July 9, 2018
S&P 500 SPDR ETF Trust- SPY
271, 268.49, 266.90, 266.20, 263 Support
276.58, 278.73, 279.48, 280.41 Resistance
The NY Composite's daily chart shows the extent to which US Equities have largely gone nowhere in the last five months, despite many concentrating on FANG stocks moving back to new highs and overall market resilience in the face of Tariffs. this Daily chart shows the price as of last week's 5th day of the month, with closing prices ranging from 12493-12680. So while the trends have been sporadic and given way to sector rotation, we've largely seen very little net change in US Equities and this index, the NY Composite, contains all NYSE listed stocks and a much more broad-based index to study. Note that last Friday's gains did help prices make some minor progress after prior stalling out was more suggestive of weakness given the trendline from early April being undercut. It's thought that last Friday's gains should lead a bit higher near-term, while any reversal back down which erases Wed-Friday gains would be thought to turn trends immediately bearish.
Summary: Equities finished the week not unlike what we've witnessed now for the last few months, with Gains, but now are approaching a time that might be important at the end of this coming week in providing a peak again, not unlike what we've seen also in recent months as early month gains give way to mid-month peaks and then back month weakness. Overall the gains on both Thursday and Friday seemed like true positive near-term developments after about eight straight days of range-bound trading. Breadth expanded in ways markets hadn't shown in at least a few weeks time, while sector indices like XLI, TRAN, XLY, XLV, XLB all made short-term breakouts, as did the NY Composite. So short-term momentum and breadth improved last week, despite this being a shortened holiday week with below average volume. The threat of Tariffs last week had cast a thick cloud of uncertainty over markets, and the consensus seemed to be that stocks would selloff sharply after tariffs were announced, as the uncertainty would certainly be heightened. Well, we saw the deadline come and pass with no meaningful "pullout" from this threat, but yet stocks advanced, and managed to do so on above-average breadth. This was one of our key reasons to be optimistic going into this past week. Sentiment had shown signs of getting too skittish on the possibility of a selloff. AAII, Investors intelligence polls contracted, while the Total Put/call all rose early in the week. The second reason for optimism this past week revolved around the thinking that pullbacks to former important lows for TRAN, XLI, XLB would all hold and likely attempt to bounce. this happened as well. and Third, as discussed, equities obeyed the early month bullish seasonality which had been seen before. So where do the problems lie?
Unfortunately the negative momentum on weekly charts remains intact, while we're still witnessing pretty meaningfully wide divergences between US and the rest of the world. Additionally, sectors like Tech and Financials remain broken technically after recent deterioration. These two sectors along with industrials and Materials were all down over 2.50% for the month of June, and have not rebounded sufficiently, (despite Thursday andFriday gains last week) to turn technical trends back to positive. One of the key worries is the extent to which bond yields have plunged in recent weeks with the 30-year having arguably just broken down out of a month-long head and Shoulders pattern, which should make rates move lower a bit more quickly. The yield curve has flattened out substantially while credit has wobbled a bit of late, and all of these have combined to put pressure on Financials in a way where technical trends still haven't recovered after the June weakness. So Technology and Financials remain trending down, while a few other sectors have attempted small bounces from initial support. Overall, while the last couple trading days were a technical positive, it's tough putting too much stock in this as something which will lead back to new highs. I still expect a difficult trading environment in the weeks ahead, so gains should be used to
Where to from here? 2 Distinct scenarios are possible given many of the disparities and divergences: First, equities move up into July 12-13 before reversing course sharply and selling off into July 27-August 2. Second, Equities could show the opposite, and give back a couple days after recent gains before moving up in the back half of July before making a larger peak come end of month in this same time frame. The end of July has real importance given that it lies 180 calendar days from the former peak in late January, cyclically, It also lies 45 days away from the mid-June peaks and 135 days from the mid-March highs. (Those that follow my work know how much importance I put in confluence of various timeframes from former peaks and troughs.) Bottom line, I view July 11-13 as being important, along with July 26-29, and would use strong moves into these time zones to buy or sell accordingly, expecting a reversal.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish given S&P's ability to recapture 2747 and get over this level which had been troublesome for stocks since late June. Any near-term weakness from 2763-5 should likely hold 2747, before attempting to push higher again. In the event that 2747 does not hold on pullbacks, this would be a minor warning, with a larger warning on any weakness down under 2731. For now and for the remainder of July, it looks right to have a very selective stance on what to buy and own, and utilizing tight stops is key, given a market of many moving pieces and not all of them up.
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.
LONG/SHORT IDEAS for the week:
Countertrend Longs Trend following Longs Attractive Technical Shorts
1) DBA- Grains XLV- Healthcare KBE- Banks ETF
2) EEM- Emerging mkts ETF TLT- 20-yr Lehman Bond ETF SMH- Semiconductor ETF
3) FXI- China ETF ACN- Accenture UUP- Invesco DB Bullish USD
4) EURUSD- Euro/USD LLY- Eli Lilly
5) Gold- GC_F, or GLD, IAU MDCO- Medicines Co
Five Key charts are shown that illustrate some of the recent technical developments of this past week
S&P's move above 2747 was constructive, but likely will need to be consolidatedTuesday/Wednesday before further gains can happen. S&P's move above 2747 was a minor positive for US Equities last week, as this coincided with similar moves from XLI, TRAN, and minor breakouts in XLY and XLV. However, now prices lie near the next make-or-Break area at the minor trendline from mid-June. What's troubling however is the bond market seems to not be paying attention, as Yields broke down in the 30year Long bond, cracking key support that should allow for another leg lower in yields which has already caused some concern given the extent that the flattening yield curve has raised alarms about upcoming inversion. Additionally, Financials certainly will be hard pressed to show proper gains if yield and yield curve are pulling back, while Technology already looks to have peaked in mid-June. Breadth did expand favorably both Thursday and Friday of last week, at amounts which hadn't been seen on this recent bounce from late June. Yet holding these gains will be important in the week ahead, heading into a cyclically important time at mid-month. The sector gains in the oversold sectors which had stabilized, like XLB, XLI and TRAN are vital to hold and produce further sharp followthrough next week. Any failure which results in Tech and Financials turning down and S&P reversing its gains to pullback back below 2747 would be the first warning, while under 2731 represents greater proof that this bounce was purely a counter-trend move and should begin another leg down into late July.
Bond yield weakness likely to persist- Bond yields have been pulling back sharply in recent days and last week witnessed a breakdown on Friday of the two prior lows in this reversal pattern for Treasury yields which has been ongoing most of the year. The 30-year yield's close under 2.95 is thought to put further downward pressure on yields and 30Year Treasury yields could fall to near 2.75-2.80% before finding much stabilization. 10 Year Yields also look vulnerable heading into this week, and could drift lower to near 2.75-7%, right near the lows from late May before stabilizing. Financials likely will continue to underperform in this environment and it's right to avoid buying into the Banks on this weakness given the ongoing pullback, which doesn't look complete, for XLF, nor KBE, nor KRE.
Healthcare Breakout has begun to accelerate- Favor this group for Outperformance- Healthcare's rise should be revisited as the Weekly technical Perspective from 6/18 highlighted this group has having an above average chance of outperforming. Last week this group was the best performing group of all 11 major S&P GICS Level 1 groups, higher by 3%. The charts have improved relatively speaking as well as XLV vs SPX on ratio charts has furthered its recent breakout by exceeding June highs, and as the chart shows, this breaks out above the entire downtrend for the group since last September. Biotechs had kicked off the strength a few weeks ago along with Medical device stocks, and many of the downtrodden Biotechs which had underperformed in in the last 12 months have suddenly shown sharp rallies off the lows- Regeneron, Vertex, Alexion, Gilead, Celgene, and even Non-Biotech laggards like Allergan and CVS have shown improvement. Meanwhile the Pharma space looks attractive as well with stocks like Pfizer, Merck, Eli Lilly all setting up with bullish patterns which bode well for these to outperform even further.
Russell 2000 vs SPX- Time to Sell Small-caps? Getting close, but arguably still not quite there Still looks early to sell Small caps given the ratio of RTY to SPX having broken out above the longer-term consolidation trend from late 2013. Just in the last couple weeks we've seen this ratio exceed early 2017 peaks, which is a definite technical positive. Additionally, counter-trend Demark exhaustion remains at least 2-3 weeks away from forming any type of peak. Therefore, while July has had seasonal headwinds in Small-caps historically, we'll need to see more weakness to think that this area underperforms. Near-term, IWM has shown a few signs of faltering on absolute terms, but does not yet look like a relative short.
Developed Markets vs Emerging- Despite the recent stabilization in EM, it still looks early to fade the underperformance in EM, and Developed market strength looks to accelerate- The relative chart of MXWO vs MXEF still looks to extend in the short run, given the breakout of this pattern in the last couple years. This pattern is not unlike the chart above of Small-caps to large and for near-term, it shows that underperformance is still likely for Emerging markets, even if EEM bottoms out and makes an absolute rally. Most of Developed markets should still show better than average strength vs Emerging, and Demark indicators are also premature in calling any sort of relative top in this relationship.