March 28, 2016
S&P JUNE FUTURES (SPM6)
2000-1, 1982-3, 1968-70, 1937-42 - Support
2035-7, 2040-2, 2046-8, 2074-6- Resistance
In This Issue
S&P Breaks Trend from mid-February, & might be vulnerable to near-term weakness
End of March seasonality favors the Bears
Healthcare slowly making a comeback
The risk/reward for US Equity indices is looking increasingly poor in the short run heading into the last week of March, and last week's trend break coinciding with gradual momentum loss could produce 3-5% declines into early April before a move back to new all-time highs occurs. While the trend between now and late May still favors a good likelihood of SPX pressing up to test and exceed early November 2015 highs, it's getting more difficult to think this will occur totally uninterrupted. Last week's break of trendline support followed by the snapback should provide market bears with an attractive risk/reward to short into this move with stops near last week' highs. Look to use last Thursday's rebound to consider portfolio hedges as a good risk/reward in the near-term while using last week's highs as a stop.
Overall, technically speaking, the SPX trend has gradually begun to flatten out in the last couple weeks which is an initial warning sign after a 13% move in such a short period of time. Momentum has begun to wane, (MACD negative crossovers in RTY, close in SPY) while breadth has pulled back from extreme levels. (McClellan Oscillator rose to up near 100 and over, while Percentage of stocks trading above their 50-day ma nearly touched 90%, the highest in over five years. ) The break in the uptrend from mid-February caused a quick three-day selloff for SPX and Russell 2000, with the SPX pulling back to break its 10-day ma intra-day, which was nearly violated on a closing basis, and just missed given the late rally. Financials meanwhile, have begun to trade much worse, despite Treasury yields not really budging in recent weeks. The Equal-weighted Financials ETF, (RYF), by Guggenheim, broke down under its own uptrend from mid-February lows and has underperformed badly, lagging all other major sectors on Thursday, down 0.8%, and showing nearly 2% declines for the week.
So while many might be inclined to write off this recent three day pullback, thinking it is not dissimilar from the time in early March, when SPX fell during 3/4-3/10, momentum is in worse shape this time around after the flattening out in the past couple weeks. One possible positive, however, as to do with the extreme amount of volume into Declining vs Advancing issues which occurred last Wednesday. This +2 TRIN reading from last week is always something to make note of, when thinking a pullback might extend, as it's occurred many times near market lows in the last 12 months. However, the most recent two readings were abnormal in that regard, and both late December and early February TRIN readings of +2 resulted in acceleration, as opposed to market reversals.
End of March seasonality also appears to favor at least a stalling out in US Stocks, as End of Quarter portfolio rebalancing causes many managers to lock in gains while looking to buy dips in sectors which have underperformed. Data from Stock Traders Almanac shows that the final week (or Fourth/Third to last trading day of the month) of March averages -0.77% with a median decline of -0.49%. While the last five years have only experienced one "down" period, starting in 1994 the SPX had 10 straight "down" periods of the final 3-4 days of March. Overall in a market of this sort, it's necessary to pick spots to consider fighting the trend with only minor signs of proof. Last Thursday's rebound looks to have provided at least one of those, for the first time since the rally began in mid-February. If indices shrug off losses again, and move back to highs, than this would be time to cut hedging shorts down and obey the trend yet again. For now, this doesn't appear like a bad area to fight this recent 13% rally in the last 5 of 6 weeks.
Short-term Thoughts (3-5 day) Bearish- The late week selling seems to suggest that our trend might require some "Backing and filling" before pushing up to test and exceed the highs from last November 2015, which is what's expected in the period between now and late Spring. The combination of the bearish seasonality, with trend breaks in many US indices along with the rolling over in momentum in the near-term all could allow for a near-term pullback in stocks before this rally turns back higher. For SPY, selling between 203-204 and expecting a move down to 200, then 196.25-197 is perfectly reasonable within the context of this current rally from mid-February. Stops are put above recent highs at 205.23, as exceeding this would suggest strength up to 207-208 before any meaningful resistance.
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.
5 Charts which suggest a pullback of some kind is necessary before additional gains can occur
SPY charts have violated uptrends from mid-February, with last Thursday's gains just barely helping prices to recapture the 10-day moving average which(remaining above) was seen as critical to this uptrend continuing. However, the damage seems to have been done, as the slowing in momentum looks likely to result in a downward cross in the popular technical gauge Moving Average Convergence Divergence (MACD) which makes this period in early Spring much different than that in early March which witnessed a few day period of weakness but failed to lead momentum all that much lower. While pullbacks might prove brief given the ongoing levels of "subdued" sentiment, and bullish intermediate-term strength, (Weekly MACD positive and rising after recent bullish Crossover) it doesn't preclude indices giving back 3-5% in the next 1-2 weeks before this rally continues. If this market forces its way back higher above 205.23, then that would likely be sufficient to keep prices moving higher up to 207. However, at current levels, this trend break looks like it might lead to at least a bit of pullback before this rally can continue.
Russell 2000 has shown increasing signs of rolling over in the near-term, just over the last few trading days, as witness by prices pulling back down to under 1070 from its prior attempt at exceeding 1100, or more than 3% lower just since early last week. This juncture does look important technically, with an intersection of the prior "LOW TO LOW" trend hitting right near 1100 on the Russell 2000, while MACD has also begun to turn lower on daily charts. Meanwhile the Russell stands nowhere near the area required to breakout back above the downtrend from last Summer which lies up near 1150, an area which needs to be surpassed to give any kind of real conviction to this rally. While this area can't be ruled out for the Russell in the months ahead, the spot near 1100 for now looks to be important, and its downturn last week looks negative technically. Pullbacks down towards 1030 with a possibility of 1020 look feasible before this can turn higher yet again.
Financials look to be weakening, in a similar trend break as what was seen in the broader indices over the last week. When looking at the Rydex Equal-weighted Financials sector, this break looks negative for the group given its 16% weighting in the SPX, and could provide some near-term headwinds to rallies continuing. Overall, until the Financials can regain this uptrend, the group likely should underperform further. (Last week saw Financials return nearly -2%, the third worst performing group)
The McClellan Oscillator, as a gauge of breadth, has turned lower in a fashion to break its uptrend from early 2016. This break also puts the Oscillator down under the 0 line for the first time since early February. Thus, breadth has begun to turn down more quickly than indices of late, something which historically can give some clues as to index direction, and in this case, seems negative to have broken down in the way it has since the first week of March. This chart is another reason why near-term pullbacks are a possibility before this rally can continue.
Finally, the percentage of stocks trading above their 50, 150, and 200 day moving averages have all risen quite spectacularly in recent weeks from very depressed levels. While this gives some bullish clues about the possible longevity of this rally in the next couple months, in the near-term the percentage of stocks trading above their 50-day m.a. for the NY Composite (GREEN) looks to have reached nearly 90% of total, a very stretched level. In the past when this percentage got above 70% both in November and in early February of 2015, it resulted in minor peaks in price. Given that this percentage has begun to wane in the last week, this could be suggesting that a minor drawdown is necessary given that many stocks have moved too far, too quickly.
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