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Financials could outperform short-term, as Yields rise

August 8, 2016


2164-6, 2151-3, 2139-43, 2119-20        Support
2184-6, 2191-2, 2210                             Resistance


S&P made a solid close back at new highs last Friday which on hourly charts appears to be near the highs of the consolidation that have held this pattern range-bound since mid-July.  For now, the area at 2183-5 could have some near-term importance,  but a rise up to and slightly over 2200 can't be ruled out into late August before any broader market reversal



Key Takeaways

US Equity breakout in the SPX, NDX looks to be constructive structurally and should be joined by NASDAQ Composite and DJIA into mid-to-late August before any broader market peak is in place.   The S&P Large cap breakout has now been followed by similar moves in both the S&P Mid-cap index (MID) and Small-cap index (SML) which had been lacking before.  Advance/Decline is back at new all-time high territory, while Financials have surged to show strong outperformance along with Technology in the last week, while Defensive sectors like Utilities, Staples and Telecomm have finally begun to wane.   While volume is seasonally light, and signs of "Jumping onboard" this rally have happened quickly, as the Equity Put/call ratio has fallen to the lows last seen in early July, we'll need to see evidence of this rally failing before adopting any sort of cautious tone.  For now, the move looks constructive and is being led by the "right" sectors which wasn't the case back in March.

Financials have demonstrated a sharp rally back to new monthly highs, which managed to breakout in absolute and relative terms just in the last few days.   Stocks like DFS, OZRK, BANC,JPM, TCB, KEY, FINL all look attractive, while Brokerage stocks like GS, MS are on the verge of larger trendline breakouts.   Regional banks look slightly more attractive at present than some of the larger Money Center Banks - BAC, C, which are now nearing important upside resistance.  The Brokerages all look to follow through higher in the next 1-2 weeks after their own recent outperformance, which in the case of GS, MS, is now testing important trendline resistance. 

Much of this relative strength in Financials has come about due to the Global Bond selloff in the last week which has seen the US 10-year yield start to turn up a bit more meaningfully after testing 1.45%.  Rallying near-term up to 1.75-1.78% wouldn't be an abnormal technical improvement for TNX, but rather, just a bounce within an existing downtrend from late last year along with the mild pattern of lower highs in place just since this past March.   Movement back over 1.80% is necessary to expect this pattern could be giving way.  In the next 2-3 weeks though, a further bond selloff along with gains in Financials looks quite likely.

Seasonally speaking, equities are entering a bearish period which starts with the month of August.  While this month is not as negative as September going back over the last 50-100 years, it HAS been the worst month in the last two decades, averaging -1.3%, far surpassing September's -0.7% drawdown.  Given that S&P finished July on a particularly strong note, higher by 2.8% while sentiment has improved, understandably, this combination of Divergences among the indices at new highs with lofty sentiment heading into a seasonally weak time is worth being a bit more selective and keeping stops tight.  Swinging for the fences is no longer apropos, and hitting singles makes more sense entering August.

Short-term Thoughts (3-5 days) :  Bullish-  S&P made a definitive breakout on a closing basis, yet futures lie just shy of prior intra-day peaks from last week and also just below the initial resistance zone targets mentioned recently at 2183-5.  The fact that Financials are participating in this move gives pause as to trying to sell into it so quickly.  Many intermediate-term breakouts are now occurring in many Financials indices and ETFs on an absolute basis, and Financials remains the second largest sector as part of the SPX.  In the next few days, a move up to test 2183-5 looks possible while any pullback early week should be used to buy given the structure

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 and relative charts of SPX, NASDAQ Comp, SML, TNX, Equity Put/call and many of the charts of the Financial sector, both relative and


S&P Cash index made a clean breakout above the highs registered over the past 16 trading days since mid-July which is a bullish development, and suggests additional gains in the days ahead.  Demark counter-trend signs of exhaustion per TD Sequential and/or TD Combo remain premature by at least 6-7 trading days while weekly counts look to be three weeks away from possible weekly exhaustion.  For now, given the strength in Financials, pullbacks should be buying opportunities for further gains into late August. 

NASDAQ Composite made a new weekly all-time closing high last week, but remains shy of intra-day all-time highs made back in late July which are just 10 points above at 5231.94.  Gains seem likely here as well in the NASDAQ with weekly charts still premature in signaling exhaustion, while prices have pushed up to multi-year closing highs as of last week's close at 5221.12.   Within three weeks the NASDAQ Comp would signal evidence of exhaustion, lining up nearly perfectly with the SPX into late August.  For now, it remains premature.  


S&P Small-cap index just joined the move in S&P 500 Large Cap index and Mid-cap index as of the last week, as prices failed to reverse at former resistance, but pushed ever higher.  So just in the last month, we've seen Large, mid-and small cap indices all move back to new highs while Advance/Decline has surged ever higher to new highs.  Sentiment has followed this move unfortunately while volume remains light and the VIX curve is steepening in a way that suggests caution over the next few months.  For now, no signs of any reversal and its right to stick with this move and buy dips, if given the chance in the next few weeks.


US 10year Treasury yields look to have made minor trendline breakouts as of last Friday which are important and bullish for yields in the days to come.  Technically speaking, the move back above early August is a real positive along with successfully exceeding the entire downtrend drawn from early June highs which should drive yields up to 1.68-1.72 before any stalling out with a possibility of yields hitting 1.77-1.78%.  For now, this is a short-term bullish development only for yields, but should have important implications for how Financials trade in the near-term which should be far more constructive than ordinarily might be the case in the bearish month of August.


The S&P Financial index has just moved to new highs for 2016, a fairly important move technically given the amount of consolidation at recent highs since mid-April.  This exceeds the entire downtrend from 2015 and suggests further gains and likely outperformance from the Financial sector which is directly coinciding with yields starting to turn higher.  For now, until 10yr yields get above 1.80%, the rally could prove short-lived.  However, this does appear to be one of the more significant technical developments in the last week and is seen as constructive for this sector and for the broader market in the near-term.



Financials vs SPX has made sufficient progress in relative terms to SPX to think that further near-term gains can happen when looking at both S&P Financials and XLF vs the SPX.  The broader downtrend from last year still hits a bit above current levels, so its important to note that last week's outperformance sets the stage for short-term strength only, with a move back above this long-term downtrend necessary for a larger move.  For now, Financials should be overweighted between now and early September as a result of last week's advance.



The SPDR S&P Banks ETF, or KBE, made a similar breakout as the S&P Financials in exceeding the entire downtrend from 2015 which had already been tested once before nearly three months ago.  The act of getting above both July highs as well as the minor downtrend from late last year is seen as a positive and should allow KBE to continue up to $34 to test prior month's highs, if not exceed this level. 


The ratio of KRE to KBE looks to be stabilizing after its breakout above late November/December highs followed by consolidation in the last month.  The act of holding losses right near prior peaks is seen as a good sign, and now KRE has shown initial signs of trying to move back higher.  Given the bullish structure in this ratio since late last year, one should still consider Regionals as a good technical bet vs the Banks ETF, and favor this group for relative outperformance within the Financial sector.



Broker Dealer stocks have made sharp gains relative to the broader XLF in recent weeks breaking above the initial downtrend from last year and look poised to show further outperformance at this point which could challenge the trend from last June.  For now, stocks like GS, and MS both look poised to accelerate in the weeks ahead, and are challenging areas of resistance that likely will give way given the recent action in the XLF, KBE, KRE and IAI. 



Equity Put/call ratio is one of the few things suggesting a cautionary stance when considering "chasing" this rally back to new highs, as this ratio is testing lows of the year and beginning to show evidence of real complacency.  At .52,  we're seeing nearly 2 calls being bought for every put in the Equity space and the move back down to extremes of the year is a little discomforting from a sentiment perspective when considering that most are witnessing this rise to new highs and are taking it much more seriously than what was seen a few months ago.  From a contrarian perspective, this move back to new lows is a minor concern, for now.




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