January 30, 2017
S&P MAR FUTURES (SPH7)
2280-2, 2273-4, 2260 Support
2296-7, 2300, 2310-2 Resistance
Bloomberg World index shows the breakout which happened last week to carry this index of 5000+ constituents over prior highs from last Fall and late 2015. While overdone potentially in the near-term, this is certainly a positive development technically and could help to start some mean reversion to SPX which made all-time highs this year while most of the world peaked in 2015.
Breakouts, breakouts everywhere.. Now what?
With two more full days left in the month, January is set to show far better market performance than most believed possible heading into a new year under the uncertainty of new leadership. Despite cautious optimism on the economy as a whole, there continues to be much more skepticism on the stock market, as shown by the recent inversion of Bulls to bears in the AAII poll. Uncertainty and uneasiness about the shake-up going on in Washington following the Inauguration and the new refugee ban also seems to have cast a thick fog of worry over the US and the world, yet most equity indices have largely ignored these concerns.
Yet this year is playing out almost exactly the opposite of last year. This time last year, equities were spiraling downward towards DOW 15k, not breaking out above DOW 20k. Yields were about 50 bps lower, while Commodities were hitting new lows, led by Energy, as Crude oil had shed about 50% from its highs the prior fall, and was down about 75% from highs seen back in 2014. Little did most investors know at the time that Crude was bottoming out at this time last year, and proceeded to nearly double off those lows in the last 12 months. Sectors like Telecom, Utilities, and Staples were outperforming last January, reflecting the bearishness and Defensiveness of last year's volatility, while this year's winners for January look to be Materials, Technology, Discretionary and Industrials, all up more than 3% for the year. Far different leadership, yet important to note that last year ended up just fine performance wise despite getting off to a rocky start.
Yet concerns about this market remain and many have attempted and failed to "top-tick" this bounce from November lows, citing all the right reasons, outside of price alone. As we all know, US indices continue to be resilient, and price action itself is the single most important factor alone when trying to forecast price Technically, far more reliable than sentiment, seasonality, volume, or momentum. Looking back, last week's breakout in the SPX and DJIA joined the NASDAQ in moving back to new all-time highs, which looked important. Mid-caps and Large cap indices participated, while Small-caps failed to keep pace, with this group having underperformedsince peaking out in December. World indices like the Bloomberg World index, or MSCI World index (MXWO) also broke out to the highest levels since mid-2015, while Advance/Decline for NYSE is back at new all-time highs. The percentage of stocks meanwhile above their 50 and 200-day ma are treading water around 69%, bullish, yet not nearly as high as what was seen last year, or in 2014/early 2015 when these approached 85-90%. The fewer number of stocks trading above these gauges might seem like a subtle shift from prior, but yet important nonetheless.
Looking forward, the seasonality for February along with the level of overbought conditions and counter-trend signs of exhaustion in the making (Demark) are certainly negatives. However, despite price having reached 2300 for SPX, time factors still appears elusive and have not quite lined up properly to signal a top of any magnitude. Specifically, Demark indicators on daily charts are premature in showing sells for SPX nor NDX, and while present but not confirmed for DJIA, CCMP, would benefit from another 3-4 days of upside, which could take indices up into late this week. (Note, all indices don't have to move up from here, the start of some divergence would be particularly telling, and confirm thinking that a top should be near) Sentiment also is very tough to get a handle on these days. Bullish sentiment per Investors Intelligence and AAII have dropped substantially over the last week, but most seem more neutral than bearish or bullish. Yet if the anger and frustration being played out given the ongoing marches around the world is any guide, equity market selloffs from here would likely generate fear very rapidly, thereby preventing any type of large selloff of any magnitude from happening. In other words, a tremendous amount of uncertainty and doubt being felt during a time when equities are near their highs is rarely the recipe for any sort of meaningful peak in stocks, particularly when the Advance/Decline is at/near all-time highs. For now though, a few technical gauges do show that a reversal of trend should be near. It's just wise to wait until the price action plays out instead of selling prematurely and getting shaken out of a trend just when indices have moved back to new all-time highs.
For those looking for shorts, we'll concentrate on the Consumer Staples index this week which has been the worst performing sector out of all 11 S&P GICS Level 1 groups over the last three months. This is the only major sector with negative returns during this timeframe, with -0.06% performance through 1/27/17, vs an SPX return of 7.58%. Specifically, Food/Beverage and Tobacco remains the best part of this group, while Food/Staples Retailing is the worst (led down primarily by WMT. Household Products has perked up, and has trended higher vs Staples Retailing which looks to continue. Overall, the group looks to be close to bottoming within a month. Yet for now, the next 1-2 weeks look to be particularly bearish for this group and additional undeperformance in the short run looks probable.
SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term Thoughts (3-5 days) : Bullish- Despite S&P futures and cash getting up to 2300, which was thought to be a price area of resistance, time seems not to be lining up just yet, and a bit more strength is likely back to new highs before any peak is in. Last Friday's pullback to new multi-day lows could lead to 1-2 days of weakness, yet this looks to be a buying opportunity near 2280-5 for a move up to 2315. the NDX did not follow suit on the SPX's move and still looks to be quite strong. Area for profit taking will arise likely within 1-2 weeks on strength back to new high territory.
Intermediate-term Thoughts (2-3 months): Neutral- No change- Buy pullbacks for rallies into late Spring- Overbought conditions combined with counter-trend sells and waning participation all look to be important in signaling that this year might turn out far differently than the Bulls expect. For February, Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts. Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions. Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months. Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.
Charts of the Consumer Staples sector are shown below, both absolute and relative along with several Sub-sector relationships. Finally, three stocks are analyzed, WMT, TAP, both which look to fall further, while MO looks to be a source of strength.
XLP, the Consumer Staples sector ETF, looks primed to fall further in the short run following a rollover in prices in the last few days coinciding with a TD Combo and TD Sequential sell signal on daily charts. Pullbacks to $51.75-$51.80 look likely in the short run, with a move down under $51.35 leading to a much more severe drop to test last November's lows. This chart shows a mild uptrend in place since early December, yet Staples has been the worst performing sector out of any of the major 11 ,and the only one with negative returns. The pullback last September was hugely damaging to the trend from 2015, and despite the mild bounce, it remains difficult to have much conviction in rallies in the weeks ahead. For now, additional weakness is likely in the short run before this can stabilize, with the area near trendline support just under $52 being key.
Weekly XLP charts show a bit of a different picture than the daily, as XLP remains in a long-term uptrend from 2009 which has proven very linear and steady over the years. Last year's outperformance proved to have gone too far, too quickly (as shown by the mean reversion in Discretionary to Staples in the back half of 2016) and the break of this red line uptrend from 2015 caused some weakness which doesn't appear to have completely played out. For now, additional corrections could happen which might take XLP down to a maximum of $50 right near last month's lows, though that would represent a compelling buying opportunity for 2017 from a pure absolute standpoint. At present, this sector looks close to have bottomed on an absolute basis, yet the next 3-5 weeks still look to present much higher likelihood of downside than upside. So this remains a sector to avoid in the near-term.
Consumer Staples relative to the S&P shows the underperformance which hit this sector hard after breaking down in September. Relative charts have neared former lows and momentum has reached oversold levels. Yet more evidence of stabilization is necessary before reaching for this sector, expecting an immediate bottoming process. For the next 3-5 weeks, Consumer staples is likely to underperform further, with notable laggards like WMT, KR, MNST and TAP leading this sector lower before it can bottom out.
Food Staples Retailing in relative terms to the broader Consumer Staples group remains under pressure near-term after peaking out in 2015. Wal-mart (WMT) makes up a fair chunk of this index, and while having outperformed in years past it's taken a turn for the worse this year and this sub-sector of Staples is the weakest part of the group. In the weeks ahead, additional underperformance looks likely for Food Staples Retailing, which includes WFM, SYY, KR, WBA, CVS, and COST outside of WMT. Weakness into March/April might represent a better time to take a stab at this on the long side. For now, however, it clearly looks premature, despite the monthly chart showing a lengthy bottoming process at work.
Outside of Food/Staples Retailing, the Household Products sub-sector also stands out as showing some of the more negative performance within this Staples group in the past eight years, and still appears to be a sub-sector within the group to avoid. Until there is evidence of this downtrend being exceeded, one should consider using any bounce to sell, as weakness back down to test the lows within Staples looks possible in Household products.
Food/Beverage and Tobacco however, has outperformed substantially within the Staples group and continues to be the "go-to" part of this group worth investing in. Tobacco related stocks like RAI, MO, PM have shown far better outperformance than most of Staples and are leading the group in performance this year as well as in the last 12 months. This ratio chart above highlights a ratio of Food/Beverage and Tobacco stocks vs the broader Consumer Staples index. Bloomberg's ticker for this index is S5FDBT and includes stocks like HRL, CPB, MCK, HSY, as well as the stronger Tobacco oriented RAI, MO and PM. Interestingly enough, the Tobacco and the Food stocks have fared much better than the Beverages, and TAP, PEP, DPS, KO all represent the bottom half of performance for2017 for the Food Beverage Tobacco. For now this group as a whole remains the best part of Staples, and should be favored for outperformance.
Food/Beverage & Tobacco relative to the SPX looks far different, and much more negative than when viewing this group vs the broader Staples index. Thus, despite (FBT) being the strongest part of Staples, we can see that ALL the groups in Staples are having a difficult time beating the market, specifically following September of last year when most of the group turned down. Momentum is negatively sloped but oversold, and further lagging could bring about attractive buying opportunities in the next couple months.
Household Products relative to Food Staples Retailing turned up sharply in the middle part of 2016, making this the second most desired part of the Consumer Staples group after Food Beverage Tobacco. Relative charts of S5HOUS vs S5FDSR indicate that Household products should be favored between the two, as this continued to gain strength after the breakout of the relative pattern that held Household products down for the better part of five years. Stocks like PG, CHD, and CL are all positive for this year and some of the better performing stocks within the Household products group, despite Consumer Staples lagging substantially in the last 12 months.
Wal-Mart Stores Inc. (WMT- $65.66) Additional weakness looks likely for WMT after this stock broke down under prior lows from mid-2016 as well as having violated the entire minor uptrend from 2015 lows. WMT made what appeared to be a large intermediate-term breakout back in 2012 when it rose to exceed the highs that had been in place in this stock since late 1999 and kept this range-bound for over a decade. 2012's breakout certainly changed this view for the better, yet the rally lasted only two years before giving back over 50% of what had been accomplished since 2007. For now, WMT looks attractive near $62.50 to buy in about 2-3 weeks on further weakness. Below the area near $60 stands out, and then nothing until down near $56. For now, the near-term prognosis for the next few weeks is decidedly bearish, and WMT looks like a much better short than long. Those looking to buy dips should hold off until WMT gets to near May 2016 lows at $52.72 at a minimum before buying.
Molson Coors Brewing (TAP- C$- 95.35) Another laggard within the Staples group whichlooks to underperform further is TAP, which shows a -2.01% negative return for 2016 and has lagged all other stocks but 2 within the Consumer Staples group over the last 3 month period with a -9.07% negative return. Daily charts show this stock having attempted to bottom out after retracing 38.2% of the prior rally from late 2015 into last year. However, the near-term consolidation remains bearish technically and should result in break and final pullback to near $88 which would be a more attractive area to take a look given how this sector remains under pressure. Given the multiple tests of recent lows between $94-$96 which have marked support over the last few months, additional selling looks likely which should break $94 and cause further near-term technical deterioration. For now, this is an "avoid" technically, and breaks of $94 would warrant not buying dips until this decline has completely played out.
Altria Group- (MO- $71.03) MO belongs in the group of outperformers within Staples, which has shown a 10% return over the last three months and is the 3rd best performing stock in the group in the last six months, with returns of 6.41% at a time when Consumer Staples was down -3.17%. MO has just pushed back to new all-time high territory which is a structural positive at a time when the group has been under substantial pressure of late. While overbought conditions might limit its upside to near $75 until the group can successfully bottom out, this is one to favor within Consumer staples given its stellar track record and no signs of weakness. Additional gains look likely in the weeks and months ahead, with dips being buyable in the high $60s.
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