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Rotation out of Tech into Materials, Healthcare likely- Peak still a bit premature

June 8, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

S&P 500 ETF Trust SPDR (SPY)-  
276.38, 275.82, 275.09, 274.24          Support
279.27, 281.21-53                               Resistance


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

 

SPX - (1-2 Days)- Bullish, as insufficient damage was done to cause trends to break down, and breadth was largely flat on the day, and ended up positive.  A push back up remains likely into next week, albeit on far lesser breadth.  Move to 2793 up to 2802 is likely and time-wise, looking at FOMC meeting as a chance to take profits and sell given Demark lining up next week and sentiment.  Under 2743 or late May lows would be the first meaningful warning.     

SX5E- EuroSTOXX 50Mildly Bullish-  No change and no real net change in prices over the last few days.  The rebound from early lows should lead to a bit more strength up to 3520-30, so its likely that the next couple days continue to show further upside.  Any move back under 3389 would allow for a full retest of 3261.

HSCEI- Bullish- Rally to 12525 likely, and above should lead to 12811.   Bounce ongoing and expect Dollar weakness leads this higher

Trading Longs:  CF, NTR, PX, LYB, MYL, GILD, AGN, MRK, BAX, HCA, VEEV, LPNT, ORLY, HCA, LHCG, PGR, COST, FDX

Trading Shorts:   STX, LRCX, AVB,  HPT, BXP, PCG, EIX, WEC, PNW, GGP, PCAR, ITW, BLL, SWK, CMI


TECHNICAL THOUGHTS


ACTION PLAN-  

Long SPY Targets raised to 282;  Stops raised to 275
Long XLY with targets raised to 111
Long XLV with targets at 86.35
Long XLB with targets at 64 and stops under 59
Long XLF with targets 28-28.50
Long IHI w/ target raised to 210, and stops at 200.78
Long HSCEI at 11575-11650, targeting 12525, and above to 12811
Buy Gold on any daily close above 1309, anticipating a rally back to 1346-1365



As discussed yesterday, a few new themes are emerging:   First, US Dollar downturn is coinciding with Base Metals,Agriculture and Chemical stocks starting to strengthen.   Second, the rebound in US Treasury yields has coincided with Financials attempting to bounce (minor retrace yesterday)  Third, Technology is starting to stall out, albeit slowly, and we seem to be very near a peak in Semiconductor shares.  Fourth, Healthcare has begun to strengthen, as noted by meaningful strength in MRK, BAX, ISRG, MYL, GILD, AGN, PKI and others of late.  So in effect we have distinct sector rotation, with Tech beginning to falter, while both Materials and Healthcare lift.  Granted, it will take more than a day to make a trend.  Yet, both of these latter groups appear like far better risk/rewards than Technology at this juncture.  One should consider at least partial profit-taking in most "FANG" names to consider buying Metals or Ag stocks, a few of which are listed in this report.  

When looking at yesterday's price action, it wasn't nearly as weak as S&P and NASDAQ indicated, as breadth was largely flat and finished positive on the session, and the DJIA was higher on the day as six sectors rose in trading while five fell.  S&P and DJIA both fell moderately, yet held where they needed to, as did NASDAQ, which saw distinct Semiconductor weakness, which looks to be trying to put in a top between now and next week.  Bottom line, insufficient signs of weakness to fade the rally, yet distinct sector rotation clues that are flashing warning signs about an upcoming larger degree of weakness in Technology to come after the recent runup (in my view)   What's key now is to observe the degree of any further breadth on a rally back to new highs into next week's FOMC meeting, which I feel should prove quite weak and not nearly as broad-based as necessary to help equities hold afloat into late June.   Semiconductors in particular look vulnerable, and it's wise to keep very tight stops on longs in this sector heading into next week.  

Additional charts and thoughts below.

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Bottom line, despite the divergences on hourly charts, there remains none to be seen on Daily nor weekly.  Under 2758 would be the first evidence of weakness and then 2743.  Until/unless late May lows are violated, it should still favor a bullish stance to push higher into next week's FOMC.   Watching this June uptrend will alert as to the first evidence of trend deterioration, which for now, is absent.   Given thoughts of a peak being near, I expect any further rally into next week to occur on sub-standard breadth, and for Tech to lag on a bounce, while Materials, Healthcare bounce further.  These latter groups should be favored.

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Semiconductor stocks fell to make a bearish engulfing pattern yesterday, opening aboveWednesday's close, making a higher high than Wednesday's range, selling off the whole day to close at a loss while yesterday's range completely "engulfed" the prior day.   This was important and negative price action, and given that counter-trend indicators like Demark's TD Combo indicator produced a TD 13- Countdown right near the highs, it's likely that this rally loses steam and/or makes minimal upside progress into next week before breaking this uptrend and confirming this sell.   Confirmation would require a daily close at this point under the close from four closes ago.  For today, this level needed is remaining UNDER 1422.67.  Given that TD Sequential is also present on a 9 count, and requires another four trading days of a close higher than the HIGH from two days ago, this could be resolved by a final push higher, which fails into FOMC.  

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 CF industries (CF-$42.89) is an example of the kind of rotation that's been happening in this market in recent days.  We've seen a distinct push into the Agriculture Chemical names like CF, NTR, MOS, and this group should be favored for further strength in the days/weeks ahead.   Yesterday's close at the highest levels since early March managed to break out of this consolidation that's contained prices in recent months, and is bullish for further near-term gains.  Technically it looks right to be long this group, using weakness to add, while avoiding the Semiconductors.