April 2, 2018
S&P JUN FUTURES (SPM8)
2564-8, 2549-50, 2531-3, Support
2614-6 (PIVOT), 2642-3, 2670, 2697 Resistance
Bloomberg World index manages to hold intermediate-term trendline support, for now
Foreward: Given that US stocks and many global indices have not really moved much in tandem of late, with most of the world lagging the US, this Bloomberg World index chart illustrates that stocks have still largely bottomed where they need to on an intermediate-term basis, with pullbacks holding the trendline from the US 2016 Election. Until this changes, it's worth noting that intermediate-term trends remain intact, despite the downward turn in momentum lately. If this changes dramatically, than it would add conviction to the thought that January's highs might remain in place as highs for 2018.
Volatility has returned to the market with a vengeance, with last quarter's dismal performance putting to an end many of the former records which had been intact with regards to lack of volatility heading into this year. Not only did last quarter break the string of nine consecutive "up" quarters, but also finished worse than any quarter in the last couple years, as might have been expected. The real question in many people's minds at this point is naturally. "Have we begun a new bear market??" "Has the market finally snapped its bull market run from March of 2009, turning trends from up. to sideways, and more recently, to down?" My answer to these in short and sweet form given that none of the longer uptrends have been violated is, well.. "Maybe" While the media waits until a 20% decline has been hit on the indices to claim that a bear market has begun, we see that NONE of the major 11 sectors are down less than 7% from all-time highs as of last Thursday, with most fitting into the range of -7-11% with Energy being the outlier, down over 26.6% from its all-time high close. Our streak of four straight +1.5% moves up and down since March 23rd was unusually rare to see in "bull markets" and 80% of the time, since 1950, this kind of action has happened in bear market declines. Looking back, there have only been 5 years since 1985 that have seen 4 or more 2% declines, with each of these years associated with above-average volatility, and not necessarily on the upside: 2000(7), 2001 (7) 2003 (4) 2008(8) and 2009(16) Finally, 9 of the 11 sectors are now lower than their 50-day moving averages, and we've seen persistent underperformance in Mid and Small caps vs the broader market since the 2016 election while the Equal-weighted SPX has also dramatically underperformed.
This tells us in no uncertain terms that a handful of stocks have been leading the charge. We've also seen a huge decline in momentum on weekly and monthly charts since late January. This is important and negative for the intermediate-term, as even on snap-back rallies in April into May, a push back to former highs would very likely fail to carry momentum back to these former peaks given the degree of deterioration in the last couple months, (hence, setting major market indices up for Negative momentum divergence, similar to what occurred ahead of former prominent market peaks) The key message to all of this is as follows: Bull markets take time to break, and peaks sometimes can take a few years, where the stock deterioration begins first with Small-caps and then Mid-caps, only finally extending to Large caps. When most major indices have set their actual price peak, most stocks are already down well off their all-time highs in the neighborhood of 10-20%. So it pays to watch Market breadth compared to 2015-2017, the percentage of stocks trading above their 50/200 day moving averages, and the performance of Small and mid-caps very closely in the upcoming months. Failure of stocks to mount a strong rally in terms of breadth and participation in April/May followed by a break of 2500 in the SPX would suggest that this topping process for a new bear market has begun. Naturally, long-term trendlines from 2016 and from 2009 need to be broken to have real conviction that a bear market is upon us, but this often can require substantial technical deterioration to have real proof, and for SPX alone, requires a move down under 2175, or nearly 18% down, (which breaks the uptrend from 2009) just to have proof that markets will then be able to weaken (likely) a whole lot more based on historical standards given momentum, trend damage, and of course, gravity. This speaks volumes as to how extended prices have gotten above long-term trends, and the return to volatility should be a very meaningful "shot across the bow" at the very least, that needs to be paid close attention to, regardless of the optimism surrounding earnings growth, economic progress, or Fed policy.
Overall, heading into the new quarter, much of what was highlighted last week remains very much the same. In the short run, we've seen sentiment start to wane and become more fearful (contrarianly Bullish) while intra-day charts became oversold, after many indices and sectors came within striking distance of February lows. Counter-trend signals of exhaustion were triggered on the SPX and NASDAQ Composite, while breadth has begun to stabilize and turn higher (Last Thursdays move was key in this regard) Meanwhile the longer-term trends remain very much intact for indices, which is seen as a big positive, given a general lack of trend damage to the indices themselves on an intermediate-term basis. On the flip side, we have seen triangle patterns broken to the downside now only in SPX, but also major sectors like Industrials and Financials. Short -term borrowing costs have also been surging, giving worry about a possible funding crisis (Libor-OIS) This last part seems to have correlated directly with much of our recent equity weakness, and is a concern for markets most likely in the months ahead given how rapidly this has begun to accelerate. This last point underscores the need to study markets outside of just equities, as this correlates far better with why equities are weakening than trying to pin the Ebb and Flow of market movement on DC Dysfunction, or Trade policy fears. However, the key worry at this point, technically speaking, going forward is more intermediate-term in nature and centers on two key words: Momentum deterioration. The severe drop we've seen in momentum from very high extended peaks should be a concern to anyone who's studied markets over the years. Plunges in RSI coinciding with an uptick in volatility aren't easily recouped, and often do set the stage for future intermediate-term declines (even if a trendline break has not yet occurred.)
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish- Last Thursday's sharp rally was impressive from a price point perspective, but failed to exceed the downtrend from mid-March. While breadth was higher than average, the end result doesn't suggest that trends should turn up just yet. The late day selloff from 2659 down to 2637 on Thursday afternoon happened right near the key downtrend from two weeks ago. Moreover, the last four days have shown consolidation near the lows, but these types of configurations often lead to one final pullback to new lows from where a V-shaped Bottom can emerge. TD signals failed to produce a perfected TD Setup last week for SPX, and while counter-trend buys were in fact confirmed by TD indicators by end of week, there hasn't been sufficient progress off the lows to have conviction that a new uptrend is yet underway. Finally, most important to highlight perhaps is that hourly momentum reached overbought conditions, while daily and weekly are bearish and negatively sloped. Conditions like these often set up with great risk/reward opportunities to sell.
Intermediate-term (3-5 months)- BULLISH into Mid-May- The selloff which began in mid-March looks to be near completion, and suggests that a counter-trend rally is right around the corner. Sentiment has turned more pessimistic in the last few weeks (AAII shows more Bears than Bulls, CNN Bulls/Bears Poll now shows extreme fear) Meanwhile, hourly charts reached oversold levels early last week and have been consolidating near February lows. Even on a minor breakdown at this point, this will cause positive divergence, allowing for dips to be bought with a bit more conviction. Thursday's surge also showed very impressive breadth of nearly 4/1 positive, a major tell that stocks in general have begun to turn back higher (regardless of the whipsaw like nature of the indices) Additionally, Demark's TD Sequential and Combo indicators showed confirmed Buys on Thursday for SPX, while the NASDAQ formed a perfected TD Buy Setup, which often are important in correlating with near-term market bottoms. Finally, the key reason for why stocks could bounce concerns the lack of any material damage to the larger trends, be it S&P, DJIA, or NASDAQ, after what looks to be a successful retest attempt. Weekly charts show the uptrend from 2016 very much intact. So the combination of heightened fear with counter-trend buys, while prices have tested former lows and weekly uptrends remain intact suggests that this first leg down very well could be complete. Look to buy any early Quarter weakness in the first week of April, with thoughts that stocks should turn higher for at least a more meaningful bounce than what we've seen thus far.
This week's Weekly Technical Perspective covers some of the key charts surrounding our latest selloff and rebound attempt in equities over the last few weeks.
SPX- As of last Friday's close, prices had not travelled sufficiently higher to think meaningful lows had yet been put in place, and the trend remains susceptible to a more meaningful retest this week before stocks likely can begin working higher. As the Daily chart shows, momentum remains negatively sloped given the severe dropoff since March 12/13 highs. The break of triangle support held where it needed to, and then attempted to bounce last Friday. But intra-day momentum is now overbought, while both daily and weekly are negative, which is a concern when hoping that last week's late rise might now continue. The positive breadth shown last Friday was indeed a bullish sign. Yet, trends have not yet shown any positive ability to breakout, while momentum is bearishly sloped. The next week's price action should answer quite a few questions in this regard.
New York Composite- McClellan Oscillator- Readings have improved as of late last week, with Fridays' gains helping the oscillator now approach the Zero level while it managed to bounce this past week at a much higher level than what was seen in early February. This bodes well for some kind of larger bounce likely taking place in the month of April, and while near-term weakness might persist early in the month ,the last few weeks should be positively biased.
LIBOR-OIS Spread- This has been one of the more negative developments of late that the stock market actually has been paying close attention to. Given that Short-term borrowing costs have spiked dramatically, this rally in LIBOR vs the Swap market often is a good gauge for signs of funding stress in the market. This charts breakout above both 2016 highs as well as 2012 is seen as pretty bullish technically for this chart, which might be a larger negative for the markets and economy in the months ahead.
2/10 Treasury Spread- Flattening back down to new lows for 2018 - While Short-term rates have held up resiliently, the back end has been pulling back hard lately, and the yield curve has broken down further into the 40s, which at this point seems to be on a steady course towards possible upcoming inversion. Given that the 2/10 curve has broken down under last year's lows, a move to the high 30's looks like the next stop before this can stabilize. So further flattening looks imminent after this breakdown.
AAII Sentiment- Back to levels which support buying Stocks, as complacency has been reigned in- The latest AAII poll shows bearish sentiment continuing to grow and now has exceeded the level of bullishness by nearly 4 bps. This is a far cry from the former levels shown in January when Bulls had widened out to over 40 bps vs the Bears. While the near-term progress has been lacking in the last week, this poll would suggest markets are certainly growing closer to a tradable Buys which should breakout of the downtrends.
5 TO CONSIDER, Technically
lululemon Athletica inc (LULU- $89.12) - LULU looks attractive given last weeks' breakout back to new all-time highs, and this symmetrical triangle pattern had been going literally sideways for the last five years, so this breakout is a welcome change to this pattern, and suggests higher prices in the near future. The area near the base breakout should be good to buy dips- $85-$86, while further upside should help LULU reach $100 before any kind of meaningful top. The duration of this pattern is an important factor in gauging the importance of this formation and what might be in store.
Five Below Inc. (FIVE- $73.34) FIVE also is quite attractive technically, and more so than LULU from a near=term risk-reward perspective. The stock broke out initially near $50 a few months back, but the consolidation from that move lasted the last month before this broke out yet again just last week. This suggests an upcoming rise up to $80 can't be ruled out, and FIVE remains one of the more attractive Stocks within the entire Retailing space given the strength in the last year. Pullbacks that take place in the market early in the week that cause any kind of pullback back to $70 should represent an even better risk/reward opportunity to buy dips for a further push higher.
Twitter Inc (TWTR- $29.01) TWTR pullback in the last couple weeks should represent an above-average Technical buying opportunity for most investors and downside should prove limited, while the upside could allow for this to move (eventually) back to the low $40's. The breakout last year was memorable, and this consolidation in the last couple weeks simply allows for a better suited buying opportunity given the positive sloping momentum.. Any dips in the week ahead likely should be contained near $27.50-29 and present a good buying opportunity.
Micron Technology (MU- $52.14) Buy Half position here, with balance at $50 with upside targets at $63.50 near former highs . MU has been one of the top performing SPX stocks this year along with in the last 12 months, so it pays to stick with a name like this until there is evidence of pretty strong lagging behavior. Just in the last week we saw a very steep dropoff in the stock, yet it failed to do much deterioration and prices have pulled back to an area which should be bought, Technically. The decline since mid-March has totaled over 10% but has failed to violate any of the key areas of support (shown on chart) while structurally this remains in good shape. Technically any further weakness Monday/Tuesday should be bought near $50, thinking that a rally back to near $63.50 is very possible in the next couple months.
Seagate Technology (STX- $58.52) Buy with targets at 67.50- STX is another stock which was relatively unaffected by the pullback a few weeks ago, and still lies short of targets to sell, having rallied up well above last Falls highs, yet still above levels hit back in 2014. Movement up to the mid-to-high $60's is likely before any real peak, and one should buy currently, using any pullbacks in the next week to add to longs for a larger than expected April rally. Momentum is positively sloped and overbought, yet no real evidence of any weakness since last Fall has transpired, despite the selloff from late January as well as March. Therefore this remains an attractive technical buy candidate for gains to the mid-$60's.