July 16, 2018
S&P 500 SPDR ETF Trust- SPY
275.84, 274, 272, 268.49, 266.90 Support
279.93-280, 280.41-280.75, 281-281.5 Resistance
The S&P might look to some to have broken out last week, but important to see the degree to which momentum has begun to diverge with price, not joining on this push to new monthly highs. Counter-trend indicators of exhaustion are also present, and sentiment has taken a big step higher in the last couple weeks, as tariff escalation has not led to any dismantling in Equityland. Given the price march into what I believe to be an important time cycle-wise early in the week, my feeling is it's right to take profits on this move, expecting prices to stall out and turn lower. Key areas for the S&P lies at 2805-10, which aligns with quite a few Gann's Square of Nine targets from prior lows in June, February and early May. Financials meanwhile failed to get any meaningful lift from initial earnings last Friday, and broke down relatively yet again vs SPX which looks to be an additional near-term Headwind. The strength in Treasuries in not selling off to coincide with the Equity move along with Technology reaching key upside levels also looks important and could lead both yield and Tech to also turn down this coming week. Watch for signs of 2770 being broken, which would lead to a more severe pullback down to 2747-50 initially, but then likely 2700 area.
Summary: The Equity trend has been bullish for the last two weeks now as part of a larger consolidation that is ongoing since the January peaks. While the SPX has structurally improved with its ability to get over June highs, Equities have begun to show evidence of slowing momentum and breadth that likely can produce the same kind of trend reversal seen back in Mid-March, Mid-April, mid-May and Mid-June. Sector non-participation and divergences between US indices and global indices are rampant and show this market to be far different than what many might feel upon just looking at "FAANG stocks like FB, AMZN, AAPL, NFLX, or GOOGL. It's thought that this week brings about a peak in the near-term trend, and while it might prove minor initially, a selective, more defensive stance looks proper heading into this time. Bond yields are thought to move lower this week, and the Dollar looks to have just a bit more upside before turning lower into August which should bring about some relief for the commodity trade.
Looking back, Equities finished the week with a string of two consecutive days higher that allowed SPX to close above the mid-June and March closing highs and the highest levels since early February. After the first seven of nine "UP" days, equities have now started the quarter with gains of over 3%, as indices managed to bottom on schedule into late June and turn back higher. Healthcare, Technology, Discretionary have been the leaders this month, each with gains of greater than 3%. However, when looking back over the last month, it's been a much different story. Utilities, Real Estate, Staples and Telecom have all outperformed in the rolling 30-day period, a much more defensive time than Equity performance would have us believe. Additionally, two of the key "risk-on" groups like Financials and Industrials, have both shown losses of greater than 2.5% during this time. While it's thought that Equity indices "ignoring" the volatlity inducing news such as tariff escalation is a positive, the lack of broad-based participation in this rally seems to be a larger concern which could serve to hinder Equity progress in the weeks ahead and should be addressed. I'll list what I believe are the five biggest near-term concerns at this stage of the rally (Note, given that long-term trends are intact, these deal purely with short-term concerns, and until the long-term trends give way
The 5 Warning signs that a pullback could get underway this week
1) Breadth & Momentum slowdown- This is always an important factor to watch during rallies, as the lack of strong breadth normally can warn that a rally is tiring, despite prices being "up" over any given time period. The Advance/Decline peaked out on or around July 9, and McClellan's Summation index (Smoothed breadth indicator) made its highest peak for the last month in mid-June. The last few days of trading last week saw breadth nearly flat, barely more stocks rising than falling, which is a far cry from what happened in early July at most recent lows. Momentum meanwhile has begun to diverge negatively on 4-hour charts and the latest push up to new highs last week was not accompanied by Momentum. This is an important and negative development.
2) Sector Non Participation- ( Deterioration in Financials while Technology and Discretionary shows upside exhaustion.) While many realize SPX and NYA are trading well below their January peaks, it's important to see how the lift above June highs in SPX really hasn't been followed by many of the leading sectors. When looking at the five major sectors by SPX weight, Tech, Healthcare, Financials, Discretionary and Industrials, these comprise over 3/4 of the market currently. However, Financials are now trading nearly 5% below June peaks and Industrials also are 4% below levels hit in mid-June. Technology meanwhile and Consumer Discretionary have snapped back to test or briefly get over June peaks, but yet both sectors show counter-trend signs of exhaustion that might now limit their upside. Healthcare is the true standout that shows excellent technical structure which looks to outperform further. The key message here is that one by one we're starting to see leading sectors fall by the wayside, (in this case, Industrials and Financials) so any hint of stalling in the Tech and Discretionary sectors this week would likely cause index prices to turn lower.
4) Sentiment- The Equity Put/call ratio lies in the low 60s and its 13-week moving average has been dropping since late April and lies at .61. Both Investors intelligence and AAII polls have rebounded, as might have been expected with equity rallies in the last two weeks. So trend-wise, sentiment has continued to get more and more optimistic given Equities resilience in managing all this "potentially market moving" negative News and holding up. While certainly not at extremes, the quickness with which sentiment went from bearish to bullish of late is worth mentioning, given that Financials and Industrials trends are under pressure.
5) Demark exhaustion- The daily counts on SPX, NDX, INDU all show evidence of Counter-trend exhaustion now and in the case of NDX, the first TD Sequential sell signal on daily charts since it peaked in late January. IWM got a signal back in mid-June and still lies beneath these June peaks, while intra-day charts on S&P have lined up to show the first 240 minute (4 hour chart) Sell since the lows in Late June. Historically, when these signals tend to cluster on different time frames and different equity indices, they can be importnat in producing turns.
6) Cycles- While the key 6-month 180 degree cycle from late January hits in late July, indices have now reached mid-month yet again, a period this year that's had importance given the last five months and should be watched carefully for evidence of turning down similar to recent months. Gann's Square of Nine chart pinpoints the area at 2805-2815 to have much importance for SPX in being important for a possible key area of resistance this coming week, so aside from 7/26-7/27, it's thought that the first few days of this week could cause a stallout.
Other issues such as Defensive outperformance has been ongoing for the last month, as discussed above, while most of the Developed and Emerging market world has shown far less superb performance of late. Additionally, we still see US intermarket divergence with DJIA and SPX not confirming the NDX's push back to new highs. The intermarket divergence has been an issue for most for most of the last couple months, along with divergence to overseas, as Europe and Asia are well below June highs.
With regards to the positive issues, I feel the Advance/Decline pushing back to new highs is a positive towards thinking any near-term pullback proves to be buyable and does not lead to any deterioration right now in excess of 3-5%. Additionally, the SML and MID push back to new highs also seem like intermediate-term bullish factors. Most major market peaks normally begin a pronounced period of breadth deterioration before larger peaks unfold, and we don't seem to be there, despite being nine years into this rally. However, given the momentum dropoff from late January, it's going to be unlikely that equity indices can regain that peak in momentum, and for the first time in years, we're setting up for classic intermediate-term negative divergence. Finally, the degree that sentiment has turned bearish quickly into late March, April, May and June all are factors that have limited the equity weakness, and for now are putting a floor onto any larger pullback. All in all, the longer-term trends are obviously very much intact, and a near-term pullback is expected only for now, with a chance for greater technical damage in September/October. This goes towards the thinking that the intermediate-term thesis remains bearish and prices should ultimately be lower over the next few months before turning up.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish as risk/reward has grown poor in the last couple days, with S&P up against prior highs from March and June while breadth and momentum have given warning signs at a time when indices have reflected upside exhaustion. Pullbacks to 2770 are initially important, than 2747-50 and 2700. Resistance to sell into lies at 2805-15.
Intermediate-term (3-5 months)- Bearish- Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October. While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks. Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable. Intermarket divergence is a concern for equities also at this point, with US ignoring the selling being seen globally which can only last for so long. Furthermore, intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally. This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next. For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet. Intermediate-term support to buy lies down at 2450-2550.
LONG/SHORT IDEAS for the week:
Attractive Technical Longs Attractive Technical Shorts
1) XLV- Healthcare KBE- Banks ETF
2) TLT- 20-yr Lehman Bond ETF SMH- Semiconductor ETF
3) ACN- Accenture IWM- Russell 2000
4) MRK- Merck QQQ- NASDAQ 100 ETF
5) XOP- Exploration & Production ETF EL- Estee Lauder
6) CXO- Concho Resources UAA- Under Armour inc
7) MTN- Vail Resorts DFS- Discover Financial
8) KFY- Korn/Ferry Intl SYF- Synchrony Financial
9) AAOI- Applied Optoelectronics WDAY- Workday
10) TNDM- Tandem Diabetes Care Inc BKNG- Booking Holdings
11) BAX- Baxter Intl T- AT&T
12) MDU- MDU Resources AMBA- Ambarella
13) MELI- MercadoLibre Inc VGK- STOXX 50 ETF
14) GWPH- GW Pharmaceuticals JNPR- Juniper Networks
15) APC- Anadarko Petroleum RF- Regions Financial
Five charts are shown that illustrate some of the recent technical developments that are importnat to know going into this week
XLV- Healthcare- Ongoing push higher makes this one to favor technically
Healthcare continuing to make positive strides and should still be overweighted, despite short-term market concerns. This chart of XLV has now advanced to the highest levels since January exceeding both June and March peaks. Biotech initially took the lead, but Pharma has since been playing catchup, along with a number of former laggard Biotechs which have made an above-average bounce in recent weeks. This sector still is the one to favor for the weeks and months ahead, despite Biotech ETF, XBI getting a bit ahead of itself. XLV should be able to rally up to 90 and above to test January highs before any stalling out. Key stocks to favor within this space: MRK, LLY, PFE, UNH, ABMD, REGN, ALXN, VRTX, BAX, BDX, and BSX.
Financials have pulled back to new relative lows last week, an uncomfortable development for Bulls hoping this sector would be able to carry the market higher after its recent underperformance. After earnings in C, JPM and WFC last week, the sector deteriorated relatively vs the SPX again to the lowest level since last June. This makes any sort of broad based market rally premature until this sector finds its gripping and for now, this group should be avoided, expecting additional relative and absolute weakness over the next couple weeks.
QQQ has reached an area which looks right to take profits and consider betting the other way for a pullback into late July before any real low is in place. For the first time since early April, the NASDAQ 100 ETF, QQQ is showing counter-trend exhaustion signals, similar to what it showed back in late January at the peaks. Additionally, we're seeing evidence of negative momentum divergence on this rally back to new highs, as neither RSI, nor MACD is nearly to the same degree that it was back in June when it peaked out last month. Overall, it's thought to be likely that QQQ can back off into late July similar to what happened into late June before this can turn higher. While the longer-term trend in Tech and Biotech remain very much in place, they both look to have moved a bit too far too quickly and prices lie at unattractive levels to think this rally continues.
Treasury yields remain key to Equities and for now, the trend still looks to go lower. After peaking out in mid-May coinciding with bearish positioning, Yields dropped sharply then made lower highs before pulling back again. Given how this yield trend seems to coincide with Financials performance, no thorough look at Equities is complete without examining the bond market given the degree of correlation in the last couple years with yields and stocks. IN the short run, a pullback in 10-Year Treasury yields down to near 2.76% looks likely and should lead the Yield curve and Financials lower.
Commodities have pulled back sharply in the last month largely coinciding with the strengthening in the US Dollar since early June. While it was thought that the outperformance early this year and CCI index breakout in early June were constructive, the recent downward pressure does not look complete near-term, and might coincide with weakness into late July before a turn back up into August/September. Weekly CCI chart shows the break of the Uptrend since last Summer and last week's selloff puts this exhaustion count on a 6, indicating that at least another 2-3 weeks of weakness are possible before this reaches support and turns back up. Precious metals, Energy and Grains have all been hard hit of late and the Dollar rally still looks to be in only a gradual topping process and oculd lead to a bit more strength in the next week before peaking. Therefore investors should hold off on buying this dip in the commodities space in July, and this weakness has negative implications for Materials likely also in the coming weeks. Late July likely should coincide with this group starting to stabilize and turn higher.