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Large-Cap Tech & Small-caps still areas to overweight

June 1, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

S&P 500 ETF Trust SPDR (SPY)-  
269.38-.50, 267.45-.76,  266      Support
274.25, 275.88, 276.61               Resistance


LINK TO TECHNICAL WEBINAR from yesterday:https://stme.in/Z1TiZuapkS

 

SPX - (1-2 Days)- Bullish, turning bearish with close under 2695-  Thursday's weakness occurred on about 2/1 negative breadth, while volume into Down stocks was 3/1 negative.  The power of Technology to help buoy this market is something to lean on in the short run, and despite Financials being weak, it's thought that markets likely are still ok with Tech acting well.  If Tech starts to reverse while Financials are unable to stabilize, than a bearish stance would be right.  

SX5E- EuroSTOXX 50Mildly Bearish-  Wednesday's reversal is supportive of the idea that a bounce can happen, but trends are far more negative than in US and a minor rally should lead to selling opportunities.  Area at 3480-3520 could have importance, while any move back under 3389 would allow for a full retest of 3261.

HSCEI- Bullish- Prices are now down to initial support and should rally back up above 11900 in the days ahead.  Weakness has reached February lows and Demark exhaustion is present, so it looks wise to cover shorts and attempt to play a bounce.  

Trading Longs:  XLK, X, FB, MSFT, GOOGL, AMZN, NFLX, NUE, UNP, HCA, CAH, LHCG, DCT, FRGF, TDG, PGR, BAX, BSX, COST, FDX, TWTR, LVS, WYNN

Trading Shorts:  LL, DISH, DISCA, CNA, USB, BCS, PCAR, ITW, BLL, MMM, SWK, CMI, GE, MAS, MAT


TECHNICAL THOUGHTS


ACTION PLAN-  

Long SPY w/ target 275.88-276.61
Long QQQ w/ target 172.50, and closes above this lead to 175.20
Long IHI w/ target 202.80
Long NYFANG index @ 2730 with expectations of a move back up to new highs which could reach 2860-70 within 2 weeks before a peak
Long HSCEI at 11575-11650
Long Grains through WEAT, or CORN
Buy Gold on any daily close above 1309, anticipating a rally back to 1346-1365




After several days of markets reversing the prior days trend, S&P sits right below the area it broke above on Tuesday which initially caused the rapid surge and above-average buying and positive breadth.   Tuesday's volume along with yesterday's were far heavier than the positive volume shown on Wednesday of this week.  However, the breadth was far better on Wednesday than anything seen to the downside on Tuesday or yesterday.   Overall, this remains a very splintered market right now.   Tech is moving higher and FANG stocks in particular remain one of the better areas for near-term outperformance.  Meanwhile, Financials have faltered as rates have not convincingly moved back higher, and it's much more important to be selective when buying the Banks.  Europe's Italian bank stress could very well lead to a larger problem with Europe in the coming months.  Many European banks overall like DB, BCS, CS, LYG have fallen on hard times and have accelerated lower, which is putting pressure on the overall indices themselves.

It seem likely that the spike higher in Italian yields along with the widening in Credit spreads is a harbinger of greater issues in the month of June.  Additionally, it's worth keeping a close eye on US and German bond yields which turned down dramatically and are making their own statement about possible disbelief in the economic growth being forecasted, and/or the number of upcoming rate hikes in store.  10-year Treasury yields, as has been mentioned, sliced through 9 month support and have not been able to recoup that in recent days.   Thus, the trend in Yields, and Financials is lower, with Financials returning -1% for the month of May.  The defensive groups continue to get hit hard, with Utilities and Staples being down over 1.5%  in the last month, while Telecom finished lower by over 2%.  So despite the fact that May was positive to the tune of more than 2.5%, the year has been up less, at a paltry 1.18% for SPX heading into the worst seasonal month of the Mid-term election year.  The DJIA remains negative for the year, down -1.23% through 5/31/18.   Overall a very tough environment for bulls and bears alike. 


Additional charts and thoughts below.

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The month of May at a snapshot looks pretty boring and range-bound, much more muted than the European news might suggest.  S&P has largely been in consolidation since May 14, but pulled back from mid-May, not unlike what has happened in other months this year.  Looking back, we saw pronounced peaks in mid-March, Mid-April and then Mid-May before selling off in each of these prior months.   June very well could turn out similar with evidence of Thursday's pullback occurring near similar levels of symmetry to prior lows.  So the risk/reward of buying dips here looks appealing, thinking that between 2707 and 2685 represents the downside, while upside could carry prices back near highs of 2741 and above.   Given Technology strength and improved patterns in Industrials and parts of Healthcare, it still looks a bit early to abandon a long thesis, and dips like we've seen intoThursday likely can turn higher as a new month gets underway.  Under 2685 though would be a warning, and likely lead to more meaningful weakness.  

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Technology continues to be the place to overweight, having outperformed all other sectors this year and Big-cap Tech in particular looks promising, despite the late day pullback yesterday.  Movement higher to test and exceed March highs in XLK appears likely in the short run, so this remains a sector and an ETF in particular to overweight.  Stocks like FB, MSFT, GOOGL, NFLX, AMZN, AAPL all look promising to move higher into early June, so late day pullbacks into Thursday likely constitute good buying opportunities.  

 After a full month of rally in the US Dollar, we're finally seeing evidence that this bounce has run its course.  DXY broke a month-long uptrend, confirming TD Sequential sell signals in the process.  While sentiment seems to have turned against the Euro in the last week given the Italian banking debacle, this might prove to be the right time to buy into the Euro after recent weakness, expecting a bounce in this and Pound Sterling in the days/weeks ahead.