August 29, 2016
S&P SEPT FUTURES (SPU6)
2157, 2141-3, 2119-20, 2086 Support
2184-6, 2191-2, 2210, 2214-6 Resistance
S&P divergence vs Europe is further highlighted here, showing the extreme underperformance in Europe as seen by SXXP (STOXX600 index) vs SPX which has continued on its steady downtrend. While oversold by some measures, we'd need to see some evidence of trend improvement before thinking Europe could outperform the US.
Stocks largely still range-bound, not bullish, nor bearish, while last week's breakouts in Treasury yields and US Dollar index are worth noting. Yes, last week's performance in US Equities did manage to finish "DOWN", but S&P prices still failed to get beneath 2165 in Futures on a close, and finished at 2169 in SPX cash, or 5 points away from where prices closed back on July 14th, which marked the start of this massive sideways consolidation. While the NASDAQ did in fact snap an eight-week win streak, it's still quite difficult to think the "Highs are In" with regards to Equities, and a significant selloff is right around the corner. Prices managed to close up above the prior week's lows in SPX and NDX, while slightly weaker in DJIA. Additionally, there are signs of positive momentum divergence on Hourly and 120-minute charts now on S&P futures, while weekly charts for DJIA, NDX, NASDAQ Composite and SPX do NOT yet show evidence of TD Sequential sell signals, a counter-trend indicator of upside exhaustion which normally would be expected to show a confluence of "13 Sells" on various indices right near the highs.
Will the US Bond yield breakout lead to similar movement in the near-term in Europe? UK Gilt and Bund yields need to be watched carefully for signs of breakouts early in the week- Asia actually looks to have precipitated this move a few weeks ago with JGB yields bottoming and turning sharply higher. US Yields managed to breakout of out their 1 month+ long consolidation, while both UK Gilt and German Bund yields look to be on the verge of similar moves. So while the technical divergence between US Stocks and Bond yields had been noted recently as the two have not moved in tandem, last Friday's breakout is notable. "Should" this breakout now lead stocks LOWER? That's tough to say, Financials certainly would benefit tremendously from a rise in rates, and last week's Euro STOXX Banks index breakout seems to suggest higher prices for European Banks which could also bolster US Financials which got see-sawed tremendously last Friday. But the Fed trying to "coax" the market to be more prepared for Rate hikes quickly in a fashion that causes stocks to fall based on uncertainty of Future rate hikes and the Fed just hiking based on "Dow" resilience, not "Data" resilience could have the opposite effect if stocks fall into the mid-September Equinox Fed meeting, already a frequent time of market turns over the years. Stock declines that frighten the Fed into believing volatility is back would certainly keep the prospect of any hike on the Back burner until December or early 2017. For now, key to watch for next week is both 10-year Gilt and 10-year Bund yields, which both confirmed short-term "BUY" signals based on Demark indicators late last week, despite being in downtrends. Breakouts of their existing ranges would be a likely boon to Financial stocks. But as mentioned, whether or not stocks fall depends largely on how much the market feels it's behind the curve in gauging the Fed's newfound "Hawkishness" and whether or not that's built into perceptions.
The month of September is approaching this coming week, which is a reminder for investors not to get overly complacent given this month's consistent record of poor returns. The average decline of SPX 0.5% in September makes this month rank last for the DJIA, SPX and NASDAQ, and even in Election years, the month typically is lower by 0.2% for SPX and NASDAQ and -0.4% for DJIA. Barron's points out (8/29/16) that cumulatively over the years, one would have lost 31.6% of one's portfolio by investing only in September, (while investing all year would have netted 551% on a price basis. ) Sentiment wise, there did seem to be a rush towards bullishness from late June into mid-July, as would be expected on a stock rally, but that now seems to be dissipating. The AAII % Bears has spiked to 29.64% from 24.6% in mid-July, while the VIX has jumped over 20% in the last five trading sessions alone. While 13.65 seems to be relatively a very low VIX number compared to having registered readings above 25 in late June, our latest "mini-Drawdown" for stocks has definitely not gone unnoticed. The Equity Put/call ratio registered a reading in the upper 70s during last week, or the highest reading since late July (hitting its upper Bollinger Band in the process) while the composite aggregate Total Put/call ratio reached OVER 1 last week after having bounced from readings just near .60 during mid-July. Overall, sentiment seems to have ratcheted down in the last couple weeks, as might be expected given a market that now seems "unprepared" for a rate hike in September. Any selling we get as expectations rise further would only serve to stoke bearishness even more, which contrarianly speaking, should be "good" for stocks with SPX closing prices still only 1.1% off all-time highs logged on 8/15/16.
The rotation out of Defensives, which we noted might be nearly complete, still looks to have a bit more to go on the downside, as per last week's movement. Despite the market finishing with small negative returns for the week, defensive sectors like Utilities were the worst performing of the major groups in one-week performance while Staples also finished down in the lower tier, with -1.16% returns in the S&P Consumer Staples index. Conversely, Financials outperformed ALL other major sectors last and along with Technology, was the only other sector achieving positive gains for the week. Further signs of Treasury yield increases after last week's range breakout would only further embolden the bullish sector bias, suggesting that outflows from Defensives might have a bit more to go. XLU, IYZ,VNQ, and XLP have all violated six-month + Trendlines which supports the notion that these could still weaken a bit further heading into the bearish month of September. Stay tuned.
The US Dollar's advance last week caught many off guard, us included, when prices in the US Dollar index broke back above a one-month downtrend which had kept rallies contained. This surge last Friday exceeded the early August lows as well, so despite being seemingly stretched on intra-day charts, it IS a bullish near-term technical development, regardless if Rates in fact are not hiked in mid-September. The FOMC's long-term economic uncertainty doesn't seem to bode well for a lengthy US Dollar advance, though in the near-term that DOES seem now likely. This should have ongoing bearish implications for Emerging market equities and commodities, while helping Growth stocks to outperform Value. Many had noted how rapidly the Metals and mining sector had imploded late last week, with GDX undercutting its 50-day moving average for the first time since late January (if one throws our the 2-3 day minor undercut from late May) This formerly leading sector has definitely begun to deteriorate more quickly and any signs of Gold violating the key 1300-1310 level which marked both former May highs and July lows, would certainly cause additional weakness here. Commodities, as shown below in one of our featured charts, now appear to be turning back lower after their six-month advance into July. Any break of 415 in the CCI index would not only take this index down to new monthly lows, but also violate the entire uptrend from January, putting the commodity rally in serious doubt.
SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term Thoughts (3-5 days) : Neutral - While prices seem to have gotten down to near-term make-or-break levels before bouncing last Friday, it remains difficult to be overly bullish or bearish in the very near-term, and I think a short-term tactical approach makes sense until more evidence arises of how this trend should be resolved. Buying into indices after weakness over the last two of three sessions to near short-term support makes perfect sense, though with realization that any decline back under 2157.50 in September futures likely will precipitate additional short-term weakness down to early August lows at 2141. Even in this case though, a move back to new highs still looks to be necessary before a breakdown under August lows. Movement up to 2200 and over towards 2210-2215 remain legitimate upside targets to consider possible before any larger top appears. Use any early week decline under 2157 to buy at 2141 with thoughts that a snapback to 2200 and above should occur.
Intermediate-term Thoughts (2-3 months): Bearish- No change in thinking here, and despite the short-term view being inconclusive and largely still positive on move back to new highs, i still view a selloff to be a possibility in the months of September/October. 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.
Actionable Ideas for active traders:
Attractive Long Ideas: NLS, FB, NFLX, HRT, BABA, PLNT, GRUB,
Attractive Short Ideas: EIX, DE, COH, SCG, KORS, RL, DTE, CBRL
Absolute charts of QQQ, TYX, Energy Sub-sector relationship charts, Breadth charts and commodity index CCI analyzed below.
The churn continues, but Fading US Stocks remains difficult, trend wise- Some minor pullback last week, but as shown above, we still remain above 2168, 8/17 lows in SPX cash, 2165 in S&P futures, and even on a minor break down to early August lows, would barely show any real technical damage to the larger trend. Only on a break to new monthly lows is it likely that we're beginning to top out, which for now, remains premature. Hourly positive divergences are present in momentum looking at S&P futures and Daily TD Signals for upside exhaustion are not complete. Overall, a neutral stance heading into this week as there "could" be a test of 2141 which can't be ruled out, but based on the ongoing resilience, this would be a buying opportunity and back above 2188 should cause a test and breakout to new highs into September.
Europe has been largely more range-bound than US Stocks since the Spring, though larger underperformance continues. This trend in the last couple weeks doesn't seem all that bearish from an absolute perspective, near-term and should be able to mount a climb back to test Spring highs, which would be more serious resistance to consider "fading" For now, the trend has improved a bit since July given the rebound in European Financials.
The near-term stabilization in Europe vs US hasn't yet triggered any sort of buy signal, as this daily chart of SXXP v SPX shows, which is a close-up of the weekly chart shown at the top of this report. European Bank strength has helped SXXP to hold support a bit since July, but the downtrend persists, and even on minor strength in the weeks ahead, Europe should be avoided/shorted vs the US. This goes a long way towards supporting shorts in VGK, EZU, IEV and even EUFN on strength.
The NASDAQ Composite looks to be giving indications of a possible peak in price which should drive underperformance in the NASDAQ as September arrives. While Election year tendencies for August tend to be quite bullish for the NASDAQ, they're quite different for September, and the combination of a slowing in momentum of this ratio along with counter-trend Demark Sells arriving in confluence should result in NASDAQ Composite reversing course just as August comes to a close. For now, this remains very much a counter-trend trade, as we've seen precious evidence of the reversal. But sufficient signs are now present which should drive a reversal in this ratio and one should consider fading this bounce from June.
The breakout in the US Dollar index is a new bullish technical development, a meaningful surge above the USD's one-month downtrend while getting back up above late July lows. This should drive commodities lower, while favoring Growth vs Value in the weeks ahead into the FOMC. On lack of any hike, which would be postponed if stocks exhibit any kind of traditional seasonal weakness, this move likely should be reversed. For now, additional Dollar index strength looks likely, which translates into EURUSD pullbacks.
Commodity indices have begun to falter on recent US Dollar strength, regardless if economic strength is a reality, or merely providing a near-term window for FOMC hikes. Movement down under this "RED LINE" shown above, or 415 would not only be seen as an intermediate-term trendline break, but also a move down under July lows which would be negative structurally for the Commodity complex.
Gold has shown signs of breaking down out of its symmetrical triangle that's kept prices range-bound over the last couple months. Movement down under 1300 would drive Gold to 1200 and be a bearish technical development, which would likely become a reality on any September Rate hike. For now, the weakness is worth watching as it nears Gold's support at 1300-1310, representing the area at former May highs and July lows.
Ten-year Treasury yields have now successfully broken out above their one-month consolidation range along with exceeding the entire downtrend since early this year. This is a bullish near-term development for Yields suggesting additional gains ahead of September's Fed meeting. While a slow yield rise likely shouldn't be all that damaging towards stocks, and if anything, help the Financials complex, it is worth watching near-term and not immediately fading given the length of time this consolidation has been in place. Unless this trend is immediately reversed Monday through Wednesday of this week, TLT should be temporarily avoided, while TBT would work better as yields rise.
German Bund yields have to be watched carefully now for signs of breakouts given that US Yields have made this move, given that UK Gilt yields and Bund yields have both confirmed Daily TD Sequential "13 buys" as of last Friday's close. While the downtrend remains very much in place on both, movement back above -0.027 bps would drive yields up to +0.093 or even to .20 bps technically before any slowdown, which would be a giant move, exceeding this downtrend from December 2015 and allowing for a big decline in Bunds on par with April 2015's yield rally.
Healthcare weakness was fairly persistent last week, which resulted in some damage to US indices, given the percentage amount of Healthcare in the SPX. Following the Epi-Pen pricing controversy, the Presidential front runner Hillary Clinton spoke out against these hikes, which resulted in a big drop in performance in many of the Biotechs, which earlier in the week last week were set to close at the highest levels since January of last year. For now, we'll need to see a big rebound in the group to gain confidence after the amount of weakness which has taken place just since early August for Healthcare. At present, Healthcare represents 14+% of the SPX, the third largest group behind Technology and Financials, so some evidence of stability is necessary to help this group start to trade better, and in turn, provide some necessary tailwind to the SPX at a time when it's entering the bearish month of September.
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