April 4, 2016
S&P JUNE FUTURES (SPM6)
2047-8, 2020-3, 2000-1, 1982-3, 1968-70 Support
2074-6, 2083-4, 2100-2105, 2130-3 Resistance
In This Issue
S&P snaps back, though still diverging with WTI Crude and TNX
April gains look to continue, given market resilience
Utilities, Staples make new quarterly all time high closes
The ability to reclaim new highs for the year has stopped out shorts and looks to press even higher as indices enter the seasonally bullish month of April. If history repeats itself, US equities typically average about 2% in the month of April, the month which directly proceeds the "Sell in May and Go Away" period. Markets are higher typically 66% of the time, and even a greater percentage of the time 71%, when the prior month is higher by 5%, such as March according to Bespoke.( DJIA up by 7.08%) While April typically is the best month for Equities when considering the DJIA, 3rd/4th best for S&P, NASDAQ respectively, it lands a mere 3rd during Election years, averaging just under 1%. However, it's important to remember that the the 2nd quarter of Election years typically has one of the worst returns of any within the Election year cycle, (Averaging -1.2% since 1900) and we see that three out of the last four times this occurred since 2000 were negative (2000, 2004, 2008, and 2012) (Stock Traders Almanac) Yet this time around, the selling very well might prove muted until indices reach former November/December 2015 highs, given that little resistance lies between prices and these levels at present, and they're only 1% higher )
Overall, when looking back.. the only words that come to mind are. WOW.. What a quarter. Reviewing US Stock returns of 1% for the first quarter certainly doesn't do this past few months much justice. Not only did indices completely reverse the 11.3% negative return into mid-February of 11.3%, they managed to rally more than 13% just in the last seven weeks , recouping all of the prior two months of losses to end the quarter on a positive note. Globally, stocks returned 0.4%, with European indices losing -2.4%, Japan -6.4% while Emerging markets reversed their own 10% losses and gained more than 17% to end the month of March, finishing up nearly 6%. Yet it wasn't the Financial or Healthcare stocks that led performance, despite their more than 30% combined weighting in the SPX. Both of those groups finished down. It was the Utilities.. dominating the second best sector, Materials, by more than 900 basis points,nearly 10% greater than the 2nd place Materials, which along with Industrials, finished the quarter higher by just a bit more than 4% gains.
7 DJIA stocks managed to make new quarterly closing highs at the end of March: UNH, MCD, JNJ, HD, KO, TRV, and MMM. Sector-wise, XLU, XLP, XLK all made new Quarterly closing highs, with all-time highs being made last quarter for the Utes and Staples. Technology had higher prices back in March of 2000.
For now, our brief window to attempt to hedge gains given some minor signs of weakness failed to pay off. Stocks managed to shake off weakness similar to what occurred in early March, grinding right back to new 2016 highs, albeit with a definite slowdown in both momentum and breadth over the last few weeks. Yet, it's worth pointing out that these are near-term concerns only. Being within 1% of highs put in late last year, and only lower from All-time high territory by less than 3.20%, much of the INTERMEDIATE-TERM breadth and momentum concerns on an intermediate-term basis have been alleviated. Overall, most technicals at this point would suggest further upside follow-through into mid-month before the start of any bearish Q2 seasonality gets underway. The trend remains bullish, and the beginning of resurgence in some of the former laggards like Industrials and Healthcare is definitely seen as a positive factor.
Overall, five factors seem important to highlight that have just begun to happen of late and could impact the market going forward:
1) Correlations Breaking up between SPX, TNX, CL- First, SPX has broken its recent positive correlation with both WTI Crude andUS 10 year Treasury yields of late, with both having collapsed early last week along with Equities. However, SPX managed to rally all the way back to make a new closing high for the week. Whether or not this correlation can remain unbroken for a longer period of time is uncertain. However, when these divergences have been rectified in the past, they've almost always seen Treasury yields as having made the "correct" move, while SPX followed suit. For now, we've seen afairly meaningful divergence in this 3 month correlation just in the last week.
2) Mid-caps have begun to claw back , and have exceeded trendline reistance that should allow this sector to gain ground steadily in the months ahead. This was far different than was expected after Small caps and Mid-Caps turned down to near bearish levels in the last few months, but miraculously, both groups have managed to bounce in a far more robust fashion than most would have expected.
3) Both momentum and breadth have begun to steadily wane in the last few weeks. SPX recorded an official MACD sell signal last week when it broke its trendline, causing daily MACD to cross its signal line. Breadth gauges like the McClelllan oscillator have turned down sharply after having reached extreme levels. While this backing off isn't bearish per se, after breadth reached very overbought levels based on historical trends, going forward it will show noticeable negative divergence as stocks climb while this remains subdued, and much lower than peaks made into early March. Momentum wise, we're at a tricky junction, as daily momentum has gotten overbought, while weekly remains positively sloped but in neutral territory. Monthly momentum, however, remains negative given the selloffs seen into last August, January 2016 and February of this year. Even on a move back to new high territory, its highly unlikely that momentum catches prior peaks, setting up for a larger negative into this coming Fall and next year post-Election. (Bearish)
4. The US Dollar's decline has begun to hasten in the last week, which should prove to be bullish for Commodities, though the rally in Energy seems mostly to have played out. Precious and base metals remain positive and recent consolidation should be a buying opportunity. Grains however, remain negative as supply concerns and negative technical pictures have failed to improve. Formations on GBPUSD look to have potential of rallying which would go against those expecting BREXIT fears. Meanwhile, EURUSD rallies look to continue while Emerging market strength looks to have further to go given Dollar weakness.
5) Sentiment is gradually getting more positive, but still nowhere near levels that would coincide with a top in equities based on uber-optimism. AAII spreads are now only 2% points greater with regards to Bulls vs Bears, and actually are more pessimistic than what has been seen in the prior two readings. DSI and Investors intelligence readings are both fractionally higher, yet also both of these are nowhere near levels that would suggest an above-average levels of optimism.
Short-term Thoughts (3-5 day) Bullish- Last Friday's move to push back to new highs keeps the near-term trend bullish, which had stopped out Shorts mid-way through the week with the movement back up above 2050. Despite the minor weakening in momentum and breadth of late, it looks premature to fade stocks based on those reasons alone, and the month of April remains quite positive seasonally speaking, though not as bullish as a regular non-election April. Bottom line, until 2020 is broken, it pays to stay positive, and expect some ability to press up back to last November's highs.
Intermediate-term Thoughts (6-8 Months): Bearish- Despite the improvements in breadth suggesting that rallies likely can take indices ever higher on a 2-3 month basis, it will be very difficult to erase the downturn in momentum which started over a year ago and has accelerated on the pullback into last August's lows as well as into February of this year. Indices like the Russell 2000 have not yet moved back up above former August lows, while the broader Bloomberg World index along with the NY Composite still show this rally to be a counter-trend bounce, structurally speaking. The selectivity of this market which caused Small-caps to turn down nearly two years ago followed by Mid-caps and then Large hasn't been dramatically reversed by the sharp rally of the past three weeks, and markets are still well overdue for a 20% correction which normally follows long bull markets which begin to rollover, similar to what we saw back in 2000 and 2007. Historically, drawdowns average 40-50% after lengthy rallies, like markets experienced from 2009-2015. Overall, given the extent of the momentum downturn, along with the structural weakness, gains into late Spring should be used to pare back longs with the idea that intermediate-term weakness between June-September/October remains very likely.
10 Technical Breakouts that should lead to further upside over the next 1-2 months
The following are a list of stocks that have just pushed up above former highs in a fashion that appears technically attractive, and should lead to further gains. While many might feel the risk/reward is poor overall given a 14% rally n the last seven weeks time ,all the stocks mentioned look to have solid technicals backing up their moving up.
Sonic Corp. (SONC- $35.33) Bullish- Near-term overbought, but breakout should allow for further follow-through to the upside over the next few months. SONC's push back to new high territory comes on better than expected Q2 earnings and guidance where the stock soared back up above former late yet highs as well as peaks established back in early 2015. Following nearly a one-year period of consolidation after the tight symmetrical rally into early 2015, this latest surge should lead to the stock up to the high $30's in the months ahead. Pullbacks down under $34 to relieve short-term overbought conditions would create ideal risk/reward buys, but SONC looks like one of the better positioned restaurant stocks to show acceleration given its technical progress on the heels of solid earnings last week.
Ellie Mae (ELLI- $88.90) ELLI is another example of a stock which has just broken out of a beautiful seven-month cup and handle pattern which began last August. While the stock might appear overbought near-term, with momentum waning after this recent pop above $85, it's important to keep in mid that ELLI also just exceeded last August peaks, which makes this much more promising as an intermediate-term risk/reward. Near-term targets lie near $90, and then the high $90's can't be ruled out given the improvement in technical structure. Pullbacks under $83, while not expected, would be necessary to cancel out the benefits of ELLI's recent breakout.
Stamps.com (STMP- $99.26) STMP is a breakout of another kind, this one having retraced nearly 20% since having gapped up to new high territory earlier this year. What makes this stock appealing at current levels has to do with the gap being filled that was present back in February. Interestingly enough, STMP has a long history of upward gaps, which happened at least seven times over the last 18 months. This occasion marks the fifth time that STMP has pulled back to retraced its breakout and fill the area of the gap, which historically, has been an excellent area to consider buying the stock technically (See May, August and September of last year, along with this past February. The fact that STMP has declined during a time of rising equity prices is not a dealbreaker, as the stock remains in a steep uptrend from 2014, and has declined to an area that makes this an attractive risk/reward. Gains back to test recent highs above $120 look possible, with only a move down under $90 canceling the positive nature of this chart.
Broadcom Ltd. (AVGO- $157.80) AVGO's success in regaining former highs from last winter and summer should translate into this moving steadily higher, despite the presence of overbought conditions in the last few weeks. The stock has been basing since last May, so while a steep rally back to new highs might be looked upon as a chance to sell in the near-term, the intermediate-term prognosis is healthy given a breakout above two former highs , which occurred at the same level. Upside looks likely to near $180 with pullbacks down to $150 or slightly below representing a better risk/reward area to consider buying.
Dollar General (DG- $87.31) Near-term overbought, but a very good intermediate-term structure that suggests any pullback would represent an attractive chance to buy dips for gains in the months ahead. DG has managed to recoup its entire loss from last Summer's highs, and the act of regaining $80 resulted in a sharp 10% rally over the last four weeks. While near-term overbought, not much resistance is found until $90 and any selloff would make this quite attractive to buy dips, given the bullish structure with rising highs and lows in recent years, with no signs of any deterioration.
Nike Inc (NKE- $61.59) NKE is attractive at current levels from a technical perspective, given the recent short-term breakout above two former highs, along with its pullback to test in the past few weeks. Upside looks likely, with targets up in the high $60's initially, and then following another breakout, up near $80. Given the stock's pullback in recent weeks, this should set up for an ideal risk/reward entry at current levels with stops near $58 and upside to the high $60's. The long-term structure remains quite bullish, while the near-term has gotten more attractive on NKE's breakout and subsequent pullback. Momentum is not too stretched, while the intermediate-term pattern remains quite constructive. Given NKE's pullback from the mid-$60s in recent weeks, this should set up for a great area to buy.
Bard C.R. Inc (BCR- $204.69) BCR is attractive at current levels, following the recent technical breakout above prior August highs, which just happened in recent days near $200. Momentum has gotten overbought, but no signs of technical deterioration are present that would suggest its right to avoid this move, and past movement to new highs has almost always led to further upside. Movement up to $210 looks possible, with intermediate-term targets near $225. Pullbacks should be contained in the high $190's while any violation of mid-March lows at $191.79 would postpone the rally, and shouldn't be bought into right away.
Edward Lifesciences (EW- $89.92) EW's minor basing pattern over the last month is now giving way to upside acceleration yet again, as seen by last week's move to new weekly closing highs, with closing prices right near the prior intra-day peak. Following a lengthy tradition of higher highs in price and higher lows for troughs, this act of pushing back up to new high territory marks a change that should be followed in the near-term, with upside technical targets near $100. Momentum is positively sloped, but not dramatically overbought, while the stock maintains a stellar pattern. Stops should be put near former lows at $84, which if breached, would cancel out the benefits of this rally.
Starbucks (SBUX- $61.02) The act of getting back up above $60.20, which represented a minor peak on two separate occasions since early March,should allow for further upside acceleration back to new high territory with peaks near $63.60. The stock has gone literally nowhere since last November, so this recent surge higher is thought to be quite constructive, and has helped momentum surge higher on most timeframes, just at a time when price is starting to act well. This gradual act of basing is quite constructive technically, and should lead the stock higher up to the mid-$60's. While the breakout in this case is more short-term in nature, its nonetheless quite important, and looks positive for additional gains higher.
Vantiv (VNTV- $53.95) VNTV lies right near the breakout point of a four-month Cup and Handle Pattern which has already made new closing and intra-day highs, but remains in consolidation mode as part of the "handle" in the last month. However its act of pushing back higher in the last few days should now result in upside acceleration, with targets near $60. Technically, this chart has taken the shape of many others which had begun to base in late 2015, but have since recovered all the early weakness and look poised to push higher. Long positions are recommended here technically given that the stock is not that overbought technically, while recent consolidation has made this an excellent risk/reward. Only in the event this were to pullback and breach $51 would VNTV postpone its advance. For now, this looks like an excellent long for the short run and intermediate-term, based on the ongoing bullish structure combined with recent breakout.
This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice. Newton Advisors, LLC has no duty or obligation to update the information contained herein. Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.
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