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Further near-term weakness likely for US stocks, though pullback likely proves mild compared to Europe/Asia

August 16, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

S&P 500 ETF Trust SPDR (SPY)-  
280.16-280.44, 279.11-279.16, 276.73, 275.43    Support
282.83, 283.87, 285.40, 285.98, 286                    Resistance


LINK TO TECHNICAL WEBINAR from last Thursday, 8/9/18- https://stme.in/9aXI6EKv6o

 

SPX - (1-2 Days)- Bearish- Decline under 2820 early this am paved the way for a test of 2800, and insufficient signs of the late day bounce making much headway, so by the close, the trend from late June had been violated.  Another revisit and break of 2800 looks likely which if undercut, leads to 2755;  Similarly, breaks of 7600 and 7100 for NASDAQ comp and NDX would be important

SX5E- EuroSTOXX 50Bearish-  Break of suppport in Spanish IBEX and German DAX looks important, and Europe still showing far more signs of weakness than US.  SX5E has now given up more than 50% of the entire rally from late June.  Expect weakness down to 3340 initially near late June lows.    

HSCEI- Bearish- Break of early August lows likely leads down to 10188.   Initial move down to 10188 looks likely

Trading Longs: WELL, VTR, VER, VNQ, EXC, AEE, ES, LYB, CVNA, NEP, HRTX, UNH, MDT

Trading Shorts:  WHR, MHK, AEM, FCX, ESV, SDRL, SF, MAR, WYND, FEZ, VGK, LVS, WYNN, CZR, NOC, AVGO, BABA, BIDU, CAT, DE, ITW


TECHNICAL THOUGHTS


ACTION PLAN-  

Long XLU with targets at 55
Long VNQ with targets at 85.50
Long XLP with targets 54.60-55, Stop at 52.95


US stocks showed their first real evidence of trying to join the weakness being seen in the rest of the world.  SPX violated 2820, sending prices down to near 2800, while DJIA finished Under early August lows.  Bonds rallied with 10yr getting close to initial support at 2.82%, while both Crude and Gold showed evidence of further weakness.  Breadth, which started out near 4/1 negative, steadily improved throughout the session, but yet still didn't make it past -2.5/1 negative

Bottom line, I do not view this selling as something that should lead to a broader contagion for US stocks.  While negative factors like 1) Momentum divergence 2) Divergences to Europe/Asia 3) Minor breadth dropoff DID all suggest that stocks might be vulnerable, along with 4) mid-term August seasonality, there remains inconclusive proof that the EM stress is spreading to the US.  The following are seen as positives and likely limit the extent to which equities fall in the next month.
 

  1. "All Stocks" Advance/Decline line still within striking distance of new highs (New highs in early August)
  2. No evidence of Credit trouble. If anything, high yield has remained fairly calm over the last few weeks. High Yield typically will turn down in advance of Stocks
  3. Sentiment could turn bearish pretty quickly given the Tariff threats and now EM stress as a 1-2 punch.  Thus far, the Turkish situation seems to be idiosyncratic and not as source of systemic risk.  
  4. Long-term trends are still in good shape for most, if not all US Equity indices and sectors, and no real intermediate-term trend breaks

 


Additional charts and thoughts below.

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SPX broke near-term support at 2820 Wednesday, causing a quick test of 2800 within a few ticks. While prices did rise a bit into the close, the damage looks to have been done, and can lead to additional weakness to revisit the area near early August lows near 2791 up to 2798.  A break of 2798 on a close should pave the way for an eventual test of 2755 which adjoins the larger trend from April and would be more meaningful.  The US looks to be slowly joining some of the weakness seen in many other parts of the world, yet still has yet to show too much damage. 

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Advance/Decline for "All stocks" still hasn't shown hardly any real deterioration from the highs that were put in , in early August.  Historically when examining the top Bull market peaks of the last 100 years,  equity markets tend to show a 3-6 month decline in breadth in advance of any major market peak.  This time around, this has been largely non-existent.  The only two occasions in the last 100 years where breadth failed to turn down meaningfully in advance was 1946 and 1976 where prices moved right from the highs and began a bear market.  So for this recent churning, the A/D largely has stood its ground, and indices require a lot more signs of weakness to have too big of a bearish intermediate-term stance given the lack of actual trend damage.
 

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 The Bloomberg Barclays Option Adjusted Spread, or OAS, shows High yield in relatively good shape, not showing the same degree of stress that one would think would be the case given the EM currency crisis starting to spread.  While JNK and HYG have weakened since last year, this is largely been an interest rate move, while High yield has been relatively well behaved thus far.  When the spread of High yield to 5-year Treasuries gets above 3.75%, this will be a bigger deal in thinking that credit is widening.  Based on historical precedent, this would then likely be problematic for equities.   For now, credit being in good shape means near-term equity weakness likely is buyable over the next few weeks