December 10, 2018
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2600-2, 2583-5, 2564-5, 2513-5
Resistance: 2708-9, 2731, 2800, 2814-6
Summary: The Volatility continues: Stocks reversed the prior week's rally violently over the last few days, and now have reached the bottom of the recent trading consolidation that's been in place for the past few months, with 2600 being seen as a very important area. The bond rally has continued has continued as well, while the US Dollar has largely stalled out in its recent advance. Overall, it's important to highlight the following, in no uncertain terms. Patterns in Equity indices have gotten worse, and now indices lie on the brink of a potential larger breakdown at a time when many have become very frustrated at seeing all this "Holiday Red" on their screens. Of course, as we're all aware the average stock is down much more than the indexes reflect, but seeing a larger breakdown in the indices at this point would confirm that stocks have definitely started a larger correction that should eventually lead to a bear market. However, bull markets take time to end, and after nine years typically do not go from high to low right away, particularly when many media panelists are now all but convinced that the economy is slowing and the end to the economic boom is upon us. This shift in sentiment alone suggests that having a bearish opinion for anything longer than 3-5 weeks is likely not the smart choice, and the bullish month of December can't be written off just yet. Yet, when many popular names like AAPL have lost more than 20% in recent months and sentiment has started labeling this a "trade war stock" with multiple downgrades, this is normally the time to consider looking for lows in stocks like this, not selling following the 20% loss. Yet there remains a huge focus on Technology in general it seems, despite this sector being out of favor for some time now, and everyone is still searching for the potential "Bottom" in Facebook and Apple. This week merits a shift in focus to stocks that are actually showing decent strength- The Defensives. While Utes or REITS might seem "boring" and not as sexy as owning a Facebook, or Apple, many of these stocks are acting just fine, and seem like a logical area to favor during times of heightened volatility. Below we see the SPX chart and have highlighted this key 2600 level. Unfortunately, this area has become so prominent that it could very well be prone to whipsaws as many are placing stops at 2600, for understandable reasons. Bottom line, despite this being an area of focus, it's right to adhere to this pattern and expect that any violation would be a bearish development.
Overview: After the worst week in December in over 30 years, -3.89% SPX, everyone is scratching their head as to how this kind of selling is taking place with good earnings, a robust economy (though one that's being increasingly questioned) and what's widely been seen as a thaw in the recent Trade turmoil. Investors are searching everywhere for narratives as to the "why", with everything from the Mueller investigation, to a hawkish FOMC intent on ratcheting up rates when inflation hasn't reached their target, with most in unanimous agreement that the trade policies have served as a debilitating threat, and despite efforts to dial back and negotiate now, many believe the damage has been done with regards to perception. While my Technical reports take a 100% technical take on markets, it's important to hear and see what investors feel is the "why" for sentiment purposes and gauge how frustrated, apathetic, or fearful people have become. If anything, these last few weeks have served as a sharp dose of reality as to how little the macro factors typically are in "causing" market movement and why stocks often can move in a very different direction than what earnings suggest. Many blame Trade policy for the losses, but yet our recent near 4% decline this past week occurred in an environment that was thought to be widely better than previous weeks, and the market peaked out in mid-September, with June proving to be the top for Technology. Thus it often seems to revolve around cycles and sentiment as to why stocks move, more than a group of "in the know" investors all selling at the top and buying at the bottom. Despite algorithmic systems in place to trade "News" when looking back, most of this is short-term only and has no real cause as the larger direction in most trends. Bottom line, following a 9 year bull run, this kind of volatility is certainly new to many people, but it's important to measure sentiment which is starting to get very negative at a time when market indices arguably have not broken down sufficiently to think a new bear has begun.
Interestingly enough, the key area to watch might be interest rates in the days ahead as the breakdown in stocks directly followed the break in the Yield curve, as US Long rates fell off coinciding with the breakdown in USDCNH (Offshore Chinese Yuan) Given that bearish sentiment has now been cut in half for Treasuries and yields are down near important trendline support at 2.80%, (with Demark exhaustion a few days away), it's likely in my opinion that yields stabilize here after five straight down weeks. The bond market also is readying itself for nearly $78 billion in supply this week as the Treasury auctions 3 and 6 month bills along with 3, 10 and 30 year bonds all this week. Given that stocks and bond yields moved in tandem from early October except for a brief period a couple weeks ago (that ultimately suggested that the bond move likely was the right one, not the stock rally, and stocks reversed to promptly follow bond yields) than any bottoming out in bond yields this coming week that leads Treasuries back lower (yields higher) could very well allow Financials to follow suit and provide some tailwind for an Equity bounce at a time when many least expect it, and/or have written off the year.
Until then, timing the market is difficult and the better solution seems to be sitting it out in Defensive areas until more stabilization occurs. Groups like Utilities, REITS and Staples have all outperformed of late and many charts in this group look far better than trying to buy dips in stocks like AAPL with deep downtrends (Though it's human nature to try to buy dips, or get something "on sale" which many deem to be a good long-term buy and hold when it gets cut by 20%.) Relative and absolute trends in many of these Defensive groups remain in good shape and are better technically than groups like Technology and/or Financials. With that being said, let's take a look at some of these key sector charts and then five stocks which look like good Technical bets during this time of extreme volatlity.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish- Expect a possible early week break of 2600 but which doesn't undercut 2550 and should allow for stabilization sometime this week and a move back up over 2600, as opposed to a crash. (Sunday evening, we're seeing futures down 24 points to just over October lows, on a closing basis the lowest close since April) Bottom line- Trends are near-term negative from 12/3 and look to test and potentially break 2600. Any break of 2600 that then recoups it would allow for a rally to commence. As last week's note said, movement under 2680 puts a defensive stance back on the front burner. While the daily notes recommended a defensive tone on the break of 2767 with a move down to 2722-5 likely, S&P now sits near a very important 2600 level that everyone seems to be watching carefully. When levels like this become something of interest to the media, they can often serve to offer whipsaw potential, as violations run stops before a sudden about-face.
Intermediate-term (3-5 months)- Bullish- SPX has gotten down to, but not UNDER the key 2600 level 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- 5 Index/Sector & 5 technically attractive risk/rewards for Longs
SPX daily chart has gotten worse in the last week technically as the second rally from late October has retraced all the way back down to recent lows. Weve now seen three separate 7% pullbacks from mid-October with Thus, what was once seen as a recovery effort off the lows is increasingly taking shape as a consolidation pattern that might lead to a breakdown. Yet, this 2600 level might prove more difficult to "break and hold" as many investors are now familiar with this 2600 level. Overall, the momentum and trend simply don't suggest buying dips here is all that prudent just yet before more proof of stabilization. Near-term, it appears more likely that a minor break can happen, but if fear starts to escalate, this should prove buyable, and any move back up above 2600 would kick off the Santa rally. Near-term, breaks of 2600 would lead quickly down to 2583, 2564 or even 2513 before finding support, and the next week has the potential to still be negative, but given Equity Put/call readings hitting the highest level since January, a low should be right around the corner. So one should be increasingly looking for lows, from a trading perspective.
UTES Bullish- Buy XLU at 56.46 for a move up to 59-60- The Utilities sector Sector SPDR ETF (XLU) has just made new weekly all-time highs as of last week's close of $56.46, above the prior peak from late 2017 of $56.41. Weekly charts depict this ongoing trend channel higher and it's likely that prices push up towards the highs of this channel, with targets near $59-$60 before a stalling out and reversal back lower. Near-term, Utilities look to be the best of the Defensive sectors, and should be favored given the recent Treasury rally along with broader market volatility.
DJ Utilities has broken out of a downtrend from 2016 vs SPX in relative terms as well as having recovered prior lows broken in relative terms from last year. This is constructive towards thinking additional outperformance happens, and this group should be favored for relative strength by those seeking a safe-haven play and exiting Technology. The Utilities have turned bullish near-term on both an absolute and relative basis.
Consumer Staples vs. SPX (Relative chart) Bullish for further outperformance- Similar to Utilities, we've also seen strength in the Staples group lately, and weekly charts of XLP to SPY have broken out in a very similar fashion to what's happened to XLU. This bodes well for strength in this group and longs should be favored for the Staples, expecting outperformance in the near-term. Charts of stocks like CHD and PG show these to be a couple to consider for those looking for longs within this group.
REITS have shown near-term relative outperformance vs SPX, but prices require some "work" to do to join in absolute terms. As weekly charts show above, the S&P 500 Real Estate ETF VNQ has pushed higher in rebounding to test an area that's thought to be important on weekly charts which lines up with $82 up to $84.50 on the charts based on two different trends. While this defensive group has outperformed with rates dropping lately and still looks to perform relatively better, this would begin to look much more attractive if/when prices get over $85.55, which would exceed the late August intra-week highs. Such a move would suggest this group could start to show intermediate-term outperformance after several lackluster years. Bottom line, the key takeaway above is that prices are up to resistance and for this group at the time, likely cause a bit more congestion than what's happening in the Utilities, or in Staples, which are preferred.
5 TOP DEFENSIVE STOCKS TO CONSIDER:
Ameren (AEE- $70.42) Bullish, with further gains up to $80 expected before any meaningful slowdown. The stock has consolidated for nearly a month following its breakout in early November, and prices have pushed up to the highs of this pattern in recent days. This bodes well for a breakout and longs are recommended, looking to add on a daily close over 71 for movement initially up to $75 and then $80 with breaks below $67.90 being used as support. Overall, this stock remains one of the better Utilities in performance, turning in gains of 19.38% YTD thus far, the 4th best of all 29 companies that make up the S&P 500 Utilities index. Given the long-term breakout shown above coupled with the near-term ability of AEE to accelerate in more parabolic fashion since early November, this should be favored for additional outperformance in the days/weeks ahead.
Evergy (EVRG- $60.31) Bullish- The base breakout of this Integrated Utility back in November allowed prices to exceed the entire base going back since late 2016. This bodes well for additional gains to the high $60's in the short run, with intermediate-term projections allowing this to run up to over $70. Risk is very well defined as one would exit longs on any break back down under $58 which would postpone the rally. Near-term though, the ability of this to have cleared this longer-term base is seen as quite positive technically at a time when the group also is breaking out. Thus, this price structure makes EVRG one of the top Utilities to consider technically and one should consider overweighting for further gains.
Extra Space Storage (EXR- $98.70) Bullish with targets at $106. Trends and momentum have turned sharply positive in EXR after a quick 15% rally in the last two months to within striking distance of former highs. Neither daily, nor weekly signs of exhaustion are in place, so considering longs in this under $100 with targets up near $106-$108 make sense as the REITS have been outperforming the broader market of late. While Equities in general have been shaky, REITS like EXR have been able to push higher, and EXR should be able to reach the area of the upper border of this channel, at levels above last Summer highs. Overall, longs are favored, looking to buy dips at $96.50-$98 for a push higher in the weeks and months ahead.
Procter and Gamble (PG- $92.45) Intermediate-term bullish based on extent of recent rise- Buy on dips after stallout and await move back over 95- PG's recent push to test all-time highs keeps the intermediate-term structure still very much intact, and longs can be considered, looking to add above $95 on a weekly close for a technical target at $110. PG has formed a large consolidation triangle pattern since 2014 and now is testing similar levels that were hit back in December 2014, four years ago. Overall, while this stock has stalled out in the last couple weeks, the attractiveness lies in the intermediate-term structure. Longs should be considered at current levels in small size, looking to add on any pullback to $89-$91 for a move up to $110. Overall, this "safe" stock looks right to add to the portfolio given its recent resilience and ability to push higher to test former highs. Any gains above $95 would warrant adding.
Church & Dwight (CHD- $66.81) Bullish & further upside likely given recent resilience following breakout- CHD remains technically bullish and is considered one of the top technical choices in all of Consumer Staples. This stock was written up in this report a few weeks ago, but deserves further mention for its resilience during times of market duress. The last four weeks have failed to show any real pullback given Equity declines. This basing which has happened since mid-November bodes well for this to turn higher up to $75 near-term, with additional targets up near $80. Momentum remains positively sloped on weekly charts while not too overbought given recent consolidation. Stops on weekly closes under $64 would protect any drawdown from extended levels, yet this still looks to power higher given the two-year base breakout which accelerated further in early November. No counter-trend signs of exhaustion are present and CHD remains the second best performer in all of Consumer Staples Index (S5CONS-Bloomberg) with YTD returns of $33.17% with more expected in the days/weeks ahead.