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Dips should be used to buy ahead of BREXIT vote

June 20, 2016


2050-1, 2040-1, 2022-4                              Support
2071-2, 2083-5, 2100, 2112-3, 2130-2       Resistance




Key Takeaways

1) Mild stabilization doesn't equate to LOWS in equities-S&P trend has begun to try to stabilize a bit, though remains down from 6/8 and insufficient proof of a low is in just yet to justify a bullish stance.  Above 2085 would suggest the lows for this move are likely in place and give confidence for a move back up to new highs.  For now, given that indices closed down on the week and Treasury yields still look to have additional downside, it's important to wait for more proof before trying to buy SPX at 2071.  The near-term trend suggests one final pullback under last week's lows could materialize early in the week ahead of the BREXIT vote, and this might be better to buy, before assuming prices can simply lift up to highs in absence of any news/vote.

2)  Bond surge still looks to have more to go- Friday's bounce in yields should prove short-lived, and give way to additional pullbacks over the next few weeks into early July before a meaningful low in Bond yields is in place.   The move has gotten stretched ahead of the BREXIT vote, and appears to be solely on the basis of Global yields selling off, more so than any judgement as to lack of US economic growth.

3) Seasonality suggests next week could prove negative, based on historical trends.   Stock Trader's Almanac data states that the period after the Triple(Quad) Witching expiration in June has been "DOWN" the last 22 of 25 years. Also, since 1991, of 31 down Triple Witching Weeks, 22 following weeks were also down.  Last week in the S&P was lower by 1.2%, so given the negative momentum and lack of sufficient bullish price action thus far, this week could very well also be lower.  Getting past the BREXIT vote should eliminate some uncertainty, and allow for stocks to rise.

4) Volatility has begun to rise in a strange manner with a flattening of the VIX term structure very early on in this recent decline from early June.  The Total Put/call ratio hit the highest levels since January last week, while the 5-day moving average was up over 1, near early May highs.  Credit Suisse's Fear Barometer hit the highest levels ever last week, which is based on Out of the Money options, and 5 different volatility ETN's which are based on the CBOE VIX traded high enough volume to make up over 4% of total volume.   Much of this could represent hedging given little underlying selling in the indices, but for now, an interesting phenomenon, and something to keep watch of.

5) Currencies will be front and center this week with both the Pound Sterling and EUR/USD lying near key levels ahead of the BREXIT vote.  Any breakdown in either Sterling or Euro vs USD that causes a move in the US Dollar index back over 96 is thought to be quite bearish for Commodities, and could accelerate the Earnings shortfall in future quarters.  1.11 is a key level for EUR/USD and a breakdown of this would suggest a move down to Par vs the US Dollar.

6)  Sector-wise, Telecom and Utilities managed to beat out all other eight sectors, as the yield decline caused a rush towards high yielding stocks while Financials lagged, as might be expected.  Furthermore, the three worst sectors last week (Healthcare, Technology, and Financials) were also the three weakest for the year as a whole after the first five months of the year.  In one interesting shift, Consumer Discretionary managed to outperform Consumer Staples despite a "down" week for the market. 

7) Divergences remain abundant with the SPX trading well above where EuroSTOXX 50 and most of Asia has trended in the last month, and SPX also has held up better than what the traditional relationship of how stocks and bond yields, USDJPY have shown.  For now, this doesn't suggest that SPX needs to necessarily pullback and join the others, but it is a concern given how tight the correlation has been with SPX to others, and important for SPX to remain above May lows.

S&P 500

Short-term Thoughts (3-5 days) : Bearish for a move back down to new weekly lows- Above 2085 would turn the trend bullish.   If a surge back above 2085 happens at this point, given of the recent bearishness, it would be right to trust this move and think that a move to new highs is possible.  For now, Most of the structure, while indicating some minor consolidation in place, can still allow for a bit more weakness before any bigger low in place, and very difficult to see a real rally given the amount of seriousness that the market and financial media have made this upcoming BREXIT vote.  Given that the market still largely expects a "STAY" vote, according to polls and UK betting sites, where real money is placed on the outcome, getting past next week should be a real positive, helping to clear up some uncertainty.  A "Leave' vote, would likely result in a huge decline in GBP and Euro vs the USD which would have bearish implications for Gold.  With regards to equities, dips should be used to buy

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

Combination of the poor seasonal cycle in place for 2Q post expiration with ongoing negative short-term momentum and insufficient proof of a low in place, the odds still favor that a bit more weakness is possible this week ahead of the BREXIT vote.  Given that this year as a whole has proven very choppy, with constant outflows out of Equities over a majority of the last 25 weeks, it's difficult to see how markets would suddenly gain conviction with the urge to position ahead of this week's upcoming vote.  Better to stay selective on what to buy, and await some evidence that stocks have begun to trend back higher, (which would take a move back over 2085 (2078 for Sept S&P Futures)  Dips back down in S&P Futures to 2030-40 though should be good to buy into this week, and expect some push back higher.

Bond yields remain the source of much anxiety with yields plummeting around the globe, and it's thought that some evidence of stabilization is required to have some confidence that stocks can begin to turn back towards highs, as it's been difficult in the past for stocks and bonds to trend sharply in unison over the last few years, and both tend to trade opposite in low yield environments.  When scanning Demark indicators for confluence as to signals across German Bund yields, UK Gilts, JGB's and US TY yields along with TLT, TBT signals, it looks premature on a weekly chart to make the case that yields have bottomed just yet, despite last Friday's sharp yield bounce.  Most argue for another 2-3 weeks of yield decline which might mean stocks might fail to accelerate as sharply higher until yields can truly stabilize.

The US Dollar will also be quite important to watch this week, as a sharp rise or pullback post BREXIT vote would have huge implications for Growth vs Value, Emerging Markets, commodities, and whether the Energy, Materials and Industrials sectors can continue some of the recent gains.  Some charts of the major indices along with commodities, currencies and Fixed income charts are below.


Charts & Writeups- SPX, TNX, DXY, NKY, Ratio charts, & overlays, with a few key sector stocks


SPX- 120 min chart-  Insufficient proof of a low in just yet, but should be close within the next couple weeks, with BREXIT this coming week potentially serving as a catalyst.  Look to buy dips in the week ahead on any retest of lows, with the area at 2030-40 being important as support, while movement back over 2082 should be bullish. Technically it's likely that this entire consolidation should give way to a move back to new high territory into July, so it's wise not to get too cute in trying to time the exact low, but its likely we could "back and fill" a bit early in the week before a late week rally.  Looking back. this three-month chart of SPX shows the brief move above April highs that ended up failing right away, giving way to a 60% pullback of the progress since mid-May.  In the last few days, we've seen a few attempts at bouncing which thus far have failed, but we've now seen two of the last three days close well up off the lows.  Overall, the choppiness of this pattern suggests buying dips for a move back to highs, as the degree of pessimism of late and extreme volatility surge should limit damage under May lows.



10-Year Treasury yields, Daily-  Bottom line-  Friday's bounce in yields was encouraging, but there remains few signs that this is anything more than a bounce at this point, and yields still look vulnerable to a possible move down under 1.40 before any real low is in place.  Yield charts of German Bund yields and JGB's look similar, along with UK Gilts after a global bond surge that's brought about an understandable amount of concern.  Looking at this daily chart, the breakdown in Yields got almost down to February lows before bouncing, but given a two-month consolidation that broke down, it's probably unlikely given no meaningful economic reports due right away that Bonds show any type of serious selloff which would take yields right up over 1.70.  However, this is what to look for in the weeks ahead.  For now, another 2-3 weeks of Yield weakness look possible.



OVERLAY with SPX, TNX, USDJPY-  SPX when shown on a chart with US 10yr Bond yields and USDJPY, shows the extent of the divergence that's been present since Equities took off in mid-February, while bond yields showed no similar move off the lows.  While the 12-month chart had shown a fairly tight correlation in the past, it's diverged of late, and only in the last week have equities begun to selloff once Bond yields showed a more meaningful breakdown.  There's no saying that Equities have to be the asset class that follows yields all the way down, and if anything in the next week, some stabilization in the US Dollar vs Yen and in Bond yields should give way to a bounce in these latter two in July which would be conducive to Equities bouncing back to highs.



SPX, and STOXX 600 index, and Bloomberg World index-  Just as SPX has diverged from Treasury yields of late, the real divergence has occurred with SPX vs global stock markets as a whole, as both Europe and Asia have been far weaker, and this remains something to pay close attention to in the months ahead.  Until we see evidence of mean reversion, there's no saying that US Equities should join the weakness in the other indices, but May lows will represent a key area of support that has to hold.  This can't be undercut without expecting a bigger pullback for SPX, which for now, seems unlikely.



US Dollar index-  This daily chart of the US Dollar index shows the attempted rally holding right where it needed to at 96 before failing and then retesting just in the last two weeks. Unless May lows are violated, there's no saying that the US Dollar has to move lower, and if anything, this recent stabilization and improvement in momentum since April has to be watched carefully in the weeks ahead. Movement back over 96 should cause a meltdown in commodities, with Gold falling back down under 1200.  For now, the BREXIT meeting this coming week should likely answer some hard questions about this recent churning.



NKY-  NIKKEI 225 index-  This breakdown of four-month trendline support for Japanese stocks this past week coincided with a meltdown in the US Dollar vs Yen, which got down to near 103.70 before rallying briefly.  For now, this pattern remains bearish, and suggestive of further technical selling, as rally attempts into early 2016 failed right near former lows from late 2015 and now have given way again to the downside.  Movement down to 14544, or even 13000  looks definitely possible before any meaningful rally, and Japanese stocks right now are weaker than either European, or US stocks, with prices well off all-time highs which were made in 2015.



EUR/USD-  Ahead of this week's BREXIT vote, the Euro has sold off down to key make-or-break support vs the US Dollar, which will have important implications in the weeks ahead.  Violations of 1.11 in EUR/USD would likely coincide with a sharp intermediate-term decline in EUR/USD which could end up testing last November's lows and lower.  Sharp pullbacks in the Euro likely also would coincide with commodity weakness as the US Dollar index as a whole would exceed 96 and begin a sharp move back up towards former highs.  While many are concentrating solely on Pound Sterling and its relationship to the US Dollar, the Euro seems to be equally important to watch for evidence of breakdowns or snapback rallies in the weeks ahead.



Gold, when looked at utilizing the BEWI index, to strip out the effects of the US Dollar, looks a bit more bullish than when scrutinizing the Daily chart of Gold in USD terms.  This base over the last few months is having its highs tested, and the upcoming BREXIT vote likely will have serious implications for either helping gold breakout, or fade and pullback to the lows and lower in the months ahead.  For now this pattern is more bullish than bearish, but prices will need to get up above recent highs to have a shot at real upside acceleration.



Consumer Discretionary vs Consumer Staples (as shown on this ratio chart of the S&P 500 Consumer Discretrionary index, vs S&P 500 Consumer Staples index)  remains bearish after this long-term uptrend broke early this year.  The rally attempt looks to have failed while Discretionary pulled back hard relatively speaking in the last month.  Overall, this pattern since 2013 has shown evidence of peaking out, but the top last year definitely gives some larger hints about the broader deterioration that's been seen in US stocks, as well as addressing the defensiveness of the market as a whole.



Financials have neared an area where they could stabilize after a sharp drawdown from recent highs.  However, this four-year weekly chart still shows a very weak picture for the sector.   The early year weakness violated a multi-year base in Financials vs SPX and now the recent bounce failed to get back above where it needed to, thus far.  Until Treasury yields can stabilize and start to rally off recent lows, it's unlikely this group will be able to make much progress, as recent relative strength has definitely been positively correlated with rates moving higher.  For now, it's a work in progress, but looks to be closer to trading lows after its sharp decline.



UTILITIES vs SPX- Weekly- Utilities have improved, relatively speaking after the breakout early this year caused this group to outperform all other nine sectors in the month of January.  That could have been a forewarning of what to come, as the year thus far has still seen the Utes outperform all other sectors, which has occurred both for defensive reasons, and given the yield decline.  For now, this seven-year downtrend was exceeded and relatively speaking, the group is headed back rapidly towards prior highs early in the year.  While this might not be broken just yet (as doing so would suggest a much larger Equity decline most likely) the group remains quite bullish, and relatively has just begun to show meaningful strength relative to the SPX after nearly seven years of underperformance.   Technical targets for XLU, as suggested a few weeks ago in the Weekly Technical Perspective, lie near $54.



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