down 10% might need to see an uptick in fear either in Friday or early next week's trading before any low is at hand.
The correlation between bonds and stocks has grown especially strong lately, and as this chart shows over the last week, the ebb and flow of SPX and Bonds has very much in line. Given that Bond yields still look to have another 2-3 days of gains with TNX possibly in line to challenge 2014 highs, stocks might be under pressure until early next week before yields peak and stocks start to bounce.
This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice. Newton Advisors, LLC has no duty or obligation to update the information contained herein. Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.
Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.