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Defensive outperformance looks to continue in Short-run

March 13, 2019

Mark Newton CMT, Newton Advisors, LLC


SPX Cash Index

Support: 2771-3, 2759-60, 2729-31, 2705-10

Resistance: 2795-6, 2808-10, 2816-8

Tuesday Technical Video

REPLAY LINK: Thursday 3/7/19 Technical Webinar

SPX - (3-5 Days)- Bullish- No change- Am expecting a test of March highs into next week before any stallout- The act of getting back above prior week's lows at 2767-72 along with surpassing trendline resistance should produce a lift to test and exceed March highs. Breadth proved to be far stronger yesterday on the upside than any of the down days last week.

EuroSTOXX 50- Minor bullish on Monday's rebound- Gains to 3350 look possible, with movement up over 3375 needed to create meaningful strength.

HSCEI- Mildly bullish- No change-Snapback rally likely to echo what happened in the US, Europe, with gains to 11500- above would allow for rally to 11775


Trading Shorts: UAL, LUV, CPB, K, HBI, DVA, EXPE, TRIP

Tuesday's ability to close up 0.30-0.50% on the day still make gains more likely over the next few days, vs Declines. For the second straight day we witnessed some decent Tech strength, which proved broad-based in showing strength out of the Semiconductors, Tech Hardware, and Software. Many of the "FAANG" stocks extended breakouts, with stocks like GOOGL and AAPL pushing higher as the NY Fang index broke out above the entire downtrend since last Summer. Energy snapped back along with Healthcare while Industrials lagged again, with Boeing (BA) proving to be a heavy weight on the index. Breadth came in only fractionally positive at less than 3/2 bullish, but yet seeing Technology provide some meaningful strength was thought to be a positive for the market at a time when many still doubt the longevity of this rally.

Overall, the Defensive outperformance has been unusual and persistent in the last month, with Utilities and Real Estate showing better performance than all other 9 sectors in the last week, and outperforming on a 1 month basis, with these groups up 4.02% and 2.96% respectively # 2 and #4 out of 11 on a rolling 30-day basis. While many might suggest this is a warning sign for stocks to pullback, this would only be the case if Technology starts to turn down sharply. For now, with Tech leadership and low rates, a bid for these defensive sectors makes sense given the hunt for yields while Treasuries are extending higher (yields breaking down)

This yield weakness IS something to watch carefully however, as historically yields have paved the way for equities not vice versa and it's been rare that yields and Equities have diverged substantially over the last year. For now, it's right to bet on yields moving a bit lower and still look at following this breakout in Utilities a bit more. However, both Utes and REITS have pretty substantial resistance on weekly and monthly charts (as will be shown below) that make it less likely that this push into Defensive sectors lasts, particularly if/when S&P gets above March highs. For now, despite this being a market of many moving pieces, the trend remains higher and it looks premature to fade this rally


Long FAANG stocks- FB, GOOGL, AAPL, AMZN, NFLX, thinking additional upside is likely for this group and could begin to outperform after a long consolidation

Long XLU- Upside target 58.80, with stops under 56.25

Long TLT- Expect a push up to 124 initially and potentially higher, but the breakdown in yields looks to continue throughout the balance of this week and potentially next, and it looks premature to fade.

Additional charts and thoughts below.


NASDAQ still trending higher vs SPX which is bullish- The NASDAQ has turned back higher to new monthly highs vs SPX in the last couple days, something which bodes well for this rally to continue a bit higher before stalling out. Normally before broad-based market weakness occurs, it's been typical to see the NASDAQ start to stall out and weaken relatively speaking to the rest of the market. Yet now, we're seeing precisely the opposite with NASDAQ pushing up to new highs vs SPX to the highest levels seen since last October. Counter-trend signs of exhaustion on this lift are premature and bode well for further relative outperformance in NASDAQ v SPX.


The breakdown in Treasury yields looks to extend in the near-term, with the support violation in US 10-Year Treasury note yields likely to send yields down to test early year lows near 2.545 without too much trouble. Only a move back up above 2.67% would suggest this could be a fake move. For now, additional Treasury strength is likely (yield weakness) which might keep Financials under a bit more pressure in the next 2-3 days before this group can stabilize and turn back higher.


Utilities "breakout" does look to extend near-term, and as written in this week's Weekly Technical Perspective 3/10, is something to consider overweighting into April. However, it's important to reiterate that the weekly and monthly charts look far different than Daily, and suggest selling into this move is right once XLU reaches 60, and when VNQ reaches 86 for the REITS. While rates moving lower should be bullish for these groups, the long-term channel resistance lines are likely to result in far stronger resistance than recent December highs which were just broken, and suggest taking profits/fading these Yield sensitve groups makes sense in the weeks ahead on further strength.