November 5, 2018
S&P 500 Cash Index
2698, 2684-5, 2661, 2633-5 Support
2750-5, 2775-7, 2825, 2852 Resistance
Summary: Equities have arguably begun to trend back higher this past week after three straight 1% gains (Tuesday-Thursday) that accounted for nearly the best run in stocks in over two years. Daily momentum has turned higher based on gauges like MACD, and SPX managed to exceed the downtrend line in place since early October as well as get back over mid-October lows which were thought to possibly offer resistance to this bounce. These are all short-term positives technically that bode well for further equity gains. However, the intermediate-term momentum could still pose a challenge to how sharply indices are able to rally back, as most indicators remain bearish given the extent of the pullback in October. Meanwhile, Treasuries have also seen yields push higher (and surprisingly never really turned down all that meaningfully during the entire October Equity pullback) Looking at currencies, the US Dollar has begun to trend higher again, having pushed up above the highs of a consolidation that's been ongoing for the past five months, while the commodity rally has sputtered out a bit in recent weeks, but still remains positive since mid-August. Overall, this coming week brings about the US Mid-term elections, a time when equities have generally shown good strength. This positive traction historically has not just been a short-term phenomenon, however, but has tended to last over the course of 9 -12 months, which has never been negative following a mid-term election going back since the mid-1950's. In this case, structurally speaking, such a robust rally might turn out to be far more muted given the technical damage suffered to breadth and momentum, but yet it pays to think that seasonal strength is far more likely than seasonal weakness during this time. Outside of the elections, earnings remain very much underway, and sanctions are due to be put back in place on Iran this week, along with the FOMC meeting, which is not anticipated to yield to any rate hikes. Below we see a chart of the SPX cash index, showing the positives of the recent trendline breakout along with prices having regained prior lows. Yet, just as momentum had shown some serious signs of rolling over on an intermediate-term basis, there is at least some minor evidence that a serious counter-trend rally has gotten underway. Whether or not the average stock can make it back to new high territory is still uncertain given recent damage. But trends have indeed turned positive near-term, and should give way to additional upside this week before any stalling out.
Overview: Equities have finally begun to show some evidence that a low is in place, after a very brutal October which produced declines in the amount of 2.4 trillion dollars. In percentage terms, this amounted to over 7% for broad-based benchmarks like the Wilshire 5000, or one of the largest monthly declines in stocks since 2011. Interestingly enough, this happened at a time when seasonals are thought to be quite positive, but yet as we're all aware, Q2 and Q3 seasonals certainly turned out much differently than market performance normally plays out. Last week's gains though weren't just a US phenomenon, as we saw very sharp strength out of China for the second straight week, while Japan also lifted more than 5% and South Korea's Kospi added 3.4%. Europe, meanwhile, added over 2.5% nearly across the board, proving that the global rally had less to do with US earnings or progress on tariffs and trade, and more about cycles and sentiment. Yet, stocks did rally last week on rumors of possible negotiation and/or future agreement, as Trump indicated he and President Xi were due to meet. Overall, trends remain bullish near-term and pullbacks should be used to buy, thinking that it's likely that even further strength can happen. Specifically, the price action in Financials, Industrials, along with recent Semiconductor strength area all near-term positives, as these sectors have regained prior lows and have shown evidence of snapping back. Overall, its unlikely that markets move straight higher, as weekly and monthly momentum remain a concern and we've seen some very sharp deterioration since mid-September. However, given the extent of last week's rally, it's likely to produce a "two-steps forward, one-step back" type pattern as breadth has proven better on recent strength than it did the prior week on the decline. Bottom line, make use of weakness to buy into pullbacks in growth names, expecting that Consumer Discretionary and industrials along with Healthcare and Financials should be sectors to buy into. Technology and most growth names have shown initial evidence of bottoming, but more selectivity is needed here. Look to short Utilities and REITS, using Consumer staples as the one defensive sector to consider long for those seeking safety. The bond market, unfortunately, has shown little to no evidence of rallying during October to aid those wishing to seek shelter away from equities, and it doesn't look like this changes anytime soon. For now, Staples is the one place to be within the Defensives, along with buying dips in some of the hardest hit Regional banks and Semiconductor stocks which have stabilized quite a bit.
Recent technical developments which give some comfort that a low is in place
1) Breadth was better on last week's rebound than the prior week of decline. We saw a turn up in Advance/Decline and Percentage of stocks above their 10 and 50-day m.a. The Percentage of stocks now trading above their 10-day has rallied sharply to over 70%
2) Financials, Industrials, and Semiconductor stocks have recaptured former Summer lows that were violated. (Looking at XLF, XLI, SMH as sector gauges) This is a positive and bodes well for these sectors to outperform after a very tough October
3) Structural progress- Uptrends were broken which have guided the downtrend for NASDAQ, SPX and DJIA since early October, while prices have regained prior lows from early October. This is a constructive first bounce off the lows
4) Three 1% gains is a rarity, and has only happened on a few occasions in the past 10 years. Last week's success likely means that these gains, similar to prior occasions in 2016, 2011, 2009, (which were all found at market bottoms) likely can produce further gains
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. As was mentioned above, this period has never been negative for stocks on a 12 month basis going back since the 1950's.
What's missing? We still have not seen the real capitulation, despite the sharp rally last week. Equities never showed real indication of extreme volume on the downside compared to Advance/Decline that would produce a TRIN (Arms index) reading >2 (Both February and April showed +3 TRIN) Additionally, the Equity Put/call, while arguably elevated on a 10-day moving average basis, failed to take out early October highs even while equities were plummeting into Oct 26/29 lows. Potentially given indices intra-day rally attempts, this prohibited the capitulation. Additionally, whereas most near-term declines in recent years have occurred while weekly and monthly momentum were in better shape, this time around, these gauges had already been negatively diverging from January when momentum hit near record overbought levels. The waning of Technology in June played a major role in many growth stocks falling out of favor which in turn caused the market to fail to show any real breadth surge on the market move back to near record highs into September/early October before peaking. The subsequent downturn caused a much larger decline in momentum given the near sideways movement since July. While intermediate-term trends are intact, the situation with momentum is not in great shape. Failure to rally sharply in November/December in broad-based fashion gives rise to concern of the broader market beginning to peak out next year (Or that September's highs is part of an intermediate-term top in the making for US indices.) For now, much depends on equities rallying back sharply in the remaining eight weeks of the year. We'll be watching closely. For now a bullish stance given the positives since late October seems correct.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Mildly bullish this week, with any early week drawdown likely proving minor and buyable technically. The last week of gains for Equities occurred at a volume and breadth which was better than the prior week's selloff and prices largely did not violate meaningful support to think that trends were turning lower on intermediate-term timeframes. The move above 2707 turned trends bullish, so any pullback early this coming week likely should hold 2707 initially and then 2685. Above 2756 should allow for a test of 2775 which has more significance. The real issue technically with having too much confidence just yet has to do with the level that momentum has turned lower on a weekly and monthly timeframe. This needs to be resolved before expecting too much of a rapid gain.
Intermediate-term (3-5 months)- Bullish- It's thought that October's pullback is likely complete, 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.
10 Technically attractive Stocks to Consider
Coca Cola European Partners PLC (CCE- $45.83) CCE is quite attractive technically and is considered a top choices to take advantage of the so-called "Safe Trade" during volatile times. Technically this looks to be preferred over KO in the short run given the stock's push back above 2017 highs as of last month. The recent symmetrical triangle was broken, allowing for prices to push higher to test $46 in what appears to be the early stages of a two-month pattern breakout. Overall, movement up to the high $40's looks likely and CCE is favored for technical longs. Pullbacks to $44.50-$45 would make this more attractive, while a move back under $42.50 would postpone the move. Bottom line, this pattern from 2017 resembles a larger Cup and handle pattern that is on the verge of producing a larger breakout and is favorable for longs in the weeks ahead.
Dollar General (DG- $112.32) DG has gained in technical attractiveness in recent months after the stock ran higher earlier this year above 2016 highs, and has subsequently formed two additional bases which lie above the previous base. This act of breaking out above a former high and then consolidating before breaking out again, each time making a smaller and smaller base, adds to DG's appeal as it starts to turn higher yet again. The stock's move above $112 has helped it to achieve a new plateau, with targets initially found near $120. While its near-term price action last week stalled out a bit once reaching former highs, DG still managed to achieve a new weekly closing high. Overall, this looks to be precisely the kind of pattern which keeps this stock technically attractive while not becoming too overbought. Longs are recommended, while looking to utilize any pullback to buy dips, with stops on longs found at $104.87.
Ross Stores Inc (ROST- $100.03) Bullish-The doubling from last year's lows still hasn't resulted in meaningful upside exhaustion and ROST still looks attractive to make further gains in the weeks ahead, with targets initially found near $110. ROST has consistently shown attractive technical structure and the breakout late last year above $70 resulted in a very sharp acceleration higher, beginning a new rate of ascent for this stock. No real evidence of any trend waning or technical deterioration of any kind has happened in the last 12 months and the Equity selloff in October had little to no effect on this name. Overall, longs are attractive, looking to buy minor dips for a push higher to $105 and ultimately $110 before any weekly exhaustion arrives.
Ollie's Bargain Outlet Holdings Inc (OLLI- $92.73) Bullish, with last week's advance to new multi-week highs likely leading the charge back to test September highs and get over this level in the weeks ahead. OLLI has shown ongoing signs of momentum acceleration in recent months, with its already steep uptrend growing even more parabolic since this past Summer. The recent consolidation from highs saw little to no damage done before this turned back higher last week. Near-term targets lie at $97.61, and above helps this set sights on $100 in short order. Only a move back under $87 would change this view, and put off the move back higher. For now, OLLI has little to no evidence of any weekly exhaustion, and its minor consolidation since September has helped to alleviate its overbought status on weekly charts. Movement back higher looks likely, and OLLI should be preferred for technical longs.
Shoe Carnival (SCVL- $40.80) The consolidation of the breakout of SCVL's four-year base makes this particularly attractive to buy dips with targets in the high $40's in the weeks ahead. SCVL had nearly tripled in price from last year before giving back nearly 20% from its highs into early October. The act of climbing back to recover more than 50% of the damage done from September should put this within striking distance of former highs. Overall, SCVL is bullish to consider technically and would be more attractive on minor early week pullbacks. Initial resistance should come in at $45, but over this should help propel this stock to the upper $40's. Only a violation of $36 would postpone this move. The fact that SCVL broke out on nearly 10x average volume and has settled down substantially on this pullback from the highs is thought to add to the conviction for longs.
Zoetis Inc. (ZTS- $92.77) ZTS is quite bullish given its breakout and pullback of the recent base which had been intact in recent months. This tight consolidation followed a lengthy uptrend from 2017, and following the high volume breakout last week (4.2mm shares) ZTS pulled back on far less volume (2.6mm) This should set the tone for gains up to near $100 which are possible in the weeks/months ahead. Given that ZTS had broken out of a trend which had lasted for the last couple months on nearly double the average volume of the last 60 days, the pullback back down to its pivot should be buyable, and makes this attractive from a risk/reward perspective. Stops on longs lie at $87.75, which can't be violated without postponing the move back higher to $100.
FactSet Research Systems Inc (FDS- $223.51) FDS recent pullback looks to have held where it needed to, and has now begun to turn higher. This past week's rally managed to break the downtrend from early September and finished above the highs from mid-October. Both of these are positive developments that bode well for FDS to continue higher to likely challenge the former September peak made near $235. Given that FDS made two formidable highs earlier in the year near $215 that were exceeded and then held on pullbacks (former resistance, now support) , the act of getting back above $220 is seen as quite positive for this stock. One should consider FDS as a long holding, using pullbacks to buy dips for a rally back to $235 or higher. $215 is still considered an important area for support and any breach of this would postpone the rally.
IShares MSCI Brazil ETF (EWZ- $41.61) Some compelling evidence of EWZ making a comeback after the Brazilian election with prices regaining more than 60% of the selloff from early 2018. As weekly charts show, EWZ had already exceeded the longer-term downtrend from 2008, so this year's consolidation should result in a buying opportunity for movement back to test and exceed early year highs. While prices are not likely to reach early year highs above $46 right away without some consolidation given the extent of the move thus far, a further rally to $43.50-$44.50 looks likely before this stalls out and pulls back. Then another rally should be able to carry this higher. Overall, the key point to make is that intermediate-term trends changed for the better back in 2017 into 2018, and now EWZ looks to be turning back higher. Stops on longs lie at $37.75 and should be moved higher as prices increase. Movement back over $47.85 hit in late January would be necessary to drive a larger rally and this largely depends on the US Dollar showing far more weakness, which for now, might hold off until end of year. However, EWZ looks well positioned to rally further in November and also should participate on a dollar downturn given the improvement in intermediate-term structure.
Vale SA (VALE- $15.45) The resilience of VALE closing well up off its weekly lows for the last two weeks has helped this reach the highest levels since late 2013. While its pattern might seem choppier than an ideal technical setup, the rally back to new yearly highs in September has managed to hold these levels without much pullback since that time. After six weeks of consolidation, it remains near its recent highs and has rallied for the last three of four sessions to close near October's intra-month highs. Movement back over $16 is expected, which should help this turn up to $19.69, the 50% retracement level of the move down from 2011. While a more serious downturn in the US Dollar index would serve to help stocks like VALE and other metal producers to rally in a much stronger fashion, this seems to be right around the corner. Recent dollar strength has not held VALE lower, but this has managed to rally despite these cross-currents and remains technically attractive. Overall, this looks like an excellent technical risk/reward and one to favor for diversification during volatile times.
Casey's General Stores Inc. (CASY- $127.88) CASY looks quite attractive technically given the recent resilience in rallying back to test highs that were made right near $130 in September. This level retested the former highs, and also lines up with highs going back since late 2016. Movement up above $130.78 which was the highs in September looks likely and should drive this higher to near $137 which was hit in mid-2016. Momentum has consolidated after having hit overbought levels back in September, so is relatively more appealing while price has begun to turn higher to test this area again which has already been hit twice before. Technically, it's likely that this turns up to new highs for 2018 on this current rally, and longs are recommended, looking to buy dips.