December 17, 2018
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2583-5, 2564-5, 2513-5
Resistance: 2687, 2708-9, 2731, 2800
Summary: Stock indices remain trending lower from early December as part of a larger decline from mid-September, but now appear to be at real "make-or-break" levels with regards to technical structure that has guided lows in SPX, NDX and DJIA since early 2018. Patterns appear to have broken down for some indices like the DJ Transportation Avg, and Russell 2k, while last week's close undercut October lows by a small amount in many of the major US indices. However, the larger patterns in SPX, NDX, DJIA remain intact at this point, while sentiment has begun to show real evidence of uneasiness. Fund flows back up this sentiment shift, with Lipper data by Reuters showing a record $46 billion of outflows from Equity mutual funds and ETF's in the week ending last Wednesday, with an equally high $13.4 billion being yanked out of Bond funds, the most since 2015. 2018 has proven to be a most difficult year for many asset classes, with poor returns from Equities, Bonds, Commodities and Cryptocurrencies alike. (We don't hear much about TINA (There is No Alternative) these days, and for good reason. Now with 10 full days of trading left for the year (a bit more than two weeks), many investors are all too Fed up with the "Holiday Red" on their screens daily, and are hoping that the much heralded Mid-term election year bullish seasonality is ready to kick into gear. The Sentiment polls from AAII , as just one source, would suggest some kind of relief should be right around the corner: Based on latest readings from 12/13/18, the Percentage Bears has jumped to near 50% at 48.87, while Bulls has receded to 20.9%, the lowest Bullish reading since May 2016. While Investors intelligence polls still showed a small bullish majority as of last week, the new reading due this week is likely to contract further given recent market volatility, adding to the degree of negativity.
Overview: 2018 is shaping up to be one for the record books, but not for the way many expect, and despite good earnings and economic data, US markets are set to turn in quarterly results of -10.78% at current levels for the SPX, and -14% for the Nasdaq with down markets for the year for the US, Europe and Asia. While market indices have not entered bear market territory, the average stock arguably has, with nearly 50% of all stocks lower by more than 20% off their 52-week highs. And now markets are faced with a growing number of Experts" who are warning of an upcoming slowdown, something which seems to have begun already in China and Europe despite the ECB abandoning its QE program. Regardless of what one feels about the economy and Powell hiking interest rates this week, which looks all but certain, the opinions of next year are all over the map. Yet, the Fed funds futures seem to be nearly always better as a gauge for Fed hikes than most economists, and this is now showing only one more hike in 2019 and not until September. Meanwhile, the other "elephant" in the room centers on the trade war and whether to believe the administrations positive tone on an upcoming "big" announcement with regards to trade with China. Our recent tariffs have certainly shaken the perception of an economy growing without any slowdown, but it seems increasingly likely that this recent "thaw" in trade war tension is likely to accelerate into next year. This begs the question, if market indices are still largely intact while sentiment has turned negative and some upcoming positive trade war truce news is coming down the pike, is it right to be negative on equities, thinking this recent selloff continues? According to the Stock Traders Almanac, the 3rd year of a presidential cycle has been bullish for DJIA on every occasion since the 1930's over 80 years ago. But given the recent ineffectiveness in Seasonality thus far for 2018, can this be trusted with indices seemingly breaking down left and right?
Technically speaking markets have shown some near-term damage in trend while weekly and monthly momentum have turned down sharply and have been bearish for most of this year, which began in January on the 14 day plunge from 1/26 into 2/9. Sector rotation started to give even more clues as of June, when Technology peaked. However, Tech has suddenly started to show some minor evidence of strengthening in the last week, just while Volume has begun to wane a bit in its bearishness- Far less volume in down stocks vs Up and breadth has begun to stabilize. Sentiment meanwhile has continued to get more and more negative, with nearly a 20% inverted ratio between bears to bulls in AAII polls. Thus, at a time when many unanimously expect a breakdown, it's worth looking for relative bright spots and expecting at least a minor bounce in the week ahead into end of year. While it's important that SPX get back up above 2687 initially and then 2800 as the larger "line in the sand" This next few days should speak volumes as to how the markets are able to stabilize. Under 2550 wouldn't be expected right away in this scenario, and likely could lead prices down to 2400-50 before finding support. For now, a rally back to test and exceed 2687 looks more likely for these next couple weeks.
Technical Longs to Favor over the next 2 weeks: UUP, EUO, TWTR, PFE, ETSY, CIEN, VRSN, LLY, KMB, TNDM, D, AEE, EVRG, PEG, CHD, PG, CQQQ
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- Expecting that stocks stabilize and turn higher for a bounce as momentum has begun to reflect some signs of divergence in the groups that broke down last week - Transports, Small caps, while Technology has begun to show some evidence of strengthening a bit relatively. (While many indices fell to new lows, the NASDAQ held up. Breadth and momentum seem to have waned in their negativity compared to mid-October, while sentiment has continued to get worse ahead of this week's FOMC. Overall, an oversold bounce looks near and one should watch both Technology and Financials for signs in this regard.
Intermediate-term (3-5 months)- Bullish- SPX has gotten down to, but not UNDER the key 2600 level (Last Friday's undercut by 1 point doesn't constitute a larger breakdown ) which is holding the larger trend intact for the index at a time when sentiment is growing increasingly more bearish. It's thought that a bottoming out in Yields should help stocks also turn back higher, in the weeks ahead, and that while 2600 could be violated by a small amount in upcoming days, markets are growing too negative sentiment wise to produce any long-lasting breakdown during a seasonally bullish time. However, seasonality has been tough to include as a reason to buy, as this has largely not worked for most of 2018. Charts have indeed been getting worse structurally, and momentum has turned negative on a weekly and monthly basis. Yet, we're facing the most positive period cyclically within the four year cycle and it's thought that the next 3-5 months likely could produce a rally out of this "mess" before any larger correction gets underway. So while near-term structure along with weekly momentum are indeed negatives, the larger patterns still seem ok to buy into, thinking any sort of larger rollover likely takes some time. While negative momentum divergence is indeed important, one might look at rallies into next Spring as a time to potentially turn bearish on an intermediate-term basis. For now, indices are under their 10 month moving averages, yet these averages have not yet rolled over and sentiment has gotten more pessimistic. We'll utilize any further weakness into mid-December to trim shorts and start favoring longs, but until proper stabilization starts in groups like Technology, it's right to stick with the Defensive groups for now while keeping a keen eye on the larger index structure.
10 Charts to review- Index, Absolute & Relative, & sector charts
NASDAQ 100 has begun to hold up relatively better in the last week- While sentiment has gotten worse overall with many indices like DJ Transports and/or the Russell selling off sharply back to new monthly lows, the NASDAQ has begun to hold up relatively better, which is thought to be a minor positive, given its ability to lead the market. The daily chart shows the pattern of a low, lower low and now higher low in the last couple months, while breadth and momentum bottomed out in October. While a move back over 7100 is truly necessary to allow for larger technical pattern improvement, the start of momentum getting "less bad" looks like an important and positive technical development which should lead to an upcoming bounce in Technology (20% of SPX, the largest sector)
NASDAQ v SPX bottomed out and turned sharply higher vs SPX in the last couple weeks, which is exactly what many would not expect to see if the market were crashing. While SPX did technically finish down under 2600 on a close last Friday, the outperformance in NASDAQ to SPX has helped this relative chart show evidence of trying to break out in the last few days. This is a small shift that suggests that a relief rally is clear and puts the comments above into some much needed perspective
DJ Transports broke down under key support but signs of near-term exhaustion are present- Watch for possible bounce Monday-Wednesday- The DJ Transportation Avg was one of the calamaties of last week's equity selling with prices pulling down to the lowest levels in over a year. This violated a large potential topping pattern as well as the two year uptrend from 2016. Until this can be recouped, this is thought to be an area to avoid, particularly the Airlines which have begun to roll over sharply again in recent days. While the formation is quite bearish, if there's any positive to note, it's that momentum has made a higher low into this recent selloff and Demark Exhaustion is due today, Monday 12/17/18 and should be perfected by Monday's close while also showing on 60 and 120 minute charts on TRAN. Thus, there remains a chance for this group to try to stabilize on a 2-3 day basis just at a time when everyone's steering clear given the breakdown. However, for now, the price break takes priority, and its a must to wait for the reversal back over 9758 before attempting to weigh in on this pattern as being a false breakdown.
Russell 2k vs QQQ- Small caps still look to move lower and should be avoided- The Russell 2k broke down under the lows vs QQQ and reflects this group still under quite a bit of pressure. Thus for those seeking to buy dips in Small-caps given the recent underperformance expecting mean reversion, this looks premature, and large-caps remain the way to position on longs in the days/weeks ahead. Note, Small cap deterioration doesn't necessarily have to carry bearish implications on the markets overall, as most of 2017 was marked by Small cap underperformance. Yet it is thought to be more negative than positive in the bigger scheme of things.
Discretionary breaking 2 year trends vs Staples- Equal-weighted Consumer Discretionary vs Equal-weighted Consumer Staples- Discretionary has definitely begun to show more weakness relative to Staples in recent months, and this breakdown of the trend from 2016 is considered bearish relatively for this sector compared to Staples in the near-term. While a bounce can happen in Equities at any time, this breakdown of the relative charts suggest that the Defensive stance remains the right one for the immediate future, and even on bounces, one would favor Staples in the months ahead.
EZU v SPY- Gradual bottoming process looks to have begun When eyeing Europe vs the US, we're beginning to see the makings of some slowdown in this recent pullback. The Ishares MSCI Eurozone ETF (EZU) has begun to show some mild improvement in momentum in the last month, just at a time when Draghi announced the end of QE. TD Sequential signals on this ratio chart of EZU v SPY have signaled downward exhaustion on weekly charts for the first time in over a year. Thus. at a time when Europe has begun to slow, this might turn out to be a better near-term risk/reward than the US. So, despite the bearish trends in EZU, it's worth covering shorts in EZU and watching this carefully for more evidence of strengthening in the days/weeks ahead.
Credit spreads have started to widen more meaningfully than we've seen in recent years when looking at ratios of JNK to LQD, the High Yield ETF by Barclays relative to the Investment grade. This is a negative development which suggests the Defensive stance shown with Equities is likely the right one in the months ahead, and that any bounce likely could prove to be a selling opportunity.
Equal-weighted Technology has begun to show some evidence of strengthening in the last few weeks, despite broader markets having accelerated the recent selloff. This ratio of SPXEWIN to S&P 500 Information Technology index has now arguably exceeded the downtrend which has been in place since this past June as a result of last week's Strength. While markets were down, Technology as a sector showed some good relative strength, and this equal-weighted basket of Tech seems to be giving some signals that the damage likely is overdone in the near-term.
US Dollar index looks to have made a meaningful breakout of the triangle pattern that's been in place for most of November. While the Dollar overall has gotten overbought and sentiment has begun to get much more bullish on the Dollar, last week's move likely helps this trend accelerate up into year-end/early January before any peak. Thus, Emerging markets, and commodities likely underperform in this scenario and should be avoided for now. Next year when the Dollar makes a more meaningful peak, this should have bullish implications for commodities, but for now is still early.
Financials also signaled a few signs of optimism this past week technically when the Equal-weighted Financials ETF held up much better than the regular XLF which fell down to under 24.30. Counter-trend signs of exhaustion are present and will grow more plentiful in number in the next few weeks, which seems to suggest that Financials might be near a turn back higher, just a time when most have given up on this sector. Overall, groups like Broker Dealers have seen some good strength vs the banks over the last couple weeks (IAI v KBE) while Insurance strength has also been notable (Defensive trade) So while absolute patterns still look to be very much under pressure, this group should be watched for evidence of trying to bottom out which might coincide with Treasury yields also lifting into year-end.