April 9, 2018
S&P JUN FUTURES (SPM8)
2584-5, 2549-53, 2531-3, 2481-2, 2461-70 Support
2619-21, 2642-3, 2670-2, 2697, 2739-40 Resistance
This kind of volatility this early in the year is rare for Bull markets
Foreward: This kind of volatility we've seen over the last few months has been quite the wake-up call following multiple months of very little volatility which had set numerous records for the amount of time without a 1%, 3%, 5% drawdown. What's interesting is that after three weeks thus far with multiple 2% down days, this has been quite rare for markets that aren't in bear markets by the traditional 20% definition. Of the last eight highest occurences since 1950, seven of those had experienced 20% drawdowns. Furthermore, this year ranks first so far in terms of the percentage of calendar weeks that we've experienced such a drawdown as a percentage of the whole, nearly 21.5%. While this data is not set to prove that our current market is in fact a bear market, it makes it difficult to think that prices could simply rebound in a way where things could "go back to normal" at this point after what we've experienced. Even on a sharp rally into late Spring, momentum would in all probability not get back to highs seen in January, thus creating meaningful negative divergence heading into Q3. (Chart courtesy of OddStats)
After finishing three of the last four weeks lower, Equities have now produced a more meaningful pullback to test early February lows which has served up as much uncertainty as we've seen since early February. While trends remain negative from mid-March, last Friday's pullback has still not violated February lows, and could provide a likely attractive area to buy dips as equities near the start of a bullish seasonal part of April. This volatility has certainly been worthy of the record books lately , equally as much as last year's lack of volatility had set records. Each day thus far in April has moved more than 1%, and 2018 now shares the dubious honor of having produced three weeks with two days of 2% or greater declines thus far. An incredible achievement for many years, but even more remarkable in that we're only 14 weeks into 2018. Volatility, which was non-existent in recent years, looks to be here to stay. That's good news for traders and for technically oriented investors, yet incredibly unnerving for most fundamentally oriented folks who are seeing prices show tremendous volatility lately without much rhyme or reason. It's important to note that this volatility started back in late January in the US and most of the world, and isn't just a new development which came about as a result of fear of a trade war and/or tariffs.
For now, heading into the second full week of April, there are several positives to be highlighted which go directly against the notion of an immediate Tariff fueled crash, and need to be revisited. While momentum and breadth have been weak for the last couple months, we have yet to see meaningful trend violation on weekly charts. Most indices maintain uptrends from 2016, while near-term momentum has actually improved in the last week, specifically based on the ability of prices to turn up sharply last Wednesday. So, despite the late week plunge, momentum actually is in better shape, while indices maintain their intermediate-term trends. Furthermore, the unpredictable nature of the verbal sparring towards China has fueled uncertainty, which has caused sentiment polls like AAII to flip Bearish, with more Bears than Bulls over the last week. While fear certainly has not reached the levels seen back in February, we've seen sufficient concern to warrant looking for lows in this market, vs thinking a panic selloff is inevitable. Additionally, volume as of last Friday reached nearly 12/1 into Declining vs Advancing stocks, causing the TRIN to register above 3. Historically this has proven to be a time to buy into stocks, particularly when prices have not violated February lows and maintain ongoing uptrends. Furthermore, markets are nearing the middle of April which has shown far better returns in the back half of the month seasonally speaking going back since 1950, and as Stock traders Almanac reminds us, following the 10th trading day of the month, April tends to be quite positive. Finally, Demark signs of exhaustion were present in the SPX last week(based on TD Sequential and/or Combo indicators), while QQQ showed some evidence of hourly and 2-hour charts reflecting exhaustion which could fuel a bounce in the weeks ahead. Whether its healthy and broadbased or not, is tough to tell, but it seems right to cover shorts technically for those that are 4-6 week or longer tactically oriented traders and look to buy dips early this week.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- Stock indices seem close to short-term lows given a combination of better near-term breadth, momentum, while sentiment has worsened given last Friday's -2%+ decline. A capitulation in volume to the downside caused TRIN readings to register >3 often can allow for prices to stabilize in declines and turn back higher, particularly given that US indices have held up above February lows. While a negative week with multiple 2% down days like last week often tilts the odds for Monday weakness, this likely can set up for gains into one of the more seasonally bullish parts of April. Look to cover shorts Monday and start to assume longs, thinking that a counter-trend rally is right around the corner.
Intermediate-term (3-5 months)- BULLISH into late April/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'ssurge 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- Hourly charts show last Friday's 2%+ selloff to be a bit more positive from a risk/reward perspective when seeing how this fits in with the prior week's pattern. After the rise from Wednesday helped to turn short-term breadth and momentum higher, last Friday's decline resulted in prices testing support where lows were possible. Momentum based on RSI has made a steady upward slope since late March and bodes well for this recent dip to be bought. Hourly charts show what looks to be the start of a potential Reverse Head and Shoulders pattern which would be confirmed if prices can manage to turn back over last Thursday's highs at 2672. Initially key areas of importance lie near 2620 and this would be a stop for Shorts heading into Monday. Declines back under 2584 would suggest a full retest of 2558 and then 2532-3. However, given some of the positives mentioned above, this would be thought to be an area to cover shorts and/or attempt to buy into this weakness.
The TRIN, or Arms index, registered a very high reading north of 3 last Friday, representing an abnormally large amount of volume flowing into "Down" vs "UP" stocks compared to its overall Advance/decline. These types of extreme readings in the Arms index often are part of the thinking that stock indices could be near trading lows, and coupled with improvements in momentum, could help S&P bottom out without much further damage early in the week.
The Equity put/call ratio spiked during last week's drawdown, yet even after two 2% loss days, still isn't producing readings above .80, and as this chart shows, this is nowhere near levels seen back in early February, nor last Spring/Summer when readings above 0.90 were seen. This would seem to indicate that while some sentiment polls have clearly retracted and are showing signs of concern, overall some have definitely not shown the same degree of fear that would mark stock market bottoms. The AAII for example has contracted to levels where more Bears are present than Bulls. Yet, the Investors intelligence still shows a healthy spread between Bulls and bears which makes a difficult case calling for any type of meaningful low. This put/call ratio is similar in this regard. While a spike from 0.50 to .75 is important, it still hasn't reached former peaks, suggesting that fear might have a ways to go before reaching levels seen in the past.
McClellan's Summation index has shown evidence of turning higher over the last few weeks, so this recent pullback back down to the lows likely represents a short-term buying opportunity and could lead to at least a minor bounce. Charts above show the Summation having bottomed at a lower low back in early February, while having shown successively lower peaks since last October. Overall, this represents a short-term optimistic scenario, while the intermediate-term picture is more of a concern. The steady drop in market breadth since last Fall gave some important warnings when this plunged as much as it did into early February, and won't be able to be recouped anytime soon. Thus, while a minor bounce does look to be near and could get underway this coming week, the longer-term picture needs quite a bit of work to show improvement.
BUY STAPLES- Consumer Staples index showing evidence of Exhaustion on this decline for the first time in two-years. Monthly charts of Consumer Staples vs the SPX has shown pretty severe underperformance in the last two years, as might have been expected as the stock market rose to new heights, yet now is indicating that a turn back higher is imminent. Oversold conditions on relative charts coupled with counter-trend Demark indicators pinpointing Exhaustion not unlike what happened back in 2006 (1 year early) and 2014 at the lows, along with 2009 at the highs suggests that this group should be poised to turn up in the weeks ahead. On an absolute basis, Consumer Staples has been the 2nd worst performing sector this year, down over 8% in absolute terms. Yet the last week has begun to reflect outperformance with the group losing just 0.28% vs an SPX return of -1.38%. Stocks like MO, ADM, CVS, HRL, PM all rose more than 1.50% last week, and Staples looks particularly appealing given this new era of volatility the market seems to have entered this year which has produced three weeks thus far with 2 or more 2% down days. While this group of "safe" stocks might seem pricey to some Fundamentally oriented analysts, technically its two -year underperformance looks ripe to end this year and turn higher.
Food Beverage and Tobacco has begun to turn up sharply over the last two weeks, which bodes well for further outperformance in the weeks ahead. This group has been trending down within the Staples complex since mid-2016, and while a minor period of stabilization happened last Spring, this recent upturn looks to be on more solid footing to succeed. Both weekly and monthly charts show the presence of counter-trend exhaustion per Demark indicators when plotted on ratio charts of the Food Beverage and Tobacco index relative to SPX (S5FDBT index/SPX index) as shown above. The last time these were present on weekly charts occurred as Sell signals and right at the highs two years ago. The act of breaking the downtrend relatively speaking vs SPX should create an attractive risk/reward scenario for this sub-sector of Staples after TD Combo and TD Sequential buy signals were confirmed, allowing this group to outperform the SPX in the weeks/months ahead.
5 Consumer Staples Stocks to Consider
Constellation Brands (STZ- $227.19) One of the more attractive stocks right now from a risk/reward perspective within the Staples complex, STZ has formed what many would refer to as a Cup and Handle pattern following a strong year of outperformance in 2017. This area from $230-2 near early March highs has been hit three times now in the last month, and the recent pullback should provide a buying opportunity for an upcoming breakout back to new highs. The longer-term structure remains in very good shape, while the churning in the last few months shows very little of the technical damage that's affected other stocks. The slope of ascending troughs since late March should allow for a push back higher to challenge $232 in the weeks ahead, which this time around likely gives way for a move up to $240 initially. Technically one would buy vs the $222 lows from early April, with a move under there stopping out longs. At present, this looks to rally back to new all-time highs, and is seen as bullish technically.
Philip Morris (PM-$101.02) PM looks attractive to buy, technically after having lost nearly 20% of its value over the last 10 months since peaking last June in 2017. However, at current levels, the decline has not breached meaningful trendline support from 2009, and the bottoming in the Food Beverage Tobacco sector should help to lift this off its lows in the weeks/months ahead, as the "safe stocks" within Staples begin to show more outperformance. Bottom line, the risk/reward is attractive to buy this dip between $95-$102, while any move under $95 would postpone the rally. Upside targets lie near $110 up to $112.84 initially on rallies.
Archer Daniels Midland (ADM- $44.33) ADM looks attractive technically given its recent ability to exceed the downtrend which has been in place since mid-2015. Technically this stock has been a relative laggard over the last few years, but the recent uptick in the stock looks meaningful structurally, and might lead to additional strength up to the upper $40's in the weeks ahead. Last week's weekly close not only surpassed this three-year downtrend, but managed to close at the highest level since this time last year in mid-April. While the pattern of gains in the last few months has appeared choppier than normal, this stock should begin to trend higher more meaningfully given the uptick in momentum as price looks to have made meaningful progress.
Campbell Soup Co. (CPB- $43.73) CPB looks technically appealing after nearly a 35% decline in the price since last July. Not only has this stock retraced 50% of the rally since 2002, but also a perfect 61.8% retracement from the 2009 lows. Additionally, at current levels hits the long-term trendline from those 2009 lows, making this an attractive area to consider buying dips. Finally, technical momentum gauges like RSI have begun to show evidence of positive divergence lately on the recent stock decline under $45 to current levels, as RSI has improved and is higher than late 2017 when the stock was trading at higher levels. Overall, this looks like an attractive area to fight this downtrend since last Summer as numerous factors support buying dips near current levels. Upside lies near $52.50 which represents the lows made near the US Election. Structurally this represents the first meaningful area to consider lightening up on a bounce. Weekly closes under $41, while not immediately expected, would postpone the rally, allowing for a likely test of late 2013 lows near $38.
Hormel Foods Corp (HRL- $34.93) HRL looks appealing to buy after its late year breakout in 2017 was consolidated, and has now begun to turn up yet again. The stock has been one of the top performers within the Staples complex in the last six months, returning 10.17% making it seventh-best out of the 34 companies that represent the Consumer Staples index. Its appeal technically comes from the fact that its symmetrical downtrend that lasted nearly two years was exceeded last November, and helped momentum to begun turning up sharply. Last week's weekly close finished the highest since mid-January, and bodes well for a continued rally up to test and exceed late December 2017 highs near $38. This represents a 50% retracement of the decline from 2016 while additional technical targets lie a bit higher near $39.62, and then $41.95. Overall, one should consider HRL at current levels, while using any weakness back down to $32.50 to buy dips. Only a weekly close back under $31.71 would negate this bullish pattern, and for now, looks unlikely right away.