January 29, 2018
S&P MAR FUTURES (SPH8)
2867, 2860, 2853-5, 2844-6 Support
2878-81, 2886-7, 2898-2900 Resistance
Goldman Sachs Risk Appetite has hit new all-time highs
Goldman Sachs Risk Appetite index has now reached a record high extreme, and notes the highest optimism on record since 1991. This is notable and definitely a concern after this rally, as it appears everyone's "Jumping on board" at what appears to be some of the most overbought readings seen in over 20 years.
What a year it's been for stocks, and we're just 19 days in. As fellow colleague Filippo Zucchi pointed out on Social media last week, "we're creating a new breed of traders who haven't even seen a down day, much less a bear market". Equity indices continued (of course) to set records this past week for its vertical blowoff parabola, making the largest number of days of new all-time highs (SPX) in a month in over 60 years, along with setting a new record for the longest span without a 3% correction (446 Trading days as of today) while being just 18 days away from besting 1959's record for the longest 5% rally without a 5% correction (575, vs 593 record- Data from Urban Carmel) Data shows the eight times that DJIA has been up more than 7% in January (8 in total), seven of these ended in gains for the full year, with an average gain of 17.49%. Given we just have three days left in January, the Stock Traders Almanac's January Barometer suggests that "As January goes, so goes the year" STA has shown the nine occasions when this has proven wrong amounts to an accuracy rating of a whopping 87%.
As we know, however, the Election year cycle along with the degree of overbought conditions both point to a less likely chance of repeating last year's gains at this stage of the economic expansion. Yet, we've seen no evidence of weakness. We're constantly reminded that breadth tends to drop off precipitously before most major market peaks, such as was the case both in 2007 and the 2000 peak. Yet, advance/decline line continues to scale to new record heights, and over 84% of all stocks are above their 10 and 50-day moving averages, with the majority of sectors hitting new all-time highs, outside of the Defensive Utilties, REITS, Staples and Telecom. Many seem perplexed at the lack of drawdowns, as complacency and market greed this time around have proven futile as gauges of market vulnerability. The sideways trend markets which we observed for a few months in the middle of 2015, 2016 and last year all managed to emerge higher, accelerating to new record heights, as a stair-stepping type uptrend continues. As market history has shown, these types of starts to a given year and for the duration of the market rally itself really aren't unparalleled, but yet they certainly "SEEM" extraordinary for most market participants who have witnessed this low volatility rally continue uninteruppted for months and months. Below i list 5 key reasons why this rally looks close to at least a minor top in prices. However, until sufficient deterioration occurs in this tape, it will be difficult to make the case that this just proves temporary, despite being seemingly unprobable.
Outside of Equities, Treasury yields continued their upward assault last week, and 10-year Treasuries look likely to test 2.68-2.75% range before even a minor peak is in place. This relentless bond selling follows of course the recent breakout in bond yields which occurred in US and also in Europe, and resulted in severe underperformance in yield sensitive stocks from last September through January. The US Dollar's massive selloff, however, has been the biggest story, hitting the lowest levels in over three years. Whether or not Treas. Secy Mnuchin and Trump agree about the best path forward, it was apparent that Mnuchin refused to walk back earlier comments, but recognized how sensitive a topic this had become by end of week. The dollar's decline doesn't seem likely to reverse until mid-February (given lack of confluence of Demark exhaustion) and this continued weakness should boost commodities even further in the month of February, at least until mid-month. Overall with regards to bonds and US Dollar, further declines look likely for both this coming week, though TNX looks close to levels where it might pause and briefly reverse (upon exceeding 2.68%)
6 Reasons that Markets might peak this coming week:
1) Momentum has reached parabolic heights- Traditional Technical gauges like RSI have now exceeded 90 on weekly charts, while Daily and monthly gauges show 87% and 88% respectively. Monthly RSI has only exceeded 80 on three other occasions since the mid-1950s: 1996, 1986 and 1955.
2) Sentiment has gotten even more bullish than prior readings: While Market Vane, Consensus, AAII, and DSI data had all shown signs of speculative excess, Investors Intelligence shows the Spread between Bulls and bears at the highest spread in over 30 years. The Percentage Bears dropped over the last couple weeks down to 12%, which is extraordinarily low. The Equity put/call ratio now sits at .49 or more than two calls being bought for every Put. Meanwhile the 13-week moving average has slid to .55, the lowest since early 2014 and similar to levels seen back in early 2011 over seven years ago.
3) Defensive issues have begun to gain ground. Utilities, Real Estate and Telecom all outperformed Technology and Industrials last week, the only three sectors that have turned in negative performance in the rolling 30 day period ending 1/26/18, yet have all begun to stabilize, with XLU, VNQ and the S&P Telecom index all having made the highest weekly close in the last three weeks. So extreme weakness in week 1 of the year, but persistently strong of late. Often times these rotations to defensive sectors are major "tells" that the market has reached exhaustion.
4) 20-week cycle along with Gann projections from last August's lows both pinpoint the next week as having importance for a change in trend. The 20-week cycle showed lows back on 8/24/15, 2/11/16, 6/27/16, 11/4/16, 3/27/17, 8/18/17, and has not yet peaked to form this current cyclical low, which looks to be inverting and could turn out to be a HIGH this week.
5) Signs of stress in leading sectors like Semiconductors and Transports began in earnest last week, with both sectors cracking uptrend lines from late December (Semis managed a brief recovery last Friday) while ETF and Sector dominant leaders like AAPL fell over 4% in the last six trading days. Airlines had been persistently weak in the past week, but actually topped out in relative terms vs the Transportation space late last Fall. This suggested that the Rail stocks might be favored vs Airlines.
6) Markets have shown a slide in breadth in recent days, that can be directly seen when studying indices like McClellan's Summation index, a smoothed version of the Advance/decline, which peaked in mid-January. This index is on the verge of breaking down below the 13-day simple moving average of the Summation index for the first time since last November. Last week's surge Friday barely had more advancing stocks than declining and was largely negative for most of the day until the final hour. Most of the days last week failed to show breadth gains surpassing 3/2 positive, not the 3/1 or 4/1 positive breadth which might show a more broad-based balanced rally. Signs of thinning breadth following a 6-7% move in the first 19 days is definitely something to watch carefully, and normally will precede at least a minor correction from severe overbought levels.
Overall, the coming days should be important, and given these warnings, could produce a trend reversal by Wednesday or Thursday of this week. While earnings rarely can be pinned as a catalyst for market turns, there are some heavy hitters report earnings this coming week, which could prove to be pivotal. Microsoft (MSFT), Facebook (FB), Amazon (AMZN), Alphabet (GOOGL) and Amazon (AMZN) all report this Wednesday and Thursday. Combined these stocks make up 26% of the NASDAQ. All of them outside of AAPL could potentially show counter-trend signs of exhaustion per Demark indicators this week on a daily basis, and are very overbought, which could be important.
SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish- An end to this parabolic state looks likely in the following 5-7 trading days, given the reasons we've mentioned above, a combination of excessive sentiment, very stretched momentum, while sector splintering has started to appear as Defensive sectors begin to stabilize. For near-term conviction, dropping under the 5-day Simple moving average, which hasn't occurred all year, is a good first step towards taking on a defensive stance for those wishing to short the market vs just buying implied volatility. Defensive sectors should be favored between now and March, and most Tech , Discretionary, and Industrials stocks should be avoided for 4-6 weeks until consolidation has occurred, as the risk/reward is just simply too poor in the near-term. While picking spots seemed foolish heading into 2018, after 7% gains in 19 days, we're clearly seeing some evidence now that it looks proper to lock in gains on some of the sharpest moving stocks. given For now though its right to hold off on getting too defensive until 2769 is violated. Once this occurs, one can expect a swift move down to at least 2700 in the short run.
Intermediate-term (3-5 months)- Bullish It's still thought that a snapback pullback of 3-5% or greater awaits stocks in the month of February and potentially into March as well, but the next 3-5 months should likely have a tough time being lower given how strong momentum has been in the last two months. Given that 14 days of new all-time highs have been made, markets have only closed down three months later on one occasion historically when 12 or greater New all-time highs occurred. Furthermore, data on daily RSI closes above 87 (from @Twill01) show that while markets typically suffer in the short run, the returns three months later have been positive on every occasion except 1 over the last 25 years. Furthermore, momentum getting over 80 (RSI) on monthly charts historically has never led to immediate tops for stocks since the early 1950's. Overall, we'll need to see the extent to which markets can pullback to have any sort of confidence of a bearish intermediate-term outlook, and this likely takes shape in 2H, vs thinking that the first half is negative. Initial pullbacks of 5% or even 10% would certainly seem likely given the combination of very bullish sentiment during very overbought conditions
This week's Weekly Technical Perspective covers 10 charts and commentary regarding some of the warning signs mentioned above, covering sentiment, indices, and sectors which have been showing deterioration and others which present good risk/reward opportunities.
SPX has stretched higher in parabolic fashion, causing weekly RSI (14 period) to reach over 90, a level that hasn't been seen in a least 20 years. Even by bullish standards, prices have risen too far too quickly in recent weeks, and look to be entering a key time for trend change. Sentiment concerns along with shifting sector rotation and recent breadth woes suggest this coming week very well might prove important in this regard, in finally producing at least some evidence of slowdown and/or trend reversal. Evidence of S&P getting under the 5-day ma would provide some evidence of this finally turning down, and a few cycles suggest that could come about by end of January, i.e. this week.
Equity Put/call ratio has reached very low levels, under .50 as of last Friday, so more than 2 calls are being bought for every one Put, a condition that often coincides markets peaking out and starting to backtrack. The 13-week moving average has also plummeted to the lowest levels seen in over three years. This dramatic pullback in equity put/call should be noted as it directly coincides with some of the other sentiment signs which have cropped up lately with giant spreads between Bulls and Bears. This makes the upcoming longevity of the near-term rally far more questionable and makes it imperative to utilize stops and/or not be complacent.
RSI , the Relative Strength index for SPX, on a monthly basis has now exceeded 85, a condition which formerly hadn't been seen since 1996, and proved to be nearly four years early before the larger market peak. Prior to that, 1986 and 1955 both had prices elevated sufficiently to show RSI readings above 80, but in each case, they proved early to producing market peaks. Overall, this strong surge in momentum looks to be a potential powerful force for helping rallies continue in 2018, despite near-term momentum likely coinciding with a short-term correction in February. (Chart courtesy of Oppenheimer)
McClellan's Summation index, a smoothed version of the McClellan oscillator to measure breadth, turned lower nearly two weeks ago and has failed to keep up with the recent surge in prices. This often can serve as an early warning sign for extended rallied that should turn lower for at least a minor correction. Demark's Counter-trend indicators, when plotted on this Summation index, also have just triggered TD Sequential and TD Combo 13 Sells, a condition which normally suggests a trend reversal and in this case, argues for additional downside.
DJ Transportation Average has broken the uptrend which carried Transports higher throughout the first few weeks of January. This deterioration looks important given the weakness in both Airlines and Rails and the fact that Transports often are a leading sector. Both the Semiconductor group and Transports have split from major averages in the last week, and at present are areas that suggest further selling and/or underperformance can happen.
Airlines broke down from Transportation nearly six months ago and began underperforming, a far cry from what many investors believed only happened recently with the possible Far wars happening in the Airline industry. Technically speaking, this breakdown of the five-year uptrend suggests Airlines likely continue lagging performance of the broader Transports space, and it's better to overweight Air Freight and/or Rail stocks than attempt to buy the Airlines. This break isn't too extended from the area of the trendline, arguing that additional near-term underperformance is indeed likely.
Utilities look to be bottoming in the short run after showing the worst performance in January thus far, which largely occurred in the first two weeks as Treasury yields were rising. At present, the break of this downtrend in XLU argues for a larger then normal bounce following this recent selloff, and Yields also look to be nearing areas of resistance right near 2.70%. Stocks like PNW, NI, NEE, AEE, CNP all look to be above-average candidates for a bounce in the weeks ahead, and shorts in this area should be covered given that the Utes look to be bottoming, on a short-term basis only.
Investors Intelligence polls continue to show some of the more complacent sentiment conditions that have been seen in years, with Bull bear spreads of over 50 Percentage points with Bulls at 64.7% while the Bears weighed in at 12.9%. This is extreme bullish sentiment, and doubtful that this rally carries through into February/March without a meaningful pullback and/or consolidation to bring some bearishness back to this market.
CBOE Volatility index continues to show a very constructive base-building effort and the recent equity rally has had little to no effect on implied volatility which is normally a warning as volatlity holds up despite rising prices. Implied volatilty levels have risen from under 9 at beginning of year to over 11 and look to be consolidating in a manner technically that can lead to an upcoming breakout. Movement back over 13.50 would break this longer-term trend in Vol, suggesting a further lift lie ahead.
Bloomberg Dollar index-(BBDXY) Finally, we'd be remiss to not comment on the Dollar's plunge back under last September lows, which has served to fuel the commodity rally as well as Emerging markets and China. While near-term stretched, no evidence of any counter-trend exhaustion is present and makes the case for additional US Dollar weakening in the weeks ahead. This index has far less exposure to the Euro, but EURUSD still looks probable to test 1.26 if not get slightly above before peaking. Counter-trend buys for USD along with sells for EURUSD are still 2-3 weeks away, which suggests in this case, further US Dollar weakness.
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