August 15, 2016
S&P SEPT FUTURES (SPU6)
2164-6, 2151-3, 2139-43, 2119-20 Support
2184-6, 2191-2, 2210 Resistance
S&P experienced both downside and upside breakout attempts in the last couple weeks, but remains largely range-bound with a bullish bias. Movement back to new highs appears likely early in the week before a stalling out, potentially led by a slowdown in Technology.
SPX trading range remains intact, albeit with increasing strength in various other Stock indices, such as DJIA, NASDAQ Composite which have now joined the SPX back at new all-time highs. Many might express skepticism about the markets being in a trading range, but how else can one explain the SPX closing last Friday, 8/13 within two points from the exact same levels as hit the prior Friday, 8/5, at 2182.87. In fact, in the last month, SPX has been only 0.008% higher, at 2184.05 vs 2163.75 from 7/14. So increasingly the large cap move in July has now been joined by mid-cap and Small-cap stocks, but the move in Large-caps looks to have largely stalled out over the last month.
This isn't 1999 all over again, but if anything 2016 looks to be weaker in many ways. We've heard countless chatter about this being the first occasion all three major indices have hit new highs in unison since 1999. While this is certainly a constructive move back to new highs in recent weeks, and this can be confirmed by Advance/Decline at new highs while Momentum remains positively sloped, 2016 is a far different market than that seen in 1999, and if anything, is in technically worse shape. Indices like Transportation Avg, Russell 2000 index remain far off highs seen back in 2014/15, while SPX has diverged substantially from most of the developed and Emerging markets world in the last eight months. Monthly momentum indicators such as MACD were bearish over hte last year up until last week, but still should have much difficulty in reclaiming highs, something that looks to be the beginning of possible bearish divergence on monthly charts for SPX. While it's right to favor US Large Caps (SPX) given that US has clearly led in this outperformance and there's no discernible evidence of immediate mean reversion), at some point, given the history of SPX tracking global index tendencies, there should be an attempt either for SPX to peak out in the weeks ahead, or for global stocks to begin closing the gap on the US.
Technology looks to be reaching near-term areas of upside exhaustion, which might cause the broader market to face headwinds, given Technology's 20% weighting in the SPX, the index's largest component. Most of this thinking comes from the presence of Demark's 9-13-9 pattern, which could be complete early this week in NDX, NASDAQ Composite, along with XLK. Any slowdown in Technology would likely translate into the market becoming much more selective heading into a bearish seasonal time, and signs of trend reversals are a must for both XLK and the NASDAQ. For now, the next 2-3 days seem to be important in this regard for signs of exhaustion to appear when using TD Sequential and TD Combo indicators. This could provide short-term signs of stalling out and consolidation on stocks like FB and GOOGL which have made steady progress in recent weeks, and both of these look like poor near-term risk/rewards, along with MSFT after their gains of late. For the next couple days, there should be one final attempt to push back to new highs, but then would expect some stalling out in Tech. Overall, until these signals are in place and show some signs of working, the near-term trends remain positive. It remains tough just yet in fading equities based on a stretched positive trend with no completed 9-13-9 in place for the NASDAQ.
The Decline in Treasury yields and USDJPY certainly haven't been reflective of a genuine shift towards risk assets and despite US indices having moved back to new highs, we've seen some definite divergence in Treasuries also rising recently along with stocks, while the US Dollar has fallen off vs the Yen. This obviously hasn't just been a US phenomenon, as globally, interest rates continue to plummet towards new lows. However, one supportive factor important to keep an eye on his how well the High yield market seems to have rebounded. The Junk Bond ETF JNK continues to press up to new highs, and if anything, it's proper to await signs of this starting to breakdown before adopting too much of a bearish tone for stocks. Commodities have stabilized somewhat, in the last week given US Dollar weakness, but still very little evidence of much technical damage in stocks.
Sector rotation in the last week was nearly the opposite of what had played out in the last month but generally the shift towards constructive sectors such as Consumer Discretionary, technology, Financials and Healthcare have been positive forces for Equities. Financials, for now, remains the sole "down" sectorin YTD Performance, and stalled out last week, while having outperformed all other sectors outside of Technology in the rolling 30 days. However, this sectors gains have occurred despite a pullback in treasury yields in the last couple months.
Short-term Thoughts (3-5 days) : Bullish- The So-called breakout in SPX last week failed to gain much traction, though also failed to reverse meaningfully from 2183-5 highs in Futures, and prices largely remain range-bound near levels that were hit over a week ago. Movement back up towards highs looks likely again early in the week, and still very difficult not to expect new highs with Advance/decline at new highs and most US indices now having broken out to join SPX in the last couple weeks. While counter-trend signals look close to appearing on intraday charts of SPX along with QQQ, XLK, the patterns still largely look constructive for a push back up to new highs.
Intermediate-term Thoughts (2-3 months): Bearish- The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October. While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness. However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August. Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows. Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows. Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern. For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.
Absolute charts of SPX, NDX, TNX, DXY, JNK and relative charts of Utilities and Margin Debt with SPX vs SX5E shown.
S&P Cash index has shown enough momentum in the last six months to help monthly MACD turn back positive, something which is a minor bullish development allowing weekly and monthly MACD to now align positive for the first time in nearly two years. Structurally, prices remain bullish, but the extent of the consolidation since last May has caused sufficient deterioration in momentum to think that any rise in prices would definitely take some time before MACD started to lift back higher. For now, it's doubtful that MACD could get back to new highs and in general, marks the beginning of monthly negative divergence which might prove bearish 12 months down the line if not resolved.
NASDAQ 100 index along with NASDAQ Composite and XLK look to record counter-trend signs of exhaustion per Demark indicators on daily charts for the first time since "buys" were recorded right at the lows this past winter in January/February. While NDX would need to show actual evidence of confirming this signal sometime in the days ahead with a daily close under the close from four days prior, it is a minor warning sign of possible upcoming stalling out in price in otherwise what might be viewed as a very bullish chart configuration.
The "Fang" index, or a compilation index made up of Facebook, Amazon, Netflix, and Google (Alphabet) has just triggered daily sells per counter-trend indicators that also line up with what's being shown in the NASDAQ for this coming week. The last meaningful signal occurred as a buy back in February, while sells occurred in late November/December of last year, both proving quite important as turns. While other indices don't yet reflect any type of sell given recent strength, it will be important if this starts to stall out and turn back lower in the days ahead. FB, and GOOGL both look to be near key areas on the upside in the short run, given the acceleration in both, while AMZN is quite close. Technically the basket as a whole remains quite bullish after having broken out to new high territory on an intermediate-term basis, but is just overbought near-term after this rise and now reflecting a few signals which could allow for a stalling out between now and late September.
SPX has diverged substantially with most of Europe in the last eight months, with S&P having risen back to new high territory, while the SX5E, or EuroSTOXX 50 remains still 5% away from areas of its breakout and over 20% off highs made last Spring. While Europe has begun to trend up in a bit quicker pace in the last month, it remains well off the highs and is something to consider carefully when making bullish bets on the SPX given the degree that this has already risen.
Ten-Year Treasury yields remain trending lower, and have not enjoyed the same degree of upside as has been seen in Equities in recent weeks. While TNX and SPX had enjoyed a fairly positive degree of correlation in the past, (and did both bottom in January from extreme lows) TNX has failed to make any real headway in its recent bounce. Movement back to new low territory looks likely for TNX, as US TY yields get below 1.35% in the next couple months before any serious bottom in yields is in place. This should bode well for TLT longs, and/or TBT shorts.
US Dollar index fell sharply last week, but managed to still close above late July lows, which keeps the trend choppy, but mildly negative at best. Pullbacks to test 94 look possible before this shows any kind of sense of bottoming out, and for now the near-term trend remains negative for DXY. Movement under July lows would being about a further upside acceleration for the metals, and in general should be a net positive for Commodities into the Fall.
Utilities showed some definite weakness over the last month, and despite the choppiness of indices themselves, the Defensive sectors have had a difficult time, underperforming despite yields remaining low. The trend of Utilities vs SPX broke a trend from April lows and remains under pressure in the short run, as an underperformer, while maintaining a move positive trend on an intermediate-term basis given the rise into late June/early July. For now, this break doesn't look to have bottomed, and additional weakness looks likely for the Utilities.
The High Yield ETF, JNK, looks to be just exceeding a key downtrend which has been intact for the Junk ETF since the middle part of 2014. This is an important area given the failure in mid-2015 and ability to clear 36.50 should enable this to continue to improve over the next couple months. Given that most equity downturns tend to be led by weakness in High Yield, we'd need to see some degree of weakness here in the weeks ahead before turning too negative on the equity market, based on prior history.
Consumer Discretionary has begun to show much better signs of outperformance vs the Staples which goes hand in hand with the fallout in the Defensive sectors overall since mid-July. This breakout of the downtrend since 2015 should allow for a bit more strength in Discretionary which has largely been led by Retail names in the past month. For now, this looks to continue after a severe period of underperformance.
The SPX looks to be diverging recently vs Margin Debt on NYSE, something which historically has shown fairly tight level of correlation. Margin debt mostly has risen and fallen along with US Equities in the last 20 years with a distinct top in both 2000 and 2007 that coincided with Equity peaks. For now the divergence in S&P not following Margin debt likely gets resolved sometime in the next couple months, but for now, is something to keep an eye on. Margin debt peaked in 2007 a good three months ahead of the larger equity top, and for now has fallen since mid-2015, coinciding with the larger top in Equities that was seen globally and since has been erased by SPXs move back to new highs as this index ignores much of the near-term global weakness.
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