December 3, 2018
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2631-3, 2622, 2603
Summary: Bullish seasonality looks ready to get underway as the G-20 meeting successfully exceeded expectations and Futures have spiked overnight nearly 2% to levels near prior highs in S&P. Whether or not a true reduction in tariffs is possible next year is still difficult to say, but with just four weeks left in 2018, we've seen some improvement in technical trends along with a reduction in uncertainty at a time when sentiment had gotten understandably subdued. The near-term trend in both SPX and NDX changed to bullish last week, and while the negative slope in weekly and monthly momentum present concerns heading into next year, for now, it's thought that Equities likely can rally further given the setup heading into this weekend. Sectors like Financials and Healthcare had been showing steady strength lately, but It was the stabilization in Technology that is truly important for markets given the 20% SPX weighting. Additionally, the Industrials strength (while Transportation dominated) has helped this sector also turn higher, and is a definite near-term positive heading into the final month of the year. Overall, it looks right to favor rallies in the weeks ahead, while scrutinizing the breadth and participation in this rally carefully, as next year could bring about more volatility. The chart below shows the S&P progress in exceeding trendline resistance ahead of this past weekend's G-20 summit. This bullish breakout happened also in NDX, CCMP and should be a positive for the indices themselves. Given that nearly 50% of the market had declined nearly 20% from 52-week highs, it's more difficult to have confidence that the average stock can make as much progress. Overall, given that expectations were low but hopeful heading into the weekend, the sign of a trade truce goes beyond the outcome thought likely and should bring about an early week rally (As of Sunday evening, futures have surged. higher by nearly 2%, and while overbought on intra-day charts, such a move is quite positive if it holds on Monday's close, and bodes well for further strength.
Overview: Most of the non-technical reasons for concern heading into December look to have thawed at least temporarily after this weekend. Whether one had concerns on a Fed set to hike too quickly, or an escalation in the Trade war, both of these look to have been reduced in the last week. Prices heading into Monday's open have spiked higher ot the tune of nearly 2% as of 11pm Sunday evening, and the ability to hold these gains is a real positive for December in all likelihood. Technically of course we had seen some evidence of stabilization in breadth and momentum and some improvement in both, with MACD having turned positive on last week's rally. SPX managed to log its best weekly gain in over six years, higher by nearly 5% or more than 100 points from levels seen just after Thanksgiving. While there are some concerns about the quality of last week's rally, despite the impressive breadth, as it appeared overly large-cap dominated (Equal-weighted SPX lost ground vs the SPX) yet the improvement in structure combined with momentum at a seasonally bullish time when sentiment is under pressure could prove to be the perfect recipe for a rally in the weeks ahead. Sunday's rally pre-market, if holds, would certainly be the catalyst in this regard.
Heading into December, we find leading sectors like Transportation starting to turn higher aggressively, fueled by both Airlines and certain Rail stocks, making sectors like the Industrials ones to favor selectively in the weeks ahead. This group has been a notable underperformer in recent months, while the tariff concerns have taken a toll on some of the multi-national Industrials, we've also seen ongoing deterioration in GE and the recent weakness in UTX after its split-up plans have finally come to fruition. However the strength in many of the Airlines coinciding with Oil's weakness is important to highlight, and the lack of real damage to key Rail stocks like CSX and UNP.
Overall, it's thought that the Tariff truce should now help many of the stocks that were hurt by this announcement in recent months and stocks like CAT and DE which have been hard hit have shown evidence of trying to bottom out of late. The XLI itself looked to have made an Elliott-style 5 waves down into late October, but now has begun what appears to be a robust three-wave ABC pattern off those lows, with last week jumpstarting what's thought to be the third leg of this pattern. Tus, a push up above November highs looks probable for XLI and one that could take the ETF up to 75 from its current $72.54 close last Friday. Some charts on the sector, from an absolute and relative basis are shown below, along with five of my most attractive Industrials stocks to own heading into December from a risk/reward perspective.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- Last week's near 5% surge helped to exceed the downtrend from early October, something that was thought to be essential before weighing in that this rally could continue. Stocks bottomed and rallied during a time of heightened tension which took a toll on sentiment, yet now that the Fed is sounding more dovish while the Trade war is back on the back burner, Stocks likely can benefit during this seasonally positive time. Stock futures heading into Monday have spiked dramatically, so the ability of this to hold during Monday's session is thought to be a real positive. The first key area of concern was exceeded last week- 2750, so Futures have followed through higher to the next big area of concern, or 2810-5. While it would give more conviction to see Small and mid-caps participate, the fact that Technology seems to have stabilized , while Financials, Healthcare and Discretionary have surged back and Industrials is pushing higher is a definite positive in the short run. Most of these points suggest stocks likely are ok in the short run despite the uncertainty and negative weekly/monthly momentum. Movement back under 2680 would be a defensive stance back on the front burner. For now, rallies up to near 2815 have occurred as of Sunday evening and any ability to hold these gains is certainly positive for the prospects of further gains for December.
Intermediate-term (3-5 months)- Bullish- Indices look to have made trading lows in October and despite the downturn in momentum this pullback caused, have failed to show the kind of structural weakness that would suggest a further drawdown is necessary and/or likely in December. While negative momentum divergence is indeed important, one might look at rallies into next Spring as a time to potentially turn bearish on an intermediate-term basis. To have any kind of near-term bearish stance, we'd need to see market indices show more signs of trend damage, and move in unison UNDER 2018 lows which would be a larger signal. Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 20% 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. For now, trends in both Financials and Healthcare have begun to show outperformance, so this alone makes it still a bit premature to pull the plug on the rally in the indices to recoup much of what's been lost since September. However, the average stock might face difficulty in regaining all-time highs. 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 like we've seen is typically one to buy into given a lack of long-term trend damage.
10 Charts to review- 5 Index/Sector & 5 technically attractive risk/rewards for Longs
XLI-Industrials Select SPDR ETF- Near-term Bullish -Last week's ability to claw back within striking distance of former highs bodes well for this group to begin to show better performance in the month of December, and a challenge and move back over $75 looks likely. While the move lower from Fall highs looks to have played out in "five waves" lower, (which could lead to additional intermediate-term weakness after this bounce is complete, the near-term picture looks bright for a further rally. Given the pickup in Transports by means of the Airlines and Rails last week, further outperformance is likely out of XLI over the next few weeks and should rally back to $75.
Equal-weighted Industrials vs S&P 500 Industrials Index- Near-term Downturn after challenging highs- When viewed in Equal-weighted terms, last week's progress was actually not too constructive for the group, which mirrored what occurred in the SPX. On an equal-weighted basis, Industrials fell, and might see additional losses in the weeks ahead. This bodes well for diversification and holding off on buying dips too aggressively in stocks trending down sharply, like GE. For now, any pullback in the days/weeks ahead should be buyable, but for now an added layer of selectivity looks prudent.
DJ Transportation Avg (TRAN) Last week's bullish breakout of two prior highs should allow for further gains, with targets up near 11200. Daily TRAN charts show prices having gotten up above two prior highs and bodes well for prices to show further gains in early December. Overall, it's right to be bullish, technically and look to use any minor pullback to buy.
XAL- NYSE Arca Airline index breakout worth following near-term. Airlines look to show further strength in the days/weeks ahead, and given the WTI Crude washout of late, Airlines have responded quite positively, with XAL exceeding the area of trendline resistance which can help this group start to gain traction. While Crude looks to rise sharply early this week (Potential 5% gains to start the first week of December, it might take some time before seeing a large move higher in Crude. One should favor some of the stronger names, like UAL, DAL vs the weaker, and expect that these likely can still outperform.
S&P 500 Rails index- Rails have moved higher sharply higher also in the last couple weeks, and prices now sit near prior highs from early November, a development that bodes well for further gains in this sector. While many prefer CSX, stocks like UNP look more attractive for gains from a risk/reward standpoint. Near-term, it's tough to exclude any stocks here if Stocks are set to move higher aggressively, For now, prices have spiked but where indices close is of utmost importance.
Waste Management (WM- $93.75) Bullish, with near-term targets at $100- Last week's rally managed to exceed highs of the last couple months which also has brought this stock back to new all-time high territory. Yet the degree to which consolidation has taken place for most of this year makes this particularly attractive from a risk/reward basis as it lies less than 2% from highs achieved back in January. Thus this breakout has occurred on a pattern that's literally been ongoing for most of 2018 and should provide some above average gains in the weeks and months to come. Stops can be placed near $90 which if broken, would temporarily derail the rally. At present though, this pattern looks quite attractive for further gains, so longs are recommended with the intention of using any minor weakness to add.
Union Pacific (UNP- $153.78) Bullish on the breakout above November highs which should allow for immediate follow-through to technical targets at $165 which represents September highs. This UNP pattern resembles the formation present in TRAN which has just begun to turn higher after consolidating from early October. Whether or not this pattern turns out to be an ABC type corrective bounce, or the start of a wave 3 higher, the fact that prices closed above prior highs is quite constructive and bodes well for follow-through in the coming weeks.
Ingersoll Rand (IR- $103.52) Mildly bullish near-term, which would turn more positive on a breakout of November highs at $105.18 which looks forthcoming in the days/weeks ahead. IR has been consolidating gains since early October, but has formed a Cup and Handle pattern in the last two months that favors owning the stock at current levels for an upcoming move back to new highs. Momentum has lessened in the last couple months on this churning of late, creating what's thought to be an excellent risk/reward for buying ahead of the upcoming move. Positioning long at current levels targets $110-$115 while downside should be capped at $99.64, an area that's a stop to current longs. Technically speaking, the first daily close up above $105.18 should constitute a chance to add to longs. On an intermediate-term basis, IR has been overbought since last year, but yet has not yet shown any real trend deterioration that warrants any concern.
United Continental Holdings, Inc (UAL-$96.70) Bullish, with this recent XAL breakout helping leaders like UAL to extend gains in a fashion that should allow additional outperformance to continue. Last week's breakout in the Transports was largely led by the Airlines which have shown some good relative strength with WTI Crude having pulled back sharply. UAL has been the top performing stock of any of the 20 members in the DJ Transportation Avg in the last 3 months, with gains of 10.29% YTD. The recent rally back above $90 was constructive in that it exceeded the highs of a giant consolidation pattern that had been ongoing for the stock over the last three years. While overbought on a monthly basis and beginning to show some negative momentum divergence, this stock is likely to show further strength in the month of December with near-term targets at $100, and then $105 before any slowdown. Minor weakness in the next week should prove buyable technically with only a pullback under $91.65 preventing this from climbing higher into year-end.
FedEx Corp (FDX- $229.00) Near-term bullish for a move to 245-250, but doubtful this gets back above November highs right away. The pattern in FDX has improved as of late last week with the ability of prices to have pushed up over $225 which effectively broke out of this near-term triangle. While the longer-term pattern is largely neutral and unconvincing since January's peak, the short-term prognosis looks attractive given the recent improvement in momentum and ability to turn back higher over $225. Movement up to $240-$250 looks likely in the weeks ahead as the Industrials complex starts to improve. If in the event this can get back over $259.25 from mid-September, that would improve its intermediate-term chances. For now, FDX is attractive technically for an above-average bounce into year end, and is likely to play catchup. Longs encouraged here technically, looking to buy any dips though with stops at $222.