July 2, 2018
S&P 500 SPDR ETF Trust- SPY
268.49, 266.20, 263 Support
273.66, 276.58, 279.48, 280.41 Resistance
The 2nd quarter,while positive, came to a close with a whimper and S&P hourly charts put this recent churning into perspective. Key areas are thought to lie at 2747 and also near 2770, while on the downside, holding last week's lows will be absolutely vital in hoping that an early month bounce can get underway. Regardless of whether it happens later in the week, or in the weeks ahead, any break of 2693 at this point, structurally for S&P futures, turns the trend even more negative and could bring about acceleration. Charts of XLF, XLK, XLI, TRAN, NDX, DJIA should all be watched along with SPX for evidence of weakness under last week's lows. This would be the signal that a selloff into mid-month happens, and no bounce until thereafter.
Summary: Equities finished the week, month and quarter in an ugly fashion last Friday, selling off sharply in the final hour to bring the month's returns back to negative territory. The DJIA's -1.48% returns for June were nearly in line with its historical averages going back since 1950, and as we've discussed here, June has been seasonally the worst performing month of all 12 in Mid-term election years. As for the year as a whole, US indices remain fairly mixed, and we've seen fractional gains (+1.67%) for the SPX, a more robust +8.79% for the NASDAQ, while the DJIA is lower by 1.81%. While Tech gains have been impressive, there seems to be some recent evidence of this reversing course and Tech starting to reverse back lower to join some of the other sectors, not the others rising to join Tech as many expected. Elsewhere, Bond yields have shown increasing signs of rolling over in recent weeks, while the US Dollar index has proven incredibly resilient. Overall as we enter the month of July, trends have not yet stabilized sufficiently to think markets have the "All Clear" to begin moving back to new highs. Trends, and momentum remain bearish from mid-June, with the SPX, DJIA and NASDAQ having broken their two-month uptrend. Many broader gauges of US Stocks, like the NY Composite, has been languishing in sideways consolidation since the early part of February and despite the trade war heating up, the FOMC hiking rates while stressing a robust growing economy and earnings data coming in fairly strong, equities have largely gone nowhere, to the consternation of both Bulls and Bears.
Overall, there are reasons to be optimistic about early July, for three distinct reasons: First, Sentiment has begun to turn more negative, as per polls like AAII, Investors intelligence which have all contracted of late. Additionally, we see the Total Put/call ratio spiked north of 1.2 last week which on a monthly close, represented the highest close for the Total Put/call ratio since 2011. So investors seem to be fearing the worst with regards to possible Trade tension and the resulting implications. Second, the early part of the month for the last four months, has been bullish, and from a cyclical standpoint, we've seen markets bottom out into end of month, while trade higher to peak mid-month. Until this changes, it's thought to potentially happen again in July which would make this coming shortened holiday week positive, along with potentially the following. Third, Sectors like Transportation, Industrials, Materials and Technology are all down near initial support and have begun to show evidence of trend exhaustion on this June decline. Thus, while trends are certainly bearish over the last couple weeks, there're a few things that support the idea of a bounce, based primarily on stabilization within this decline after sentiment has grown more negative and markets have reached early month positive seasonality ahead of a major US Holiday. However, this will have to be watched carefully, as any break below last week's lows in Technology ETFs and Stock indices would immediately paint a more negative picture for downside acceleration into mid-month, and rallies would be postponed..
Of the 10 reasons listed back on 6/18/18 that were concerning about the market and had warned of a potential pullback, a number of these remain valid concerns and have not been alleviated. I'll list these below with a short reply
-Intermarket divergence- SPX, DJIA remain well below this year's highs, and now NASDAQ has shown signs of rolling over
-Price divergence with many world markets- While the NASDAQ rose to new highs into mid-June, China's indices have been poor enough to push these into what the media would define as "bear market territory" while most of Europe peaked out in late January and also May and well below these peaks.
-Lack of relative strength/weaker price action out of Financials and Technology (Financials was down -1.01% for the month of June, while Technology just barely eked out gains, +0.35%, but trailed seven other sectors) Financials trends have worsened substantially in the last two weeks, with intermediate-term trend breaks in KRE, KBE, while the XLF made the lowest monthly close since last September, 2017. As a reminder, these two sectors make up more than 40% of the SPX
-Cycles- The thoughts of a mid-June peak proved correct, and now looking at the month of July the key timeframe seems to focus on July 11-13 and then late Month, 7/27-8/2, which both could be important areas for trend change.
-Seasonality- Even though we're now past the bearish month of June, this is a concern typically for markets between now and October, particularly when momentum is negative and markets have been struggling.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Early week Bullish, but reclaiming 2747 likely only provides strength to 2770, while under 2693 would be an immediate negative, suggesting further downward pressure. Difficult to have too much conviction yet on the long side, but heading into the new month, last Friday's downdraft should allow for a good risk/reward long with tight stops near 2693, so risking 28 points to potentially make 50. It's thought that breadth and volume should be suspect on any rally in the next couple weeks, and that indices still have an above-average chance of turning down into late July. However, for this week, a positive stance initially looks correct given some of the recent stabilization attempts while sentiment has shown a few signs of worsening.
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. 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.
Five attractive risk/reward ideas are examined through ETF's along with targets, stops and brief writeups. Given the ongoing bearish trend from mid-June, this necessitates a tactical hit-and-run appraoch with tight stops and not emphasizing any timeframe longer than 4-6 weeks. When trends start to improve, we'll take a look at some longer dated ideas.
Gold (Spot Gold - $1251) Target 1370 initially and above leading to 1550- Stop under 1235, representing 5 ticks under last December 2017 lows Gold has reached an attractive area for buying dips after selling off down to near 1240, which lies up near December 2017 lows. Near-term momentum has gotten oversold while sentiment has contracted substantially in Gold in the last couple months. The metal has pulled back over 7% in the last couple months, losing more than 100 points from its important resistance highs near 1370. Counter-trend buy signals based on Demark exhaustion are now present after this recent selloff and should be important in helping this downtrend cease and begin to stabilize and eventually reverse course. Seasonality is also turning favorable for Gold, and the time between July and October has historically been the best time of the year to own the Metal, expecting outperformance. While a turn back lower in the US Dollar is important to precious metals finally turning back higher, the combination of near-term oversold conditions, negative sentiment, counter-trend buys and positive seasonality bode well for Gold to turn higher. Buying Gold at current levels with a tight top at 1235 while expecting a rally back to 1370 makes for a very good risk/reward.
Emerging Markets - Ishares MSCEI Emerging Markets ETF (EEM- $43.33) Target initially $45.12, while a move over this on a weekly close should begin the start of a larger bounce to the high $40's. Stop a $41.90. EEM has shown its first signs of turning back higher after a fairly severe pullback over the last few weeks which violated key support which began back in early February. Counter-trend signs of exhaustion are present, while prices have just exceeded the downtrend from mid-May. Movement up near $45 looks likely based on last Friday's positive close, while a turn in the US Dollar back down should help Emerging markets to stage a decent bounce at a time that sentiment has turned quite negative
Pharmaceuticals ETF- SPDR S&P (XPH- $43.01) Upside target initially $47.50, then $50, Stops under 41.25. While Healthcare has gradually begin to improve, much of this has taken place in the Medical Devices and Biotech while the Pharma stocks have largely lagged of late. However, stocks like MRK, LLY, PFE have begun to show signs of strengthening in recent weeks as part of bullish bases. The rally from early May has pulled back in the last couple weeks and given back roughly 1/3 of the prior rally. Yet this group likely should perform better as Equities show some evidence of tiring, and should be overweighted for a pushback up to the mid-to-high $40's. Stops on longs should be placed under $41.25. Bottom line, it appears that this pullback has created an attractive risk/reward opportunity to buy dips for a push back to test January highs.
Agriculture (DB Agriculture ETF- DBA- $18.03) Target initially $19.25 and press longs above 19.54 for a move to $20.95-$21.05. Stops at $17.50 Agriculture looks attractive here after a very severe correction throughout the month of June, a month that seasonally has proven to be quite negative for the Grains. Signs last December of the grains trying to bottom out was confirmed in January with a very sharp move higher and breakout in Grains like Soybeans, but yet the last few weeks have given back all of these recent gains. However, the turn back higher late last week managed to breakout of the downtrend from late May, and the move to multi-day highs should allow DBA to continue higher with targets near 19.25 initially and eventual targets up near $21.
Short IWM- Russell 2k (IWM-$163.77) Target of 160 initially with the potential for 153 into late July before this bottoms. Stops at 166.52 for half and balance at 169.20. Last week's pullback in IWM broke the trend going back since early May and given the extent to which this had gotten extended above its longer-term trend, it's likely that we see weakness in the weeks ahead with initial targets down near 160 but the potential for a larger selloff to 153 before this bottoms. Russell 2000 traditionally has performed quite poorly during the month of July in mid-Term election years, the worst month of all 12 months. So while the uptrend is still very much intact for IWM, a pullback looks possible for July before Small-caps continue their outperformance. Overall, given bearish seasonal tendencies coupled with near-term overbought conditions, it looks right to bet against Small caps in the weeks ahead, thinking IWM should weaken further from a technical perspective.