December 19, 2016
S&P DEC FUTURES (SPZ6)
2142-3, 2218-20, 2200-279-81, 2164-6 Support
2272-3, 2288-9, 2299-3k Resistance
The divergence between US and Europe has been widening most of the year and should continue to be monitored closely for any evidence of weakness in US equities and/or sufficient strength in Europe that support a bigger period of mean reversion and snapback in this ratio. For now, Europe (shown in Blue) remains under its highs from last year
Equities have stalled, yet still haven't shown much signs of weakness and this might be postponed until next year. The last five days have brought about massive volatility in bond and currency markets, yet precious little real progress in either direction for Equities. The SPX finished the week within 2 points of its prior weekly close, while the DJIA is knocking on the door of 20,000 for the first time ever, a level that's more psychological than important technically, and should be exceeded into year-end. Meanwhile, most momentum indicators remain overbought and the recent waning in the last couple days means that prices need to push back up to highs immediately to avoid at least a minor correction in the days ahead. While a few other sectors have joined the rally in the last couple weeks, the outperformance is still largely dominated by Financials which seem to ebb and flow along with the movement in rates.(which lately as we all know, has been straight up) Breadth-wise, we've seen a bit of deterioration in recent days, which makes sense given the sideways action in prices, but despite Advance/Decline being back at new highs, the participation isn't as robust as we saw from February lows into May of this year.
Sentiment continues to be very optimistic, which might be expected given the combination of Election uncertainty being relieved, economic data beating expectations at a quicker rate, along with Equities heading into year-end on much better footing than most expected. Readings by AAII, Investors Intelligence, Consensus, and CNN's Fear and Greed index all show investors to be as bullish as they've been all year. While sentiment gauges at these levels can often precede pullbacks, they're more difficult to come by in December, and often most declines are postponed until January, which given that only nine trading days remain in the year, looks increasingly likely.
Sector-wise, the Defensives have all begun to sprout up in recent days, showing some of the strongest outperformance of the week, with Telecom, Utilities and Consumer Staples all being within the top five sectors in the past five trading days. Financials continued their own recent dominance, and with yields still not showing much signs of reversing, still look to have a bit more to go on the upside. The biggest change seems to have come with the recent stabilization and rally in Healthcare, while Technology has improved in recent weeks, two sectors which should be favored for outperformance between now and February.
With only nine trading days left in 2016, Seasonality should kick into gear in a bigger fashion over these last two weeks as equities are entering a traditionally very bullish time of year. The Santa Claus rally period which begins the last five trading days of the year into the first two of the following year typically brings about returns of 1.4% gains since 1950According to Stock Traders' Almanac, Presidential Election year Decembers rank #2 for DJIA, and NASDAQ and #3 for the SPX. So given that our recent rally has stalled out, but yet has not shown evidence of making any serious move to the downside, this churning could very well allow for upside surprises into year end before any volatility rears up in January.
For now, technically speaking, these seem to be the main reasons why rallies can still happen into year-end despite the overbought conditions and recent slowdown:
1) The 10-Year Treasury yield rally still doesn't show sufficient signs of being complete. While the pace of the rise has slowed a bit, no real evidence is present for a turn back lower just yet. Upside looks to be possible to 2.70-2.75%
2) VIX has moved back down to multi-day lows and looks apt to test if not break lows seen at 11.33with no evidence of any daily signs of exhaustion while weekly will require another 2-3 weeks of drawdowns which should coincide with equities moving back to new highs into end of year.
3) Financials have been consolidating at/near highs with no real signs of weakness. Despite some minor slowdown over the last week, this hasn't led to any real technical damage.
4) Signs of both Healthcare and Technology joining the rally have occurred in the last two weeks, with XLK, MSH moving back to new highs which should lead to additional strength in the weeks ahead as mean reversion helps both of these groups show better performance.
5) Counter-trend signs of exhaustion (per Demark indicators) are present on daily charts of SPX, DJIA on a daily basis, but not yet weekly, and often the two need to be aligned before providing a bigger than average correction.
6) Technical structure remains quite positive , with the recent push to new all-time highs not showing sufficient weakness to fade, and sideways consolidation not necessarily a negative
7) Seasonality remains quite positive for this time of year traditionally rewards Bulls, which given above-average technical structure, still looks likely.
8) Credit spreads continue to show a contraction which keeps Equities in a "risk-on" type environment. Given that most market declines tend to start on the credit side with a widening out in spreads, the relative lack of this happening just yet is bullish.
TECHNICAL Long/Short Ideas:
Longs: NVDA, NTAP, WAAS, APA, TXN, SLB, HPT, AVGO, MRK, EXP
Shorts: VXX, YHOO, CRM, TRIP, TWTR, FLS, CCI, EEM
SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term Thoughts (3-5 days) : Bullish- The sideways grinding of the past week hasn't negatively affected the technical uptrend since November and despite some waning in breadth and momentum given this recent slowdown, the final nine trading days of the year likely should have an upward bias given the structure and bullish seasonality. 2273 will have importance on the upside, while 2243 on the downside. Movement up above 2273 should result in a quick move to 2285-2300 into end of year.
Intermediate-term Thoughts (2-3 months): Neutral- Equities are starting to look increasingly like a poor risk/reward after a huge lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies. While the near-term view remains positive and should press up higher into year-end, the 2-3 month likely will have a noticeable "backing and filling" early next year after this most recent surge. The longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions and possible counter-trend sells in the making which might be present at year end. Additionally the downturn in monthly momentum into last year still has not been properly recouped and should be a possible larger issue next year. Most of these factors make it difficult to trust this move continuing too much higher, yet are just warnings only amidst a bullish backdrop of trends of higher highs and lows.
Charts below feature SPX, TNX, DXY, along with a few sector charts and other currencies, commodities of interest
SPX's daily chart shows five days of consolidation as part of this ongoing rally. While evidence of upside exhaustion is present on daily charts which could be confirmed as early as Monday with a daily close under 2271.72, the last nine days of the year traditionally have a very bullish bias, and the combination of this positive seasonality combined with the current uptrend should allow for SPX to work its way higher up to 2285-2300 before any meaningful peak. Downside should be limited to 2233 for now.
QQQ successfully broke out to new highs last week before pulling back Friday to consolidate this move. Technically, a pullback to the base of a breakout typically marks an attractive spot to consider buying dips with upside targets near 125. For now, neither daily nor weekly counter-trend exhaustion sells are present via Demark's indicators, so this minor weakness looks like a good risk/reward opportunity to buy.
Healthcare's ascent looks to have begun two weeks ago with the group's outperformance vs SPX which has exceeded the downtrend from early November and should pave the way for additional gains in the next couple months. While the intermediate-term downtrend for the group remains intact from 2015, the recent stabilization and lift in the Pharma and Medical Devices group bodes well for further strength in the weeks ahead. Momentum has turned bullish on daily charts and it would take just a move above $63 in XBI before Biotechs would join the rally. Overall, this looks like an attractive risk/reward group given that mean reversion in the market looks to have begun.
Crude oil managed to pullback nearly all week after breaking out of its six-month consolidation range, but yet rallied back to recoup much of this loss last Friday. For now, it's tough calling this a failed breakout, but rather a chance to buy technically for a move back to new highs. Momentum remains positively sloped and movement back up above $53.41 should drive prices back to the mid-to-high $50s. While this WTI Chart is important for how Energy stocks likely perform, it's insightful to note that in multi-currency form, Crude has already moved back to new highs for 2016, with Energy as a sector providing the best performance of any of the major S&P sectors this year, outperforming the next best sector, Financials, by over 500 bps YTD through 12/16/16. In this daily chart, long positions are favored unless Crude were to move back down under $49.95 which would postpone the rally.
This weekly US Dollar index chart shows why last week's breakout was so important, as prices moved up above peaks which have held one time already since last Spring. This breakout has now resulted in the Dollar index accelerating to the highest levels we've seen since 2003. No evidence of any counter-trend sells are apparent on weekly, nor monthly charts, which makes further strength likely next year with potential technical targets found near 110.
As might be expected, the Euro also made its own significant breakout last week, albeit to the downside, as this accounts for over 60% of the US Dollar index. Closing down under 1.05 in EURUSD makes a move to Parity likely next year and makes this entire consolidation from 2015 just a large trading range which has now been violated. The intermediate-term trend for the Euro has continued lower since 2008 and after the near-term two-year neutral range now has been broken, most minor rally attempts should be used to sell with downside targets potentially near levels which were reached back in the early 2000's.
2-Year Yields spiked up to the highest levels since the Financial Crisis last week, a steep ascent which along with the Dollar move, was one of the most pronounced Technical breakouts of the week. The yield curve flattened out as a result, and upside technical targets lie near 1.35% in the short run.
Ten-year Yield charts show the driving force behind what has largely served to boost Financials substantially in the last month. Following the Election surge in yields, Financials and the broader stock market followed suit, and at this time, shows no compelling evidence that pullbacks need to happen right away. Rallies in yield up to 2.70-2.72% in the next 3-5 trading days would provide a good area to consider buying Treasuries for a move back down near 2.40-2.45 in yield. As this daily chart shows, yields have begun to take an even steeper trajectory than the uptrend projected from mid-November following the initial surge. Sentiment has reached the most bearish levels in two-years for 10-year Treasuries with most Speculators starting to bet heavily on further upside for yields. This likely should put at least a temporary ceiling for yields at levels just above. However, between now and end of year, a bit more upside does in fact look likely.
This chart of the 5s/30s curve shows that despite the FOMC ramping up Fed funds rates at the recent meeting the back end of the curve has not moved nearly as quickly, causing a severe flattening in the yield curve of the 5s to 30s along with 10s to 30s. Given that the US is moving towards tightening in a global era of monetary accommodation, attempts at normalization in the US are being possibly interpreted in the US as something which might hurt growth, as long rates have remained subdued.
One noticeable development which might be expected given a rapidly rising US Dollar looks to have affected Emerging markets negatively, as the Ratio of Developed to Emerging markets has broken out of a trend which has been intact most of the year. After several years of outperformance, Developed markets had largely underperformed Emerging markets this year until late October right before the Election. Since Trump's win, the combination of a rising US Dollar and rising US rates have resulted in severe lagging in Emerging markets, which on this chart, takes the form of Developed markets breaking out sharply vs Emerging.
VIX pullback to new multi-day lows should keep continued pressure on the VIX, leading to a test and break of early December lows into end of year. Given that VIX doesn't reflect any signs of turning back higher from a counter-trend exhaustion perspective, this breakdown last Friday should provide for implied volatility to steadily decline into end of year, coinciding with a likely equity market rally. For now, this downward pressure in the VIX and lack of any stabilization is one reason to expect that equities still have some tailwinds to move higher in the final nine days of the year.
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