December 4, 2017
S&P DEC FUTURES (SPZ7)
2547-8, 2639, 2631 Support
2670-2, 2679-81 Resistance
The parabolic rise continues, as Sunday's electronic session open coincided with a quick burst higher to the tune of 0.50% for S&P futures, of 15 handles as of 8pm Sunday evening. At the time of this writing, prices did not look to have run its course. While the reconciliation between the two tax bills could be a complicating factor which brings uncertainty to markets, there needs to be some evidence of prices pulling back to multi-day lows and holding on a close before thinking any sort of consolidation is getting underway. While prices could easily fill the gap at 2643 before pushing on to 2670-5, a breakdown below the 50% retracement from last Friday's lows alone (2634) is necessary before thinking any sort of pullback is getting underway. Parabolic moves like this are difficult to join at extended levels; yet, they're also difficult to fade before having necessary proof. As we all know in the month of December, prices can get overbought and stay there in the month of December for no rhyme or reason, and this time certainly seems no different.
Stock indices continue to defy gravity and trade in very resilient parabolic fashion, ignoring the uncertainty of tax reform (even with the passed Senate bill) as the middle of November turned out to be a turning point after all. Yet instead of being a high, this became a launching pad for a bout of extreme acceleration higher after indices were already overbought. Since November 15, S&P futures have moved 104 points in 12 days time, or over 4%, while much of the world has not followed suit. Europe is down more than 4% in the rolling 30 days, (STOXX50) while both Japan and China are lower than levels made back in early November. Rotation served to bolster US stocks, as the Industrials and Financials managed to carry much of the load in the last two weeks, while Energy, Consumer Discretionary, and Healthcare all showed sharp gains of 1.81% or more in the rolling 5 day period. Technology underperformed , with losses of 2% last week, yet this didn't seem to have much of an effect yet on the broader indices.
Given that only four more weeks are left in 2017, it's difficult to expect any meaningful deterioration, when trends have been going exactly the opposite direction, and quickly. While the issues of Uber-complacency(ultra-low Equity Put/call) combined with extreme overbought conditions while the largest Sector in the S&P has begun to falter (Technology), we'll need to see evidence of the pullback to new multi-day and/or multi-week lows to pay attention. Some of the problems of waning breadth and momentum have in fact been rectified in the last couple weeks. Yet the issues of bond yields going in the opposite direction of stocks while the yield curve plummets remain somewhat problematic. Additionally, (as mentioned previously) much of the world remains in correction mode from October/Early November, with only the US barreling higher.
Given the composition of Industrials, Financials and Technology amounting to 50% of the SPX, seeing one of these sectors waning, while the other two have ripped to very overbought levels makes for a very difficult spot to consider being long. Demark indicators have perfected their recent TD Sell Setups on DJIA and SPX as of last Friday which often can lead to consolidation, and from a non-technical perspective, the Algo-led surge in Futures doesn't seem to take into consideration the difficulty which remains on bringing these two bills together to actually achieve some kind of tax relief. Nonetheless, the trends remain in good shape, despite these other issues, and could grind higher into mid-December before any type of peak to this rally. The rebound in Small and Mid-caps alone looks encouraging, as these had been lagging for some time. Overall, it's essential to be alert during this time given the upward volatility as this could easily be quickly erased (but might be held off until January) We'll be on watch for signs of S&P possibly reaching 2670-5, as well as trends turning down to multi-day lows. Given the extent of the rally, this likely would prove important, and worth following in the near-term. For this week, we'll concentrate on recent developments and then highlight a few attractive stocks which still look likely to continue higher, along with those which have peaked, and/or should move lower, technically.
The most important Technical Developments of the last week
1) SPX, DJIA, RTY, TRAN all surged back to new all-time highs, furthering the recent parabolic move, and while last Friday attempted an early selloff.. by day's end, prices had recouped this decline to ward off any damage
2) Sector-wise, Financials and Industrials played "catch-up" accelerating back to new highs, which looked to be an important Mean reversion in sector rotation while Technology faltered. Healthcare looked to have bottomed, while Discretionary extended its gains at new all-time highs, becoming even more stretched
3) Small-caps and Mid-caps also moved sharply back to new all-time highs, as seen by both SML, RTY, and MID, which are often important benchmarks for these groups. (A few months ago the lagging in both Small and Mid-caps was noted, but this has been alleviated in recent weeks with both pushing back to new highs)
4) Style-wise, Growth stocks had a setback last week with Value outperforming. While trends of growth to value remain very much intact, the ratio is down near key make-or-break levels from a minor trend formed in July. Given no trend break, it's likely that Growth could reassert itself, but if this fails, it will be noted.
5) Europe has not joined the US index move back to new highs, and remains down over 4% from peaks made in October (SX5E), (Europe still remains below May 2017 peaks) So Europe remains a laggard to US
6) Crude oil managed to rally back to test late November highs which remain at near two-year highs, and trends remain bullish and supportive of further gains
7) Bond yields reversed their recent breakout attempts in dramatic fashion last week, with Bund and Gilt yields snapping back to new weekly lows, while 10yr US Treasury yields also fell back down under the key 2.41% level that had been exceeded the prior week. Key levels for a breakdown in TNX lie at 2.30%.
8) Equity put/call ratios got down to the lowest levels since September, with readings as low as .50, indicating nearly 2 calls being bought for every Put. (This is one concern to the current rally, as everyone seems to be jumping onboard)
9) Percentage of SPX stocks trading above their 10-day moving average(m.a.) jumped to 76%, while the percentage of stocks above their 50-day m.a.
10) SPX daily MACD moved back to positive territory, while the weekly momentum hit new highs as SPX did, which does not show any negative divergence, nor does the monthly
11) Daily SPX and DJIA charts now show TD Sell Setups (9 consecutive closes where the close is higher than it was four days prior) In the past both Buy and Sell setups have proven important in suggesting consolidation after a certain move.
12) Financials ETF, the XLF, does NOT yet show signs of exhaustion, and looks to require at least another 2-3 days HIGHER before this will trigger TD signals that might be indicative of some sort of short-term top. Thus, further gains in Financials early in the week looks likely
13) NASDAQ vs SPX along with NDX both have Daily and weekly counter-trend sell signals presently, while the NDX actually shows Monthly counter-trend sells, (NASDAQ Comp could signal these in January and is one month away) This could be an important step in the process, as the NASDAQ should be likely to peak out first before many of the other indices and begin to underperform.
14) Semiconductors SOX break of the uptrend from September looked to be an important and negative development which could serve as a headwind for Technology over the next few weeks. While the pullback became stretched quickly, this sudden downturn in momentum looked serious and suggests that rallies might be used to take profits
15) Emerging markets suffered a sharp setback last week with ratio charts of Developed markets vs Emerging showing signs of having broken out of trends which had been intact all year (Potential China concerns) Near-term, this is a negative for Emerging markets, though looks to have gotten stretched and should attempt to rebound near-term. Overall, if EEM holds November lows at 45.45 and bounces back to 46.50-47.50 before turning back down under these lows, that would be a larger issue for Emerging markets. At present, this pullback in EEM looks to be near initial support.
SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term (3-5 days): Bullish- Still quite difficult to fade this market based on price action, (SPX has barreled up through earlier technical targets) and now breadth and momentum have begun to turn upward in a manner that alleviates some of the near-term concerns. There are offsetting issues of course, with regards to counter-trend signs of exhaustion (Demark) per SPX, Technology weakness, and rampant Call-option buying which all suggest caution at these extended levels. Yet, given that this is the month of December, and overbought conditions can persist, while sector rotation can temporarily bail out the market, we'll need to see evidence of trends being broken to have concern. Futures have gapped higher Sunday evening at the time of this writing, and will need to get under last Friday's lows at a minimum - 2605, to have concern. Until then, upside to 2670-5 looks possible.
Intermediate-term (3-5 months): Bearish- Still likely that January/February should be a wake-up call for stocks, and persistent bullish sentiment/complacency, coupled with the start of Technology weakness in extreme overbought territory should offer limited upside. Breadth and momentum have snapped back, which is a temporary positive, but it remains very difficult to expect the market to continue up in the next few months even more given that Industrials and Financials are nearing extremes, and coupled with Technology these make up 50% of the market. At present, it's thought that the intermediate-term prospects are unattractive given these risk factors, and a defensive stance looks prudent. Rallies into mid-December are thought to be something to sell into, vs just expecting uninterrupted gains into end of year, and January should prove to be much more difficult than September into early December.
Comments, targets and Stops of some of the better positioned Technical risk/reward longs and shorts in my opinion at this juncture are listed below, with five longs and five shorts. For more detailed analysis, email me at firstname.lastname@example.org and i'd be happy to send you more comments that explain my thinking in this regard.
5 Attractive Technical Longs with Targets and Stops
Philips 66 (PSX- $97.57) Target 110, 116.85 Stop- 91.40- Breakout above 3 year Bullish Base
Legg Mason (LM-$40.15) Target 46.10, Stop 37.10- Surge to multi-month highs constructive
Pfizer (PFE- 36.35) Target 40, 44.65, Stop- 32.30- Move back to near last years highs bullish
Nike (NKE- $59.88) Target 67.50, Stop 55- Rally above 2 year Downtrend positive- Move to test '15 highs
Exelon (EXC- $41.83) Target 45.40, Stop 38.75- Giant Double Bottom breakout of base since 2011
5 Attractive Technical Shorts with Targets and Stops
Crocs Inc (CROX- $10.75) Target 7, Stop 12.25 Rally to 5 year Downtrend resistance, Counter-trend Demark Sells
Amazon (AMZN- $1162.35) Target 1070, 1020, Stop 1215- Too stretched, heading into Poor Retail seasonality, Demark sells
Nvidia (NVDA- $197.68) Target 162, Stop 220 Signs of momentum deterioration from very stretched position- Upcoming seasonal mean reversion could be problematic
Urban Outfitters (URBN- $31.32) Target 24.71, $22.70, Stop 34.50 Rally up to near breaking point of 7 year Downtrend
VF Corp (VFC- $71.79) Target $62, Stop $77.55 Rally to near highs of Monthly Bollinger w/ Weekly/ Monthly Counter-trend Sells
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