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Small Caps, Financials break out of recent range, while prices grow stretched

February 13, 2017


2303-5, 2285, 2273-4, 2262-3              Support
2318, 2323-4, 2329-2333                     Resistance



SPX's push back to new highs looks to be near upside targets of importance, with 2320 up to 2330 likely holding this first push higher out of this consolidation.  Counter-trend indicators such as Demark's TD Combo indicator shows sells developing within two days, which could bring about a top between Tuesday and Wednesday of this week.  While February expiration tends to be positive, prices have simply run out of upside room to maneuver in the near-term, and it's best to consider selling into this from a counter-trend perspective.



SPX and DJIA join the NASDAQ, but upside looks limited
Last weeks' ability of SPX and DJIA to push back to new all-time highs was certainly constructive from a price perspective, and trends have continued to advocate sticking with a bullish thesis, with little or no evidence of any real trend erosion.  While many began to point out the dangers of uncertainty, or Demark signals prematurely, there really has been very little to suggest stocks were turning down structurally, outside of breadth beginning to wane, which largely began in mid-December.  Outside of many equity indices pushing back up to new highs, however, we also saw a few examples of Sector and style breakouts, as Consumer Discretionary (XLY ), Industrials (XLI) Technology (XLK) all pushed back to new weekly closing highs, while meaningful consolidation breakouts happened in both Financials( XLF), and Russell 2000 (IWM), with both of these exceeding lengthy consolidations on a closing basis for the first time since mid-December.  Additionally, we saw the Percentage of stocks trading above their 10-day moving averages (MA) for SPX breakout of a trend that's held from mid-December which is also a clue that prices have begun to push higher across the board after a lengthy consolidation. 

Another noteworthy positive has to do with seasonality, as markets remain in the bullish six-month period that typically delivers above-average gains.  But expiration week in February also has fared fairly well, with a positive gainof 0.17% in the SPX since 1994 with 14 of 23 positive weeks.  Much of the negative seasonality of February tends to play out the week following February expiration which has been down more than half the time since 1994.  

1) Overbought conditions: S&P's gains have carried popular momentum gauges like RSI up to near 70 on daily charts, the highest since early December, while weekly RSI is also nearing 70, which constitutes the highest levels since 2014.  Monthly meanwhile, has shown some divergence with prior peaks which occurred back in 2014 and while also showing levels near 70, is substantially below 2014 peaks, despite the fact that price is higher.  Additionally, prices lie above 2% Std. Deviation bands on both a daily and monthly basis.
2) Demark indicators which signal counter-trend signs of exhaustion have again come together on a daily basis for many of the US indices- SPX, S&P futures, NDX and could be in place by Wednesday of this coming week in DJIA, NASDAQ Comp. and others.  While these signals must be confirmed by actual reversals of trend, the fact that indices are beginning to show these sells looks important.
3) Divergence in breadth with push back to new highs- Advance/Decline on NYSE "All Stocks" failed to move back to new high territory last week despite the breakout in the SPX, and remains near, but not above the levels from late January.  Additionally, McClellan's Summation index lies well below levels that marked peaks last Summer.  Despite a rally from last November, the Summation index lies at only around 62% of the highs from last year.

Apart from Equities, we've seen what appears to be a turn back higher in both the US Dollar index as well as Treasury yields, two asset classes which seem to have correlated well with stocks rising in recent months.  The yield deterioration which had occurred back in the latter half of December and coincided with stocks slowing down, now looks to be turning back higher, just a time when the S&P has pushed back to new all-time highs.  While this should prove to be a positive for Financials,  Equities seem to have taken the lead in turning higher this time around, which might lead to some near-term consolidation before both move up in unison.  The US Dollar rally in particular will likely need some time before moving too aggressively back higher, but does look to have begun a bottoming process that should allow DXY to move back to new highs by late Spring/early Summer.

Bottom line, with regard to Equities, still quite a few bullish technical themes still, while the negatives have only recently begun to surface and haven't really done too much damage thus far.  So, positives in Structure, and an uptick participation will eventually give way to buying drying up on this surge, and overbought conditions and counter-trend sells should cause trend reversals that likely should be in place by February expiration.  For now, flattening out certainly isn't wrong given that prices lie outside Bollinger band highs, and selectivity in this rally at this point is an absolute must.  


Short-term Thoughts (3-5 days) : Neutral- Upside limited- Use rallies Monday-Tuesday to sell into, looking to establish trading shorts by mid-week, (and if price reverses right away on Monday to multi-day lows than this might happen sooner -  Prices have reached the lower end of upside targets, and while a bit more strength can't be ruled out early in the week, this should be an area to consider lightening up and hedging by mid-to-end of week.  

Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly 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.


This week, given that there remain quite a few positive, while negatives are beginning to creep into the picture, we'll focus on 5 charts that support the Bullish case along with 5 charts of things that are of concern.   Comments and charts below

Value Line Arithmetic Avg has just pushed back to new highs, exceeding the base that's been intact since early December.  This index looks quite a bit more bullish than S&P and not as extended, and with 1700 stocks, is a much larger sample as to how to view "the market" vs purely looking at SPX.  Near-term, prices still look to have limited upside this week, but Monday/Tuesday gains would be used to sell, expecting some backing and filling by end of week and the following week.




The chart above highlights the Percentage of SPX stocks trading above their 10-day moving average (PURPLE) which just broke out to the highest levels of the year in the last two trading days.  This, coupled with the number of stocks making new 52-week highs both give a sense of recent breadth expansion in the last couple days that had been largely absent since the beginning of the year.  Given that this peaked out last December at 86% while the uptrend from those highs has just been exceeded, this looks to be a short-term bullish factor which could push prices up even higher in the near-term before peaking. 


CBOE Equity Put/call ratio Despite all the rhetoric about sentiment having become ultra-bullish in the last two weeks, the Equity put/call remains very much in neutral territory, nowhere near levels seen late last year when Calls were being bought at greater than a 2/1 ratio over Puts.   Now at a .70 reading, this is very much mid-range, and doesn't confirm the recent bullish readings on seen in Investors Intelligence data which had widened out to the greatest levels seen in years.  This neutral reading tends to align more closely with the mildly bullish readings seen in AAII data which showed just an 8% greater spread in Bulls to Bears.  Overall, this data, given the widespread thinking that sentiment has turned bullish, presents much more of a subdued picture, which in turn, makes for a more constructive view on equities.



Financials have taken a much needed step higher with XLF's push above the highs of the consolidation that has been intact since mid-December.  This looks to be an important and positive technical development, and given Financials weight in the SPX, is something to consider for those turning bearish too quickly.  The rise in yields looks to have bullish implications for this group, and this entire two-month consolidation looks to be possibly giving way to a push higher for Financials.  This should have bullish implications for the months ahead, regardless of the degree that most indices are stretched.



Russell 2000-  Similar to Financials, Small-caps seem to be breaking out, which is evident in IWM getting back above the highs from late January just in the last couple days.   While there are various concerns about NDX, SPX having run a bit too far too quickly of late, it looks constructive to see both Financials and Small caps make sufficient headway last Friday to clear recent highs on a closing basis, while giving both a good chance of extending in the months ahead.





NASDAQ vs SPX-  Recent underperformance in the last couple days suggests that NASDAQ likely should lag the SPX after a sharp couple months of outperformance.  Counter-trend sell signals are now present on relative charts of NDX vs SPX, which previously were quite accurate in projecting lows in December (though the opposite)  For now, given that NASDAQ has led the market since the election, a sign of this reversing course could very well be negative and should be watched carefully. 


Quite a few US indices have now pushed up to test if not exceed the higher border of their own Bollinger Bands for a second straight month for the first time in the last couple years.  Given that counter-trend sells are now evident on monthly charts, this doesn't look to be an ideal time to be involved on the long side, thinking that too much more upside is likely.


The NYSE "All Stocks" Advance-Decline, remains below levels hit in late January, so despite the push higher to new all-time highs, breadth lagged substantially up until last Friday. 


VIX has pulled back to within former lows in late January, but now shows counter-trend BUY signals forming after nearly a full year of selling off down to former lows.  Counter-trend buys for implied volatility looks to be complete this week potentially.  Given the ongoing level of uncertainty, one should look to buy the VIX this week, thinking that further deterioration in implied volatility is unlikely.



Long-term charts show the extent to which momentum still hasn't caught up what price has achieved this year, which in a normal environment, might have carried price back to new highs.  The former peaks in both 2000 and 2007 showed the extent to which the momentum gradually began to drop off, and this year's push to new highs still failed to carry breadth back to levels hit back in 2015-6.  While the broader trend remains very well intact , prices have become quite strong.



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