April 30, 2018
S&P JUN FUTURES (SPM8)
2654-6, 2638-40, 2584-5, 2549-53, 2524-5, 2474-6 Support
2697, 2739-40, 2753-5, 2781-2 Resistance
NASDAQ Comp- Increasing signs of rolling over as indices break to multi-day lows, violating uptrend from late March
Foreword: April set to close with marginal gains after early month gains were rebuffed and then led to just a partial retracement before moving higher last week. The problems center on trends being broken from early April, while the broader triangle/downtrend remains intact from mid-April, March and January. Weekly momentum remains negatively sloped, so these kinds of patterns ordinarily are quite difficult to expect much trend-like behavior and a tactical Hit-and-Run mentality is needed. One should use movement up to the recent April highs as a chance to sell gains, while pullbacks to the base joined by February and late March/early April highs near 2550 are likely a good spot to buy dips. For now, given the gains in the last week into this key time for potential trend change, the risk/reward favors selling into this move, expecting weakness into either 5/8-9, or 5/18-21 before a rebound into early June.
Summary: Increasingly poor breadth and defensive posture combined with lack of meaningful upside momentum thrust likely results in US equities pulling back to test lows before gains into Summer can occur. A few cycles suggest weakness in early to mid-May, so a defensive stance remains prudent, while increasingly looking to bonds to snapback along with Commodities in the months ahead.
As April comes to a close, indices have managed to claw back yet again to likely close out the month positive after what seemed to be a big reversal near 4/18 that threatened to test and break lows. Trends remain choppy and in consolidation mode over the last three months, and despite the vicious swings we've seen lately, prices remain largely unchanged from levels which were seen two months ago when March got underway. Yet, equities have taken backstage lately to bond yields, as the global fixed income decline seemed to get back underway in the month of April. The US 10Yr. Treasury sold off sufficiently to break briefly above the psychologically important 3% level and stocks and bond yields have trended in fairly positive correlation this past month. Yet not only Equities and bond yields have lifted, but Bitcoin managed to turn back up from late March as well as WTI Crude oil. The Dollar meanwhile seem to have traded exactly opposite of Equities from mid-April, as the peak in equities coincided with a short-term trading low in the Dollar.
Sector-wise, Energy, Healthcare Equipment and Services, Retailing, Autos and Software stocks outperformed this past month, while Household and Personal Products, Semiconductor names, Media, Capital Goods and Tech Hardware all underperformed. Energy's outperformance was staggering, rising over 9.4%, leading the next best sector, Healthcare, by over 500 bps just in the month of April alone. Quite the change from last year. Industrials and Staples however, look to finish the month lower, with Staples having suffered a huge decline of over 2%, thanks in part to PM and CLX, both which declined more than 10% this past month. Overall, for the year, only four groups lie in positive territory: Healthcare, Energy, Technology and Consumer Discretionary. Yet the Discretionary move could be a mirage given the outperformance of Netflix and Amazon, with YTD performance of 62.41% and 34.47% respectively. As shown last week, Equal-weighted Consumer Discretionary is flat for the year, trading within 0.50% of where it began the year, having lagged the broader market since 2015. It's been said that Discretionary typically tends to peak out 2/3 into the economic cycle as rates start to rise, so this time might be no different, and the outperformance cited by many of Consumer Discretionary outperforming looks to be largely due to the performance of just a few leaders.
Looking back at this past week, there were several reasons to be concerned, despite the week finishing largely unchanged while the month set to finish on a moderately positive note: First, markets are increasingly starting to shift back to a defensive tone. Groups like Financials, Technology and Industrials were all down on the week, which is important given that these three groups represent nearly 50% of the entire SPX. Meanwhile Utilities and Real Estate led in performance, despite 10yr yield shooting briefly over 3%. It's odd that groups like Consumer Staples outperformed Tech and Financials, but news like this was largely overshadowed by reports of yet another "stellar" earnings season underway, while geopolitical tension largely seemed to be thawing given North Korea's historic conciliatory measures. Second, breadth has been lackluster during this whole bounce from early April while volume also has left something to be desired. Chaikin's Money flow remains negative on S&P. Third and finally, markets look to be rallying into what should be another important time for trend change. This is seem by the downward bias of the 20-week cycle over the next month while this coming week has cyclical angles for a turning point tied into Gann's Square of 9 chart based on the duration of the decline fro 1/26 into 2/9. Finally this week stands out as having importance also cyclically based on Gann's Permanent cycle as potentially being important for a top into the first week of May. Given the lackluster price action in Financials while Semiconductors have steadily deteriorated, this could very much turn out to be a cautionary time over the next couple weeks before any counter-trend rally gets underway.
Overall, heading into May, it remains right to have a defensive stance, primarily for the following reasons:
1) Markets seem to be stuck in a rut, despite good earnings and less geopolitical uncertainty (While details of the North Korea disarmament need to lead to actual action, the news itself seemed to be a breath of fresh air to most of the world) One has to look no further than Financials, which saw constructive earnings out of the Banks, but saw its shares underperform, and this sector has lagged the S&P this last month
2) Breadth seems to be very lackluster, and not showing the kind of upward thrust needed to have conviction that a rally back to new highs is around the corner. We've seen eight 90% DOWN days thus far in 2018 while none of the first four months has produced a 90% "UP" day. Advance/decline activity has taken a bit of a breather, and market breadth has been steadily dropping since last October, but both rallies into March peaks and into late April have seen markedly lower positive breadth.
3) Trends themselves are negative from late January, along with from mid-March and mid-April highs, and momentum is negatively sloped (MACD) on weekly charts
4) Leading groups like Semiconductors have rolled over in the last few weeks, with both Hardware and Semis showing increasing signs of distribution. The pattern on the SOX from late last year increasingly resembles a Head and Shoulders pattern which would be confirmed under 1200. The shape of the SOX chart, however, given its deep retracements on corrections over the last six months, is increasingly bearish.
5) Technically, the uptrend from early April was broken definitively early last week, and has not been reclaimed
6) A defensive tone seems to be increasing, as seen in outperformance in Utilities and REITS, despite the yield rise, while Staples outperformed both Tech and industrials last week
7) DJIA, SPX and NASDAQ Composite all show completed monthly exhaustion signals per Demark which have been confirmed via TD Sequential and TD Combo while the DJIA shows a completed quarterly 9-13-9 pattern.
8) Growth looks to slowly but surely giving evidence of peaking out vs Value and has underperformed since mid-March
9) Cycles from 3/20 along with the 77-78 week cycle which have correctly given turning dates for the US Election in November 2016 along with May 2015, October 2013 and late March 2012 along with correctly pinpointing the post 9/11 lows, 2003 lows and 2000 highs center in on the first week of May as being important. We've just past a time also which stretched 90 degrees from the late January peak and 45 from the mid-March high, both focusing on 4/27-9, but both 4/30-5/1 also have significance, as does 5/7-9 based on several Fibonacci related cycles from 4/18, 4/2, 3/23, and 2/9. We'll see if this has any importance for this coming week.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish -This past week's late counter-trend rally should likely hit resistance and turn down sometime this current week, and remains right to have a selective stance and favor defensive positioning, expecting sectors like Technology and Financials to experience further weakness. S&P looks to have a maximum of around 50 points of upside, while the downside could cause pullbacks to 2550, or below to near 2450, so the risk/reward favors selling into this bounce given weak breadth and volume.
Intermediate-term (3-5 months)- Bearish- Markets very well might have completed their run-up from early April, and the low volume rally with Financials not participating is a particular concern for this move, while Semiconductors have now shown evidence of also beginning to turn lower, violating trends vs Technology and forming a very ominous near-term pattern since last October. While breadth and momentum did improve a bit from late March, prices remain structurally challenged when eyeing the ongoing pattern from late January and will require far more evidence of upward thrust to expect gains during this seasonally challenging time for stocks between now and October.
Technical longs to consider: GDX, M, TJX, CAKE, PANW, GOOS, CAR, FLR, NDAQ, SPLK, WYNN, GMED, TWLO
Technical Shorts to consider: SMH, AMAT, LUV, JBLU, TRCO, DISH, GPS, XRT, IBM
For those that prefer ETF's for diversification purposes, i've listed 10 below across various asset classes which offer an attractive risk/reward for longs and might help to look at something outside US Equities
TLT- Daily- Rally looks likely
TLT- Ishares Lehman 20yr Treasury Bond ETF- Bottoming out- Just at a time when investors unanimously expect bond yields to continue rising in the indefinite future, Bonds likely have a chance of bottoming out and turning higher to start the month of May. Sentiment has turned the most bearish on Treasuries as has been seen in at least the last 20 years and last week's about-face near prior February lows looks to result in gains in the weeks and potentially months ahead. Momentum on daily TLT charts is well higher than levels hit back into February lows, while 10-Year Treasuries never really experienced any real breakout despite yields getting up temporarily above 3.00%. Gains in Long bonds look likely, and TLT can benefit technically. It looks like an attractive risk/reward to buy TLT and look to average down on any pullback if given the chance in the weeks ahead.
DXJ- WIsdomTree Japan Hedged Equity Fund ETF-Attractive technically Japan looks attractive following its pullback in recent weeks, and DXJ looks to be an attractive vehicle to consider given the recent weakening in the Yen. Prices got back to near recent highs before backing off and this minor consolidation should provide a good opportunity given that momentum remains positively sloped and this pullback still remains within striking distance of highs. Structurally speaking given the many highs up near this same level, a rally back to these levels likely should result in acceleration that could reach the low to mid- $60's.
IHI- Ishares Medical Devices ETF- Attractive ascending triangle pattern bodes well for gains back to new highs. GIven that Healthcare has begun to stabilize lately and show above-average relative strength over the last month, IHI looks to be a particularly attractive vehicle technically which could offer outperformance in the weeks/months ahead. While many look to Biotech or Pharma as being key ways to invest in Healthcare, the Devices and Service stocks have been consistently outperforming other parts of Healthcare for the past couple years and look to be something to continue to overweight. This ascending triangle pattern in IHI should produce a test of upcoming highs as this pattern slowly moves towards the apex of this triangle. Long positions favored here, looking to add on ability of this to exceed recent resistance highs.
IYZ- Ishares Telecommunications ETF- Attractive risk/reward after selloff to support- Telecomm might not immediately come to mind as an attractive area to invest these days, but the sector has shown recent ability to stabilize near former highs while giving some evidence of attempting to bottom out. Given the attractive yield along with pullback to what looks to be attractive support, this looks like an interesting area to consider this group given that yields have begun to show evidence of trying to peak out. Given excessively bearish sentiment on Treasuries, bond rallies look more likely than selloffs in the upcoming weeks and months, and a pullback in yields should drive demand towards high yielding sectors like Telecomm. Evidence of positive momentum divergence has been present for the last month, while counter-trend tools such as TD Sequential from Demark's toolbox have recently confirmed weekly TD Countdowns which bode well for this sector trying to bottom out. Gains which exceed this downtrend would invite chances to add to longs for a more substantial rally. Overall, small longs are favored until this trend is exceeded but IYZ looks to offer a good technical risk/reward after this pullback to support over the last 16 months.
DBC- Powershares DB Commodity Tracking index fund- Further gains likely as Dollar reaches tipping point- Commodities experienced a breakout into early April before consolidating the last few weeks. However, technical structure remains attractive and gains up to $18-$18.50 look likely before any meaningful resistance. Given that WTI along with Precious metals have pulled back over the last couple weeks, this sets up for a good opportunity to buy dips and favor commodities for a push higher in the weeks ahead. The US Dollar has rallied in the last two weeks up to an area that's considered strong resistance based on the downtrend which has carried prices lower largely since the Election. When USD starts to turn lower, this should help commodities start to gain ground as Rates also weaken. While Energy commodities have soared lately, Metals and Grains have gradually been starting to lift and should be areas to favor in the weeks ahead.
DBA- Powershares DB Agriculture Fund- Further gains likely with Corn, Soybeans and Wheat all starting to firm up of late and DBA starting to make headway in recent weeks. Daily DBA charts show prices having bottomed at higher levels than were made back in December and now have turned up aggressively to the highest levels since mid-March. Momentum has continued to build in recent weeks, setting up for an upcoming test and break of the downtrend line from early 2017. Overall, a move back up to the low 20s is likely as the commodity rally starts to gain ground a bit more quickly in the months ahead.
VanEck Vectors Gold Miners ETF- Gold miners should begin to steadily gain ground in the weeks ahead, as this consolidation has provided a good risk/reward for buying dips for an upcoming push higher. Gold's rise has proven elusive of late as several different attempts at pushing higher have been met with resistance at 1365-70. Yet the recent consolidation from 1320-70 since January has provided a very tight consolidation which bodes well for an upcoming breakout. Gold mining shares should follow suit and momentum has turned positive for an upcoming push higher which likely can reach and exceed former highs.
IAU- Ishares Gold Trust- Attractive area to buy dips- IAU has reached areas of support which bode well for this to stabilize and start pushing higher to test and surpass recent highs of the last few months. Price has pulled back over the last couple week to test the lows which were made back in February. However, the ongoing base-building from last Fall bodes well for this to push higher, as the initial test in late January and subsequent sideways churning over the last couple months resembles a giant Cup and Handle pattern, and a rally and push up through recent highs looks likely in the weeks and months ahead. While a minor pullback to 12.50 could happen, it's unlikely that prices pullback down under 12.40 and should represent a great risk-reward to buy into recent weakness for above-average gains.
OIH- Outperformance likely into May before WTI peaks out, and Energy follows suit- Gains have been difficult to come from as Energy largely has not followed suit to WTI Crude to the same extent of the rise in recent months. Yet the last month has shown some definite improvement with Energy having outperformed all other sectors by at least 300 bp in the month of April. Technically OIh has gradually shown signs of turning back higher, and this last month has helped the near-term technical picture strengthen. Overall, further gains look likely into mid-May before any stalling out, and OIH should be likely to move to 30 before any meaningful resistance. WTI Crude should be able to reach $72 as gains continue into May, so Energy likely follows suit, and this could turn out to be one of the better longs to favor sector-wise, as Tech and Financials show increasing signs of weakening.
Ishares IBoxx High Yield Corporate Bond ETF- Attractive yield while credit deterioration is still not a big factor. While the near-term underperformance to SPX has been highlighted for the last couple months, much of the lagging has occurred with Yields having pushed higher, something which very well could reverse in the weeks ahead. HYG still pays more than 4% yield and virtually no evidence of any real credit deterioration has occurred thus far in 2018 which is likely necessary before avoiding High yield and/or expecting any meaningful spread widening. Even if a minor downdraft were to occur into mid-May, this likely should rally back to the high 80s into late Summer, and yields are high enough to warrant owning this at a time when bonds are starting to gain traction again while no evidence of credit deterioration is present. Overall, pullbacks down to 84 should be buyable and rallies back to the high 80s would be something to sell into. Bottom line, this looks to be an interesting area to consider for those hungry for yield until/unless credit woes become more evident.