May 9, 2016
S&P JUNE FUTURES (SPM6)
2037-8, 2026-28, 2007-9 Support
2068-70, 2089-90, 2105-6 Resistance
In This Issue
S&P gains last Friday still haven't done enough to think immediate gains happen
Industrials under review, and specifically, Aerospace & Defense
Summary: Short-term weakness still looks to be at hand, despite last Friday's bounce attempt, as downtrends from mid-April remain intact and insufficient strength has been seen to call a bottom of any sort.
Europe did successfully attempt to stabilize late last week, but the price action in both the SPX along with the World index is certainly inconclusive of any low. In the bigger picture, there is a good likelihood that weakness proves minimal in the weeks ahead, however, given that pullbacks have taken prices right above several different kinds of technical support while bearish sentiment is on the rise. For now, selectivity remains key in stocks and important areas to look for support lie near 2026-8 initially in S&P futures followed by 2007-8 which looks to be much stronger. Overall, with technical support less than 1% away, one should take a look at using any pullback to cover shorts, while considering the Metals stocks, technology, buying into Consumer Discretionary and Healthcare after recent weakness. The Aerospace & Defense sector has some allure within the Industrials space (which will be showcased below) as its move back to new highs makes this one of the stronger areas within Industrials.
In the short run, the near-term technical picture remains pointed lower, with bearish daily momentum pointing down,with breadth averages not having rebounded sufficiently to have conviction. For those that utilize counter-trend indicators for buying into downtrends, those also remain inconclusive at this time and not complete, which eyeing NASDAQ, SPX, or Treasury yields (which have trended very closely to stocks in recent months. However, with Ichimoku cloud support directly below, and positive intermediate-term momentum, the bigger picture still looks fine for Equities. As reiterated above, Minor drawdowns should be used to buy in the next 1-2 weeks with S&P futures likely finding support near 2026-30 as maximum area of downside before a move back to test and exceed November 2015 highs on the way to new high territory.
Overall this part of the year typically isn't for the faint of heart now that stocks have entered May. We've entered that part of the year where indices have traditionally been seasonally weak, particularly in Election years. According to Stock traders Almanac, Presidential election year Mays rank poorly #11 of 12 for the DJIA and S&P and #9 for the NASDAQ. The "worst six-month period" has indeed begun, and as history has shown, a $10,000 investment held only from May-October would have lost money since 1950, VERSUS the six "BEST" months of the year- November - April having grown to $838,486 in the period from 1950-2014. Astounding indeed. Given that technical indicators such as MACD turned down on daily charts, this period is upon us yet again. Sector-wise, Banking Materials stocks and Gold and Silver traditionally decline during May. The Financials certainly have followed suit there but Materials stocks have largely shrugged off this seasonally weak period thus far as Gold and Silver's rise have shown little signs of reversing course.
Industrials has interest at this stage of the rally given that it's had some impressive outperformance in recent months, but yet has stalled out recently given signs of XLI nearing former peaks along with many stock in this sector. While Capital goods and Aerospace and Defense remain on solid ground, other sectors like Machinery have largely rallied on Dollar weakness but could be prone to give up that outperformance if the Dollar turns back higher, which looks likely. The Aerospace & Defense part of the group still has a lot of allure within the space, with many stocks having recently broken out to new 52-week high territory.
Top 7 Ways to Play Industrials, Techically speaking
1) BUY XLI, which still looks to make headway vs SPX after recent weakness
2) Buy Aerospace & Defense- Breaking out to new high territory- Favor RTN, GD, LLL, & LMT.
3) Buy XLI vs Europe's SXOP 600, the Construction and Materials index
4) Buy Rail stocks vs the Airlines
5) Sell(Short) Machinery stocks
6) Sell (Short ) Transport stocks more than 2-3 months in duration
7) Buy XLI vs China- Favor XLI over FXI
Charts & Writeups- Industrials Sector, Absolute, relative, XLI v SXOP, Rail vs Air, XLI vs FXI, Aerospace & Defense, others
SPX index- Weekly- Following a sharp nearly 200 point rally in S&P from mid-February into mid-March, SPX has traded largely range-bound over the last seven weeks, at an area right near former highs from November. Sentiment has turned bearish in the last couple weeks given the stallout, as seasonality concerns combined with lackluster earnings and ongoing concern of China and/or the course for US Fed policy have kept people largely on the sidelines in the last couple months. As of last Friday, the AAII sentiment showed 30% Bears vs 22% Bulls, with SPX just 3.3% off all-time high territory from this time last year. So we've experienced nearly a full year of dramatic selloff and recovery with prices nearly at prior levels from last May. Overall, the near-term pattern remains negative over the last couple weeks, but selloffs should prove minimal before rising prices carry SPX back to new highs into June/July based on the current structure. In this scenario, SPX has no business being under 2000 and any additional pullback this week should be used to buy down at 2030 area down to 2010 for upcoming gains back to new highs.
Industrials- XLI shows the sharp outperformance in February in relative terms (See graph below price of XLI vs market) followed by a period of Catchup for the other sectors, as Industrials slowed. The act of getting back above former highs from last November/December is definitely a positive technically, yet the area at former Spring highs remains a strong area of resistance. Technically speaking the recent pullback into the 50-day moving average could provide good support for the group, given that it also lines up with former highs from November 2015 along with having provided good support and resistance for XLI going back since mid-2015.
Industrials in relative terms to SPX when looking on an Equal-weight basis (to strip out the effects of GE) stalled out in recent weeks right near highs made back in 2014. Recent churning hasn't done much to suggest much of a top at work, but just a slowing in performance given the presence of former highs. Arrows shown point to counter-trend sells and buys in relative terms right near highs and lows respectively. For now, additional churning can happen, but movement up to new highs looks to be in the cards which will allow for a bit more outperformance out of this sector into the summer months before any real top.
Industrials in equal-weighted terms, broke down relative to the market much earlier than most indices did in January of this year, having made its decline in late 2015. While the sector peaked out right when Small-caps did in mid-2014, it was the breakdown below prior lows from 2015 that caused the real downside acceleration. At present, Industrials seems to still be in the midst of a bounce from oversold levels, but its equal-weight chart is far more negative than what might be seen from looking at XLI charts with price within a whisker of all-time highs. The equal-weight picture has seen far more deterioration..
US Industrials vs STOXX 600 Construction & Materials index- XLI is bullish vs European construction and materials stocks, as prices have just risen to the highest levels since early last year. This technical rise back above March-April highs suggests further upward acceleration, and should continue to favor US Industrials vs European stocks of similar nature.
RAIL vs AIR- While the intermediate-term trend remains negative, this chart of Rail stocks vs the Airlines has shown real progress in recent weeks that makes additional gains likely in relative terms, favoring the Rail sector- XAL has dropped down from highs near $97 to under $86 in the span of just a couple weeks which has helped this relative chart break out of a mild downtrend created from early 2015. In the weeks ahead, additional strength still looks likely in the Rails, and if getting above the longer-term trend from 2012, this would offer a larger move for the group, suggesting overweights in Rails vs shorting/underweights in the Airlines.
Machinery vs Industrials- Machinery stocks look to be at key resistance from longer-term trends from 2014, and recent stalling out suggests a possible move back down to lows. The group has experienced strength right at a time of the falling US Dollar, which plays into the theme of multi-nationals like Caterpillar (CAT) bouncing. Now that the Dollar has been widely shorted and shown some evidence of turning back higher, (which might take a few more weeks), the Machinery stocks could very well begin to underperform again, as seen by this ongoing downtrend remaining very much in place.
S&P Aerospace and Defense index has just moved back to new high territory after exceeding highs which were important in late 2015 along with winter 2015 highs. This breakout which happened initially in late April and was consolidated, looks positive for continued outperformance in Aerospace and Defense in the short run.
Aerospace & Defense vs SPX has just made new relative highs in the last week, besting prior levels seen back in early 2015 along with 2014. This should allow for a period of outperformance that's likely worth chasing technically with those with timeframes of 3-5 weeks or longer given that relative charts have just advanced to new all-time highs. While stretched on monthly charts, it's worth still favoring this sector for outperformance until some evidence of trend deterioration occurs.
Transports vs XLI- New relative lows look possible for the Transports vs the Industrials sector give this group undercutting April lows which puts it within striking distance of levels seen back early this year. Overall, Transports showed evidence of peaking back in 2014, back when Small-caps topped out, yet most broader indices continued higher. This retest of former lows is due to trigger counter-trend buy signals in the next few weeks, but for now, additional move back to new lows should occur.
Ratios of XLI to FXI suggest Industrials should outperform China in the short run, as seen by XLI moving back to new highs vs the Ishares China Large-Cap ETF. Overall, a very steep advance since mid-2015 and one which looks likely to continue given this move back to new high territory.
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