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Rally showing increasing signs of Stalling out

June 14, 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   Today's call will take place 1pm EST- Details sent by email

 

SPX - (1-2 Days)- Bearish-  Small short positions here, looking to add on any further rally into end of week and/or Monday/Tuesday, while also using weakness under 173.18 for QQQ and 2763 for SPX to add to shorts.     

SX5E- EuroSTOXX 50Bearish-   Bounce could very well be complete and would grow more negative under 3422 for a pullback down to at least 3300.  Use minor gainsThursday/Friday to sell  

HSCEI- Neutral pattern since February, and rallies thus far above 12300 have failed, but also have not shown much weakness. there should be a floor near 11837 which can hold, but prices will need to eclipse 12427 to have much confidence of rallies, and over the next couple weeks, its more likely that global markets experience weakness than strength, and HSCEI could be affected.  

Trading Longs:  FDX, FDC, GRUB, ITT, EMN, PX, EL, HCA, MYL, MRK, GILD, CF, NTR, VEEV, COST

Trading Shorts:   JEF, IVZ, SIVB, PSA, LRCX, VNQ, M, KSS, AVB,  HPT, BXP, PCG, EIX, WEC, PNW, GGP, PCAR, ITW, BLL, SWK, CMI


TECHNICAL THOUGHTS


ACTION PLAN-  

Short QQQ at 175.80 up to 178.50 into end of week, expecting reversal and pullback to 163. 
Looking to short SPY on any gains Thursday-Friday above 279.50 up to 280.50, or evidence of prices closing under 276.66
Taking profits in XLY Thursday
Taking profits in XLV Thursday
Taking profits in IHI Thursday

Short VNQ at 79.50-80.50 Thursday/Friday
Buy Gold on any daily close above 1309, anticipating a rally back to 1346-1365


Expect that upside should prove short-lived between Thursday and early next week, and that stocks begin to turn lower for a pullback over the next two weeks of June.   Yesterday's attempted rally reversed course post FOMC, and we saw spikes up in Yields and the Dollar only to turn back lower by end of day.   US stock indices showed negative closes of -0.50% from DJIA and SPX while the NASDAQ closed flat, though breadth was about 2/1 negative, something which had also occurred on Tuesday during an "up" session.  10 of 11 sectors were down in trading, with Telecom, Real Estate and Materials leading to the downside, though Industrials also finished lower by 0.80% and only Consumer Discretionary rose.   Financials, which had risen the entire session into and right after the FOMC, reversed sharply and gave up all earlier gains, with S&P 500 Financials index posting a -0.33 negative return for the day.   Most of Discretionary's gains came from Media bouncing post T/TWX deal, but otherwise, it was difficult to find much sign of any pockets of strength outside of Healthcare Equipment and Services and Retailing..

These reasons are specifically concerning for why stocks could reverse, and NOT rally further following the FOMC's rather hawkish rhetoric about how further hikes could come sooner than later.

1)  Negative momentum divergence was present on intra-day charts  of S&P while weekly NASDAQ and SOX charts have shown negative divergnece in mometum.

2) Percentage of stocks trading above their 10-day moving average has reached 83.96% as of yesterday, the highest since April, while the percentage of stocks above their 50-day m.a. reached 74.85% yesterday, the highest since February.  While momentum is not really overbought on daily nor weekly basis, Overbought conditions have been present on monthly charts for some time.

3) Intermarket divergence is present, as the NASDAQ's push to new highs has NOT been met with similar movement by SPX, DJIA, TRAN, or other indices, and the Russell 2k moving back to new highs might seem encouraging, but it's certainly not a broad-based move among the broader market averages and indices like New York Composite are still below March highs

4) Price divergence with many of the developed world markets- as NASDAQ's push to new highs was certainly not followed by Europe's SX5E, SXXP, or most of Asia.  This looks to be another importnat cautionary market "tell" 

5) Decidedly weaker price action out of Financials which has been lagging nearly for a month now, and Technology also has dropped off meaningfully.  Technology was down last week and has dropped to third place in 1 and 3 month rankings.  

6) Technology has gotten quite overbought, with SOX and NASDAQ near March highs and relative charts of Tech to SPX showing evidence of trying to peak out, not unlike what was seen in March, or last November.   After such a strong run in the SOX and FANG in May, this looked to bring many investors back into the fold while now Tech could underperform

7) Sentiment concerns-  We've seen bullish sentiment per Investors intelligence now rise for the 5th straight week to 55%, above March highs, while Bears lie at 17%.   Ned Davis Research (NDR) Crowd Sentiment poll is the highest they've seen since early February, while Equity put/call data had reached the low 50s as of yesterday

8) Seasonality concerns-   June tends to be a very poor month seasonally in mid-term election years the worst of all 12 months, showing an average return since 1950 of -1.7% (SPX) and thus far gains have proven robust in the first two weeks to the tune of over 2% until yesterday.  The last couple weeks could very well help to spoil the Bulls party as mean reversion and bearish seasonality kicks in again this year.

9) Demark signals of exhaustion-  We've seen NDX, DJIA, SPX all signal evidence of counter-trend exhaustion on this rally for the first time since the bounce began in early May.  Now many sector ETF's also show similar signs, and this could grow in nature in the event S&P were to attempt to push back up to 2805-2815 into early next week.  It's unlikely in my opinion that seeing these across many indices and sectors means they should be ignored.  

10) Cycles point to mid-June for a possible turn, and this area lines up with former mid-month peaks that have been seen also in recent months.   When just casually looking at February, March, April and May, weve seen a specific pattern of these indices bottoming early in the month and peaking mid-month.   This looks to potentially be the case in June and also in July of this year. 


Additional charts and thoughts below.

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S&P broke its trend from early June mid-afternoon just following the FOMC meeting, and continued lower post Press conference.   This is the first evidence this month of a break in trend, warranting a defensive stance.  In the event that indices are able to snapback into end of week, this would allow for a better opportunity to take profits, thinking that the final two weeks of June should prove negative.   Given the bearish points laid out above which have all come together in mid-June, it's worth paying attention when price trends break to confirm some of these arguments.  Structurally speaking, a close under the last couple days was a negative, but it very well could take a couple days before we see acceleration.  Structurally speaking, getting under prior MAY highs from mid-month at 2742 would be a much bigger deal and something which would result in a much larger decline into late June.  Overall, the thinking is that this uptrend is in the process of being reversed and that short-term weakness should unfold but which could prove above-average in intensity for June and also in July.   The longer-term trends at this point have not been violated, so until/unless that occurs, selloffs which serve to drive fear higher but yet do not breach long-term trends will likely prove buyable again into early July and into late July.  
 

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The breakdown in the 2s/10s Yield curve following the Fed's rate hike Wednesday should push the yield curve down to new lows in the weeks ahead, as spreads reached 10+ year lows yesterday.  Technically this breakdown looks important and worth paying attention to also.  The FOMC's plan to hike more will likely invert the curve which has historically proven to  be recessionary given past precedent.
 

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 The sentiment polls look similar in having widened out broadly in recent weeks given our stock market rally, and bulls have risen for five straight weeks based on Investors intelligence polls.  Given that Bears are only 17% as of the latest reading, it's worth paying attention typically when this spread grows above 35% between Bulls and Bears as it typically brings about headwinds and difficult times for stocks to push higher.    I suspect we're heading into a similar time like this now, given the stallout in Financials and Tech of late, as the rally attempts in Healthcare and Industrials haven't been nearly as strong as needed, with TRAN unable to really get back to new high territory, and Retailing (which has been the driving force within Discretionary lately) having reached resistance at former peaks.