Please enable javascript in your browser to view this site!

Small caps breaking out of Downtrend gives intermediate-term confidence

February 21, 2019

Mark Newton CMT, Newton Advisors, LLC


SPX Cash Index

Support: 2768-9, 2758-9, 2731, 2722-4

Resistance: 2788-90, 2798-2800

My CNBC interview from Wednesday 2/13

REPLAY LINK: Thursday Feb 14 Technical Webinar

SPX - (3-5 Days)- Bullish into Friday/Monday of next week. but skeptical that S&P gets over 2800, so the next 3-4 trading days will be important. For now, little to no real signs of any deterioration, but this run-up has been lifted momentum to near overbought levels. Will need a close UNDER 2737 to pay attention on the bearish side. Watch for evidence of negative breadth during Thur-Friday for clues

EuroSTOXX 50- Bullish- Move to 3300-3350 looks likely. Similar to S&P this shows the possibility of next 3-4 days leading to exhaustion, Demark-wise, yet for now is not quite there. Will need a move UNDER 3124 for confidence in the bearish case.

HSCEI- Bullish- Prices have pushed higher and still looks early now for a peak- Move up to 11450 looks possible


Trading Shorts: UUP, EUO, AAL, TRIP, K, FRT,HAE 

Fed minutes largely coming through as anticipated, though no big market reaction and stocks are starting to stall a bit more after this rally, with S&P getting just under levels marked by December highs. The key action in recent days has NOT been necessarily with stocks, which have trended higher, though largely at a subdued pace, but with the US Dollar having turned lower. Commodities and EM look to be turning higher, and we've seen a distinct bid to China. Bond yields have largely remained down near recent lows, even with the mild bounce in yields following FOMC minutes yesterday.

Overall, two specific developments look important outside of the Dollar and Commodity movement which we've discussed. First, ratios of Small-caps to SPX have broken out in recent days of a trend which has been ongoing since last June. Second, Household and Personal Products within Consumer Staples has returned to new highs, having broken back out to new high territory, while Household/Personal products RELATIVE to all of Consumer Staples has exceeded nearly a 10-year Downtrend. This seems to be important and bodes well for intermediate-term outperformance after a lengthy period of lagging behavior.


Long GDX- Despite the recent strength, this still seems like a sector that's emerging and should be overweighted. Gold mining stocks look attractive and GDX likely reaches 25 before any reversal

Long XLB- Materials starting to outperform- Push higher to 56.25 initially possible and then low 60s

Long FXI- China on the verge of a larger base breakout now given the downturn in the Dollar- FXI should be overweighted- Above 43.56 is a cause to add to longs

Long KRE- Given the breakout in KRE, this should outperform XLF and also SPX, and its right to be long

Short VNQ- for Short REIT exposure, though a move above 85.25 on a close should not be added to as this would allow for 86-86.25 before stalling into end of February and then turn back lower

Additional charts and thoughts below.


Russell 2000 index vs the SPX, or RTY/SPX, has just exceeded an area of downtrend line resistance that has held since last June. While near-term overbought, this looks to be an important and bullish development that bodes well for further outperformance out of Small-caps and makes a convincing case that 2019 might turn out better than what most expect given this resiliency and snapback. Near-term, this looks to be a factor that likely helps this style continue higher vs Large-caps.


The Household and Personal Products index in relative terms to Consumer Staples has just exceeded a long-term downtrend which has trended lower for the last 10 years. So, despite some of these stocks like CODY, or ULTA having gotten very stretched of late, the entire sector still looks good to favor given this recent breakout and the start of some outperformance, which has been a long-time coming. (S5HOUS index- Bloomberg)


Pound Sterling has turned up sharply in recent days, and despite all the BREXIT uncertainty, we've seen a six-month sideways pattern turn much more constructive given the recent rallies in the last couple months. The rally up from December lows got right to key trendline resistance before stalling and selloffs proved minimal before this started to turn up sharply yet again. It's expected that a move higher to 1.32 is likely and over would allow for a much larger intermediate-term rally in Pound Sterling vs USD, which likely also coincides with Euro gaining ground.