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Defensive positioning on the rise as S&P should start to follow Europe's weakness over next couple weeks

September 6, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact:

S&P 500 ETF Trust SPDR (SPY)-  
286.5, 283, 281    Support
290.45, 291.16-19         Resistance



SPX - (3-5 Days)- Bearish, Under 2891 on a close should start the trend back lower,  if not Thursday, than by next Monday and upside should prove limited.  Short position recommended, looking to add on any gains Thur/Friday and Downside targets initially at 2860-3 and under to 2807.

SX5E- EuroSTOXX 50Bearish- SX5E has broken prior monthly lows, arguing for immediate acceleration down to test and likely break March lows at 3261.  Overall,  Short/avoid, expecting this recent weakness to persist, and to underperform S&P

HSCEI- Bearish- Move down to test 10200 looks likely, with max downside to near 9975 before stabilzing and turning higher for a bounce.  Near-term, additional weakness is likely and shorts recommended.  

Trading Longs: PM, CLX, CHD, HRL , HSY, NEP, EXC, NRG, ES, ETR, 



US Equities are slowly but surely beginning to weaken a bit more in recent days, yet still not nearly as much as is being seen around the globe.  This drip-drip process can still continue until groups like Financials and Industrials begin to join the fray, which as of now, have not done so.   Yesterday's action saw Technology finally showing some evidence of weakening, and it's thought that the other parts of US equities likely put in tops by end of week.  For now, most of Europe remains far weaker, and the breakdowns seen Thursday in SX5E, DAX, CAC and UKX  make these indices likely to underperform the US in the days ahead.

Defensive rotation looks to be starting up yet again, if Thursday's price action was any guide.  Both Utilities and Staples rose more than 1%, with both SPDR ETF's moving to multi-day highs.  Meanwhile Industrials and Financials have stalled in recent weeks, failing to follow-through on recent breakouts.  Yet these sectors both have not yet turned down to the extent that would signify the start of more broad-based selling.  Financials might depend on yields and the yield curve turning back down after the recent bounce, and it's possible to make the case that US 10-Year yields are close, but the next 2 days should give lots of clues in this regard.  Both TNX and XLF could record the same counter-trend exhaustion that happened near the top in Technology and SPX last week, so both of these might peak out by Friday/next Monday.   This would in turn allow for a more robust period of selling into next week and the week after before any real bottom.  At present, a defensive stance remains the preferred way to go, but for those looking to short, both Europe Asia still look like better candidates than US stocks just yet.  My feeling is this will change next week


Short XLK at 75.75, with targets near 72.50
Long XRT with target at 54
Long XLU with targets at 55
Long XLV with targets at 95, 100
Long XLP with targets 54.60-55, Stop at 52.95
Short EURUSD with targets 1.15


Additional charts and thoughts below.

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Some real evidence of Technology selling arrived Wednesday, with XLK turning down to multi-day lows.  This daily XLK chart shows the confirmed TD Signals yesterday and should give rise to further near-term price weakness to test the bottom of this four-month pennant.  Breaking $72.80 would allow for more meaningful tech weakness to get underway, which might serve as the catalyst for the long-awaited Fall correction.  For now, it's important to relay that Technology, after having spent most of August trending higher, gave up about half that performance just yesterday alone after having reached important upside resistance.  Keeping a close eye on XLK, the NASDAQ and Tech makes sense in the days ahead, but technically additional weakness here looks probable. 

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Consumer Staples turned up sharply in the afternoon on Wednesday, something which argues for a test and likely breakout of highs sooner than later.   The switch to defensives came after a rapid pullback in most of these groups throughout August.  Given the start of Technology's decline, which technically should continue in September, money should start to flow into Defensives given the market weakness, so this trade made perfect sense.   Stocks like KMB, MO, CHD, CL, CLX, SJM, were all up more than 1.5% yesterday, and this group has taken on a new attractiveness near-term.   Its right to overweight Staples over the next couple weeks. 

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The selling in Europe looks to be a much bigger deal than what's being seen in the US at present.  SX5E broke down to the lowest closing levels since early Spring, while DAX, UKX, CAC also made meaningful support violations which should allow for further weakness in the days ahead.   While the US looks close to starting its own decline, the European markets are a far weaker area right now, and one to avoid and/or consider shorting technically for those trying to hedge Long US exposure.   SX5E is likely to test and break the Spring lows in the weeks ahead.