October 29, 2018
S&P 500 Cash Index
2729-31, 2710-1, 2690-2, 2633-5 Support
2775-7, 2825, 2852, 2940 Resistance
Summary: October is certainly living up to its reputation as a volatile month. Most US indices lost nearly 4% last week alone, extending the decline to over 10% for the second time this year. This equates to over 1.2 trillion in losses over the last week and over 3.3 trillion in value since our September peak, according to Wilshire Associates. This selling has directly contradicted the seasonal narrative heading into Q4, which historically has shown robust gains. Yet as we know, Q2 & 3 proved to be far more resilient than many expected, with stocks positive through the difficult months of August and September. This success in holding up proved to be a key factor in emboldening market participants as seen by many sentiment gauges, something which in our estimation is at least as important as how many look at earnings in determining a healthy stock environment. As many know by now, earnings don't lead stock prices, and despite a fairly healthy earnings season, stocks have all but ignored many of the positive earnings. Many European and Asian indices took the lead in turning down, and US indices look to be simply following suit to the weakness being seen all across the globe currently. Overall, the near-term trend remains negative for both equities and bonds currently and many stock indices are now challenging 2-year trendlines from 2016 which would give a more clear-cut picture of the intermediate-term trend. Momentum has rolled over to bearish on a weekly and a monthly basis, but has begun to show signs of positive divergence on daily charts. This, along with some uptick in fear, should be instrumental in putting trading lows in place for stocks in the next 1-2 weeks, with November 16th being a likely maximum time that this pullback extends before finding support. However, the resulting bounce will need to be quite robust, with broad participation to avoid stocks turning down again to make an even larger correction. My technicals suggest that this should be just a near-term pullback for now, but the larger deterioration in momentum is a concern for next year and even on a move back to new high territory for equity indices, the average stock likely should not get back to highs at this point. Thus, while I'm bullish on stock indices to advance between now and next Spring, I have greater concerns that the broader market is beginning to peak out on a 3-4 year basis. At present, insufficient damage has been done to make a call to be bearish between now and year-end, and as such, it's right to buy into any further weakness in the coming days, thinking that such a decline should finally help fear gauges start to register real capitulation and put in place a trading rally for a bounce in November. Below we have a monthly chart of the Bloomberg world index, which has clearly started to show more technical damage than what's being shown in the US, and gives reason for concern for 2019.. The pullback has tested 2015 former highs (now support) but monthly momentum gauges like MACD have rolled over to negative. Overall, this is showing its first real evidence of possible trend failure on this failed breakout, unless this can stop dead in its tracks today.
Overview: Markets are likely to begin some form of stabilization and bottom out within the next two weeks, and could very well be in place by the end of October. While momentum remains negatively sloped on every timeframe, uptrends are still intact on DJIA and NASDAQ going back from 2016, and important to note that most indices could suffer 20% corrections and still not break down under the uptrends from 2009. The positives include Positive momentum divergence, the start of fear rising, extreme oversold conditions on daily charts, and bullish seasonality during this time. The negatives concern the degree that the average stock has begun to show weakness at this stage of the stock rally. While this began back in early February, many did not move back up to new highs, and momentum on intermediate-term charts has begun to diverge negatively for the first time in years, which historically has been one of the Keys to knowing that the bull market is on borrowed time. In the short run, several things need to happen to truly have more confidence of a low at hand: Fear levels, while slowly growing, should escalate more quickly to show capitulation which would be a source of comfort to those who approach sentiment from a contrarian perspective. Demark indicators, while signaling downside exhaustion last Friday on intra-day basis, should give some type of daily signal which would be a stronger area to buy into. Finally, it would be constructive to see some of the S&Ps' heaviest weighted sectors like Technology and Financials start to turn back higher and show more stabilization. One can argue that both sectors are close in this regard and many are oversold. However, the proof will come on a move back to new multi-day highs. Semiconductors, for one, seem to continue to be a very weak sub-group within Technology, and look early to buy.
What to look for to have real conviction that a low is in place:
1) Better breadth on the pullback from 10/17 than from 103-10/11. (This is confirmed, and breadth has been better on this latest downdraft, with the maximum downdraft last week occurring on -3/1 breadth, far better than the 8/1 the week prior)
2) Equity put/call rising more rapidly now than it did in early October and nearing prior peaks. (Still not as high as needed to have real confidence of fear being in place. While weekly moving averages are more important than daily readings, this still hasn't reached areas near early October at 1.3 on Equity Put/call)
3) Volume capitulation (Also early in this regard- we haven't seen TRIN readings (ARMS index) at 2 or higher yet, not to mention 3 or higher which was seen in late January and also in April)
4) Financials and Technology should start to stabilize and turn higher. (Early here, though Tech did relatively outperform last week and Financials are within 2-3 days of near-term exhaustion (though the weekly charts are of bigger concern on the degree of weakness) (KRE however, can start to outperform XLF starting this coming week)
5) Seasonality,is very bullish during this time, not just in Q4 Oct-December but also during this stretch of the mid-term election season. Technically, a few cycles suggest this pullback likely should be complete by mid-November
6) Demark signals in place on US equity indices daily charts (this is clearly a bit early and has not yet transpired) A drop back to new low territory Monday/Tuesday should help this line up by mid-week, giving some conviction as to a bounce
10 Stocks to Consider Buying Technically on Weakness over next 1-2 weeks
1) AMZN- $1642.81- Pullback still looks to be short-term only- Area at 1623 is a 38.2% retracement of the rally from 2017. Under, while not expected right away would bring a maximum near 1491, or the 50% area
2. FB- $145.17- Pullback growing close to near-term support- Buying at current levels with move to 160 likely initially and over would jump start the larger rally.
3. YEXT- $18.18- Looking to buy at $17-$17.50 for a move back to the low to mid-$20's
4. LLY- $106.39- Excellent long-term structure since 1999. Pullback in recent weeks should find support near $100 and offer a good risk/reward for gains back to and over highs
5. IIN- $41.77- Buy $38-$40 with targets back up in the mid-$50's- Very steep runup saw 50% retracement, and now starting to stall out
6. VICR- $37.08- After moving up four-fold from late last year, this stock has given back more than 60% of gains, right down to key long-term base support going back at least five years. Buy technically with targets in the mid-$40's
7. MCD- $173.34- Very good pattern from January of this year as part of larger uptrend. Buy dips technically at 170-173 if given the chance this week for a move back to 180 and above
8. VZ- $55.51- Excellent long-term structure & gains to test 1999 highs near $62.50 likely- Use recent pullback to buy dips, technically
9. UNH- $258.18- Little to no real signs of any real technical damage- Buy dips at $240-$250 if given the chance
10. BABA- $142.87- Has already given back 50% of the rally from 2015- $134-$137 stand out as important to buy dips
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Mildly bearish- Still expecting that equities likely retest lows Monday-Wednesday, but that lows should be near. Further technical losses would represent buying opportunities this week, with 2530-50 area near February and April lows thought to be maximum area of pullback to this first decline from September. However, any move down to 2590-2615 into early this week should be buyable and particularly one where fear starts to elevate rapidly
Intermediate-term (3-5 months)- Bullish- It's thought that the current pullback could be complete within 1-2 weeks while longer-term charts have not been meaningfully affected thus far. While momentum has begun to turn lower and there is ample evidence of negative momentum divergence, broader market peaks take time. We'll need to see market indices show more signs of trend damage, as opposed to just daily charts. Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 26% of SPX has rolled over in a very bearish manner. However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher. Watching participation closely will be key in Q4. Until trends from 2016 are broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline is typically one to buy into given a lack of long-term trend damage.
Charts of US indices & sectors of importance
S&P Daily charts suggest a trading low could be in place by this week, though much needs to happen to have conviction on any rally. S&P Daily charts show the following: An ongoing downtrend from 9/20 peak that made a secondary peak back on 10/3. For now, this downtrend remains intact and has begun to reflect positive momentum divergence on this latest pullback from 10/17 highs, which lacked the strength of the initial selloff into 10/11 lows. One can see popular momentum gauges like RSI having failed to push to new lows. Additionally, Demark exhaustion counts remain premature on daily charts to signal lows of any magnitude but could be in place on further weakness this week back to new lows. Interestingly enough, after nearly a 4% drop, we see that three of the last four trading days were higher by 20-50 S&P points off the lows, which has emboldened the "buy the dip" crowd, despite SPX having pushed lower. To have any confidence in a low at hand, S&P Futures require a move back up over prior lows, which lie at 2710-2, and ideally to exceed the ongoing downtrend from early October, intersecting near 2750. Downside targets initially should materialize near 2590-2615, but on a real washout, one can't rule out a test of Feb/April lows near 2530-50 area.
SPX monthly charts are important to study to put the last couple weeks of pullback into perspective. Prices have now officially breached the two-year uptrend from 2016 and RSI on monthly charts has trended down sharply to the mid-50's, while showing MACD bearish crossovers. The negative momentum divergence is shown prominently and is a hallmark of markets which are losing steam towards the latter part of a move. While a snapback rally looks likely on daily/weekly basis, the extent of the rollover is a particular concern on an intermediate-term basis. This suggests that stocks likely are peaking out, and regardless if SPX makes a last ditch attempt to rally back to test or barely exceed September highs and reach 3020-60, the average stock likely will not participate and one should expect far worse participation on bounces.
Europe down to six-year Trendline support- Most of Europe remains in far weaker shape than US, and weekly SX5E charts show prices having pulled back to important six-year trendline support near 3100. While a period of stabilization there looks likely in the weeks ahead, any violation of 3100 would create a larger intermediate-term concern for Europe, suggesting that the recent underperformance should continue. At present, shorts in VGK and FEZ likely can be covered on this pullback, thinking that we'll see at least some minor ability to hold support in the next 1-2 weeks and a bounce attempt.
High Yield seems to be finally showing some widening out in credit spreads, as per the OAS (Option Adjusted Spread) breakout above the downtrend of the last few years. While credit had been relatively unscathed over the last few months, this breakout now shows the first material widening in credit spreads to levels worse than how 2018 began. This breakout above the longer-term trend argues for greater widening in the weeks/months ahead, and is something to keep a close eye on for those who believe that credit weakness typically makes for a poor equity market. Both Equities and credit look to have peaked in September, but this breakout is worth mentioning as a something which suggests the trend should continue to worsen in the weeks ahead.
Equity put/call never officially got to levels over early October highs, showing the degree that fear truly has not yet crept into this market on nearly a 10% equity decline in recent weeks. Movement back above 1.35 would be meaningful, which combined with a high TRIN would signify a stronger amount of capitulation than anything seen thus far. The recent constriction in this trend is of particular interest, and shows a good likelihood of a breakout which should allow cause fear to spike at a time when this dip likely proves buyable. For now, more work needs to be done.
Financials broke early year lows last week, with XLF closing down at the lowest levels since mid-2017. While Regional banks look to be a few days from bottoming, this weekly chart in general remains bearish on this break, and after giving back roughly 30% of the advance since early 2016, still looks to be 3-4 weeks early towards forming any kind of true counter-trend exhaustion which would point to a strong oversold rally. For now, this trend is bearish. From a sub-sector perspective, KRE should be favored within the group between now and end of year for a good likelihood of a snapback rally. While XLF in general looks quite negative on this break, Regional banks look relatively more attractive, and recent weakness should be used to buy.
Leading Sector breakdown not encouraging- Transports breakdown along with Semis a concern for leading sector tendencies- Just in the last week, the DJ Transportation Average managed to violate the two-year trendline from 2016, similar to SPX. Monthly momentum indicators like MACD have rolled over to negative, and could bring about selling down to the area of the last major peak in price, thinking that former resistance could now become support. The area at 9300 should act to cushion further weakness, and unless October's drawdown is recouped would be the first real area of intermediate-term support, followed by the nine-year uptrend which intersects at much lower levels near 8000.