June 6, 2016
S&P JUNE FUTURES (SPM6)
2080-3, 2075-6, 2039-40, 2022-4 Support
2105-6, 2111-2, 2123-5, 2135 Resistance
1) S&P trend has consolidated a bit over the last six days, but holding within striking distance of all-time high territory is certainly more positive than negative. An upcoming move back to new high territory seems likely into early July. For now, 2105 is important in S&P Futures, 2111 in SPX cash and getting above these would allow the S&P to mirror what happened in the NASDAQ Composite and Russell 2000 last week.
2) US Dollar index gave up 50% of its entire snapback rally in May with just one day's decline last week, but is unlikely to move all the way back down to May highs, and this pullback should likely stabilize in the next week before turning back higher.
3) Treasury yields turned down sharply from resistance last week, which had looked to be setting up for a move to the upside, but now have reached the bottom of this recent multi-month channel for 10-year yields. German bund yields and Treasury yields likely need to stabilize and start to turn higher before Equities can embark on any sort of breakout, given historical tendencies
4) Sector-wise, last week mirrored what had been seen on a Year-to-Date basis with strength in Utilities, Telecom and Staples while Technology, and Financials both weakened. Healthcare was a bright spot and continues to look like an attractive sector technically which could experience mean reversion in the next couple months. (Higher after underperforming in the first five months of trading)
5) Lots of breakouts in the last week with the Russell 2000, Healthcare, and Utilities all moving back to at least new monthly highs, with Utilities hitting new all-time highs again. The Advance/Decline for NYSE "All-stocks" exceeded April highs, putting this within reach of all-time high territory.
Short-term Thoughts (3-5 days) : Trend bullish but this recent consolidation over the last six days will need to exceed 2105 SPM6, 2111-SPX to begin to join the recent strength seen in NASDAQ Composite, Russell 2k, and for now, prices have been near-term range-bound while breadth expands. One worry is the extent to which Treasuries have rallied hard in the last week along with the Yen vs the US Dollar, and both have been bearish in the past for US Stocks, so it's important this week that we see stabilization and rallies in both before thinking that Equities and Treasuries can diverge too much more. This week, it should be wise to use any minor drawdowns to buy, expecting an upcoming move back to new high territory.
Intermediate-term Thoughts (2-3 months): Bullish- (No change) - A move back to new high territory is expected before indices turn down to begin any larger correction. The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being. From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily. Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture. The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish. The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week. In addition, the total Put/call ratio has hit the highest level in over three months. Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months. While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3.
Technical review and What to expect
US Equities continue to dodge every punch that's being thrown these days. Last week equities weathered nearly the worst economic data miss possible as Payrolls came in at the lowest levels since 2010. While bond yields and the US Dollar plummeted, US Equities shrugged and churned back higher to finish the holiday shortened week at a mildly positive +0.43%. By end of week, despite some early attempts at pulling back, trends overall still show very little evidence of any Technical damage. Looking back, we've now experienced yet another dismal earnings season, while economic data remains poor enough that the Fed has seemingly boxed itself into a corner with regards to trying to hike based on market resiliency vs strength in the economy. Most market participants drew down risk into January and February along with into early May and have subsequently missed most of the recovery and have lagged the market badly this year. All of this together paints a rather grim picture for sentiment, which in turn, has fueled a wall of worry for stocks yet again with prices within striking distance of highs.
Overall, it's rare to see stocks and bonds move in unison, at least over the last couple years. As bond yields plummet, like what happened last week, sectors like Financials experience understandable underperformance, which should present a huge headwind for stocks given their composition of SPX at 16.32%, or the second largest sector. This year's +2.7% returns for S&P thus far have been experienced through a huge period of Defensive positioning for Equities, as Staples, Telecom and Utilities are in the top five (out of 10) sectors for outperformance this year. While a push back up to new high territory should cause the laggards to begin showing better performance, (and we've seen some evidence of that in the last couple weeks of technology and Healthcare showing good relative strength) it still remains difficult to find fault with and Sell the Defensive sectors
One of those groups, the best performing sector of the year, the Utilities, is the key group of focus this week for this week's Weekly Technical Perspective. Utilities remain this year's best performing sector, outperforming all other nine S&P major sectors and are leading the Second best sector YTD-Telecom by more than 300 bps with a nearly 500 basis point lead over Energy. Their January outperformance was a notable "tell" that normally tends to highlight sectors which can show further leadership throughout the year and this year has been no exception. In performance through 6/3/16, Utilities have risen by 14.95% have consistently been in the upper quartile over the last 1 and 3 month period, while showing the best performance last week, higher by 2.73% while the S&P managed to just barely get to positive territory.
This outperformance in Utilities should continue, at least over the next 2-3 months given the technical breakout of XLU back above former highs. Momentum has not yet gotten overbought, and both weekly and monthly counter-trend signals are premature to suggest some kind of reversal. Weekly patterns show the formation since January 2015 as being a giant Cup and Handle formation, with last Friday's rise above March 2016 highs likely leading to a sharp acceleration which could carry XLU up to $54 before any meaningful weakness. Finally, the group remains one which most people would rather avoid at this stage, citing valuation concerns, and/or thoughts of future underperformance given the beginning of interest rate normalization along with the start of a potential secular bear market in long-term Treasuries. For now, the technical pickup in momentum this week on the breakout above March highs makes Utilities worth overweighting, where 5-10% gains are possible in the next couple months, and fading here looks premature.
Charts and comments below.
Charts & Writeups- Utilities Sector- Absolute, Relative charts of Utilities & best ones to own on after this breakout
Utilities SPDR ETF- XLU- Bullish, and this past week's move back over March highs represents what's though to be a breakout of a Cup and Handle pattern in the XLU which should help to fuel this sector in the short run, after the consolidation throughout most of last year and from February-May of this year. XLU should move back higher to $54 as no counter-trend sells are present using Demark indicators on a weekly, nor monthly basis and XLU remains structurally attractive.
Utilities, XLU, Monthly- this longer-term channel shows prices likely to test the upper end before any trend failure, as momentum remains positive and counter-trend signs of exhaustion remain premature. Rallies up to $54-54.45 look likely
Utilities vs SPX- Weekly Ratio chart since 2007- This breakout of the long-term trend lower from 2007 was fairly pronounced in January and has since consolidated a bit, but has not really given up this breakout, and should still be thought to be positive for Utilities in driving this sector higher for outperformance in the months ahead. While markets might need to show more evidence of trend damage before Utilities can offer true trending behavior, last week's gains in Utilities back to new highs should let this sector trend higher still on both an absolute and a relative basis.
European Utilities are certainly not performing as well as US and should be avoided near-term. This ratio of European Utes vs the XLU has plummeted to new yearly lows after the early year breakdown, and still looks as if one final push back down to new lows can happen. Ratio above highlights the SX6P or STOXX600 Utilitiesindex vs. the XLU.
CMS Energy- (CMS-$42.82) The stock of this largely Michigan-based Utility has just broken back out to new highs following the move last Friday in XLU and should be favored for further outperformance. Upside targets lie near $45 and only a move back down under $40 would postpone this advance. Within the XLU, CMS Energy has been an outperformer for the last month along with on YTD terms, and technically still looks like one of the better to own to take advantage of this recent Utility strength.
WEC Energy Corp- (WEC- $61.52) Another mid-west Utility, WEC, has moved back up above former Spring highs along with former highs from early 2015, making this a stronger technical name, and should be able to push up to the mid-to-high $60's on the strength of this recent advance. Its parabolic typeadvance from last year has caused weekly momentum to push up to near overbought levels and the stock remains over 20% above its long-term uptrend line from 09 lows, it's premature to sell or avoid WEC here. Additional gains are likely to near $65 which would be the first real area to consider resistance on this move, and for now, its right to own WEC and use any dips to buy, technically.
NiSource (NI-$24.46) NI has been a consistent outperformer within the Utilities space on nearly every timeframe in the last 12 months and its breakout back to new all-time highs should help this trend continue a bit longer. The act of forming a base from April and now exceeding the highs late last week is a real positive technically, and should allow this stock to rise up to near $26 with a max of near 27.50 before any stalling out. Until there is some evidence of price showing more signs of stalling out, and weakening relatively speaking, NI will continue to be one of the top Utilities in the space.
NRG Energy (NRG- 17.39) NRG has the dubious distinction of being the worst performing stock of the major Utilities over the last 12 months, while the best performing stock over the last week, month and three-month timeframes. Its performance in the last rolling 30 days alone showed a Positive 23.95%. Technically, this is one example of some of the poor performers over the last 12 months attempting to regain their former momentum, and in this case, NRG has just exceeded prior lows that were violated from back in 2012 and 2008-9. While the stock has gotten near-term overbought, the act of closing back over $17.75 would drive this to the low $20's without much trouble. For now, given the move back to new highs in XLU, it's doubtful that NRG's outperformance comes to a dead halt right near $17.40, so this should be favored for a move into the low $20's before any real stalling.
P G & E (PCG- $61.55) PCG is being revisited given its move back to new all-time high territory, and the cup-like nature of its pattern makes this likely to continue showing above-average performance in the near-term, with technical targets up near $65. The act of forming a small base like PCG did from March after having peaked out in the past makes this a Cup and Handle candidate which has just exceeded the right-hand side of this base
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