February 11, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2681-2, 2672-5, 2622-4, 2596-8
Resistance: 2738-40, 2744-6, 2750-1, 2760-2
Summary: US Equity indices have now extended gains for six of the last seven weeks, and S&P is higher by more than 12% from its December low weekly close at 2413, while up over 17% intra-week from Christmas Eve. While weekly momentum and breadth have been constructive factors supporting this rally, some of the recent slowdown in the last week suggests indices might have a difficult time getting through the balance of February without at least a minor correction (More on this below) Bond yields have moved straight lower, as stocks and bonds have been trending in unison lately, while the Dollar has managed to break near-term uptrends in pushing higher for six consecutive days. This push up in the USD, meanwhile, has been problematic for the commodity trade and also for Emerging markets, which look to be taking a breather. Thus, while the broader landscape for Risk assets appears to have recovered meaningfully on an intermediate-term basis, there are some reasons for short-term concern where investors should be alert (and these will be discussed below) Below we highlight the Value Line Arithmetic index on a weekly basis, the Equal-weighted gauge of 1700 names. As has been mentioned last week, the recent strength managed to both regain prior lows as well as achieve what looks to be a meaningful breakout of the entire downtrend from last Fall. This broad-based gauge showing material strength does give some reason for optimism in the months ahead. The chart below shows this as being a clear-cut case of a failed reversal pattern, as prices have gotten back into this former base. This takes some of the bearishness out of the equation for the next 3-5 months as opposed to if SPX had held 2630 and turned back lower. Near-term, however, as we've discussed for the last couple weeks, there are some near-term warning signs that could allow for some minor backing and filling before this rally continues. More on this below.
Overview: S&P and other US benchmark indices have now given their first real "scare" on this run-up in backing off on two consecutive sessions before rallying on Friday up off the lows to just avoid a third day's loss. While not proving damaging in the least on weekly charts, this has served to take some steam out of near-term momentum, and breadth indicators also have reached prior extremes that suggests there could be some selling in the month of February before a further rally higher can occur.
The following points seem important to highlight:
1) Bond yields and USDJPY have lagged on the Equity bounce from December and Bond yields have gone lower in recent weeks which gives reason for concern given recent trending tendencies (positive correlation)
2) Technology has snapped back in a big way, but remains trending lower from last June and October and looks to be reaching an area of resistance in the next 1 week that could be important and serve as a Headwind. The SOX in particular shows strong resistance directly overhead.
3) Structure has gotten more bullish for equities with the breakout of the downtrend from last Fall and Breadth was noticeably strong in early January, yet now breadth is beginning to stall out again and last week's decline occurred on much heavier downside breadth than what rallies had occurred on to the upside
4) Sentiment largely remains subdued, and while less bearish than last month, this hasn't gotten bullish yet. Last week's comments on Trump not visiting with Pres XI prior to early March were widely attributed to having "caused" the decline. While I tend to favor cycles as a reason, vs news, if any sort of news had this kind of power, a further decline on "news" would cause sentiment to turn back to bearish very quickly and likely limit the extent of any decline
5) The Dollar has managed to make a very good rally of late from important support- This broke minor trendlines and looks to be a key factor that has adversely affected Emerging markets and also commodities (Charts on all of these below)
6) Last year's major low in early February coincided with the same window last week which proved to be important in causing stocks to stall out and for SPX to turn down, right at a key 1 year anniversary (2018 low projected forward a year resulted in a 2019 high) and the 90 degree time frame from early November also lined up into last week.
7) Defensive sectors began to gain ground last week, with meaningful relative breakouts in Consumer Staples and also some upturn in Utilities. REITS have been quite strong, but now up against more difficult levels to expect follow-through. Thus, the best risk/reward among the Defensives looks to be Staples.
Overall, it was thought a few weeks ago that 2710-5 would hold rallies. This was surpassed, and allowed for a brief push back up to 2740 before reversing to move right back to the same area near 2710. However, much of the reason for near-term caution continues to be important to highlight heading into this current week with regards to a slowdown in short-term breadth and momentum, counter-trend sells, cyclical importance combined with near-term overbought conditions (intra-day only- Daily charts are not quite there) Bottom line, nothing has changed dramatically, flattening out in Market exposure makes sense over the next 1-2 weeks, but one should look to buy into dips into 2/19-20 on any pullback (important time-wise) , as the improvement in structure at this point likely should not lead to a larger selloff to test/violate December lows. Additionally, the China deal likely will end up being helpful to markets, regardless if the Date is pushed out. For now, this seems to be the key narrative with regards to what many are pinning the ebbs and flows of stocks on.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Upside limited to 2760- It's thought that early week strength likely fails to make meaningful movement over last week's highs and should stall out at 2745-60 at a maximum before turning back lower. (IF 2624 is broken, this would serve as a downside catalyst of importance) While prices managed to close back up near highs of the session Friday, making the brief two-day pullback not overly important, we did see momentum and breadth start to wane. It's thought that early week strength should be a chance to sell into this move, and that a larger pullback can still happen in February that would take SPX down under 2600 before any low.
Intermediate-term (3-5 months)- Bullish- While intermediate-term momentum and trends remain negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. While a retest of recent lows certainly can't be ruled out, it looks less likely in the short run, given the positives of former lows being recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.
10 important Charts heading into this week
SPX has made a minor pullback last week, though the extent of last Friday's bounce into the close might allow for another 2-3 days of gains, which then find resistance and turn lower. It's thought that equities still have an above-average chance in weakening in February, and last week proved to the start of this, as the minor two-day pullback did negatively affect both breadth and momentum. Additionally, one Demark sell (TD Combo) was confirmed last week, (which is bearish) while the other (TD Sequential) did not, but is 3 days away. Thus, a minor bounce which fails to break above 2760 but shows a couple days of mild gains where breadth falters further, would be a big tell this week to the possibility of a further decline, which is looking increasingly likely in the short run. Under 2624 is necessary to think a larger pullback is underway, and would lead initially to near 2578-80. On the upside, early week gains are expected to stallout and not get above 2760 in this scenario. While many are mentioning the 200-day m.a. as being resistance, it should be noted that this largely failed to have any real meaning late last year when it was pierced on the upside and downside several times to no effect. (The 200-day in the NDX looks more important, as this lines up with a key 61.8% Fibonacci retracement level for NDX when studying this chart.
Stocks diverging from Yields, Dollar/Yen- This overlay chart shows the degree that US Stocks , Treasury Yields and USDJPY have all largely trended in unison in recent months, except for the last few weeks. Stocks have continued higher, while Yields have been pulling back. This could be problematic if the past relationship between bond yields and stocks is any guide. On both prior occasions in the last six months where stocks diverged from yields, stocks ended up following yields, which led the way lower. This time around we've seen bond yields turn down sharply again, while S&P has bounced. It's thought that any early week strength in Equities likely results in a stalling out and should result in a pullback in Equities which joins Treasuries yields in the near-term before yields find support and rally.
Technology - Close to resistance- Sell into early week gains- Technology has successfully made a very good bounce in recent weeks, which directly followed the relative charts of S&P 500 Information Technology index v SPX surpassing the downtrend line from last Fall. This resulted in very good performance over the last month (Technology was the third best performing sector in the rolling 30-day period, with gains of +8.42% vs SPX +5.18%) Last week proved to be even better for this group relatively as it finished second best, with returns of +1.76% for the rolling five days, second to only Utilities. Overall, this daily chart of Tech relative to S&P still looks to have another 2-3 days of outperformance/gains, which are thought to be a potential source of early week strength for the market. Yet, the group is nearing what's believed to be a very important area of overhead resistance that likely limits gains and causes a stalling out. Given Tech's 20% weighting within SPX, this area which has held since last June's peak should be important as resistance this week, causing a further stalling out in this group in the short run.
Energy remains a very weak link in the market right now, and its January outperformance looks to have reversed pretty violently given the downturn in Crude which resulted in XLE, OIH and XOP all turning lower. The chart above highlights the Exploration and Production ETF, or XOP which looks far weaker than either XLE or OIH. Thus, this should be the "Go-To" for those wishing to fade and/or short Energy this coming week. Energy gave up over 3% last week, yet still looks early to bottom, and XOP still looks attractive as a technical short, with areas of importance down near $25.50-$26, a meaningful distance still from Friday's close of $28.36.
Financials seem to be nearing their first meaningful area of support on this pullback after the breakdown two weeks ago. The relative chart of XLF/SPX looks to have 2-3 days of further selling max this week before showing signs of stabilizing given the presence of a possible TD Buy Setup (Demark) on daily charts. Thus, while the intermediate-term trend for Financials remains bearish from early last year with the recent rally holding where it needed to before turning lower, we look to be nearing the first important area of support which might cause some stabilization in this group after the last couple weeks of selling. This is important naturally given that Financials represent 13% of SPX. It should pay to be on the lookout for any weakening in Treasuries and/or steepening in Yield curve and stabilization in Financials, which should be beneficial for US Equities.
Consumer Staples are starting to turn up meaningfully in the last week, a sign of defensive positioning that often comes about as Equities start to weaken. This relative chart of the XLP/SPY broke out late last year relatively on SPX weakness in December. The group pulled back as the bounce got underway, yet now has begun to turn higher in a meaningful way in recent weeks. Staples managed to turn in gains of 1.12% last week while the S&P was just fractionally positive, and Staples actually ended up besting Discretionary, which fell for the week. Overall, this looks likely to lead to additional strength in the weeks ahead for the Staples group, and one should not be too quick to ignore.
US Dollar bounce from support still looks to have some upside- The Bloomberg Dollar index (<35% v Euro) has successfully rallied off key support and broken out above the minor downtrend connecting recent highs in this decline. This is a positive development and likely coincides with this making additional headway higher this coming week and potentially the week thereafter. While the larger chart remains problematic from a structural perspective, it looks right to still bet on more Dollar strength in February which likely is a negative for Emerging markets and also for commodities. UUP is a popular ETF designed to profit as the Dollar rises. (UUP- Invesco DB US Dollar index Bullish fund)
Commodities rolling over- The Thomson Reuters Equal-weight Commodity index broke support of the last few weeks, and the recent Dollar gains look likely to coincide with additional downside in commodities in the month of February before any type of larger rally can get underway. While the Dollar overall should begin a larger selloff sometime this year that would be beneficial for commodities, in the short run, this CCI move is bearish and likely leads this group lower. One can bet against the group using DBC, the Invesco DB Commodity index tracking Fund.
Ishares MSCI Emerging Market ETF- EEM- Short-term breakdown after intermediate-term breakout- This Emerging market ETF managed to violate the uptrend from December, putting this rally also in jeopardy in the short run as the US Dollar makes ground higher. Near-term, it's likely that any bounce in EEM stalls near prior highs from last week near $43.50. While a 3-4 day rally would help counter-trend signals to line up, momentum is also starting to reflect a crossover in Daily MACD which is a negative. Thus, despite the larger breakout of the one-year downtrend early last month, this looks to require some backing and filling in the weeks ahead before EEM can move higher. This coincides directly with the recent bounce in USD, and in the short run, EEM should be avoided, expecting strong resistance at $43-$44.50 and support down near $40.75-$41.
Equity Put/call ratio- While daily readings have pulled back from extremes, moving averages still show heightened levels of Put/call and highest since 2016. While sentiment has gradually become "less bad" on this rally from late December, we still face a situation where the 21 and 34 week moving averages lie at the highest levels we've seen since early 2016. Thus, on any pullback in Equities in the weeks to come, it's likely that sentiment gets fearful that much more quickly, given that we're already starting at a pretty high base. Overall, this is one of the factors that should limit extent of any pullback as any selloff would make fear go back into the market very quickly.