August 20, 2018
S&P 500 SPDR ETF Trust- SPY
283.59, 281.62, 280.16, 279, 278.19, 2760276.50 Support
286.01, 286.62, 287.01, 287.50 Resistance
Part 2 of last week's Divergence comments center on the extent to which the US and the rest of the world have diverged. This chart shows the S&P having rallied steady since early April to within striking distance of highs. However, the MSCI "All-World" Ex-US index has plunged to the lowest levels of the year as of last week, hitting levels it hasn't seen since last Summer. This is somewhat problematic for the bull case heading into the last couple weeks of a very seasonally challenging month along with the worst seasonal month of the year, September. While many expect profits to remain steady, the FOMC to hike rates and economic expansion continuing with stocks rising into year-end, this graph paints a very different and more troublesome picture. Either Europe and Asia rebound sharply, or the US could begin to narrow this gap by turning down. While intermediate-term trends are very much intact for the US, the next 4-6 weeks look to be problematic for the Bulls. The defensive posturing tends to be an early warning sign, and now FANG stocks have struggled lately, which is something to keep a close eye on. This week's Report discusses the Defensive trade in further detail, highlighting some of the better REITS to consider, along with some index charts to make sense of the S&P and Global equity indices.
Summary: US markets are growing closer to experiencing weakness but heading into the final two weeks of August, it remains difficult to have nearly as much confidence about avoiding US stocks when comparing prices to the rest of the globe. The early week pullback in US stocks proved incredibly short-lived, with US holding key support near 2800 before moving higher. Despite breadth and momentum rolling over, US equities have been able to successfully defy gravity despite all the divergences. Defensive sectors like Utilities, and REITS showed strong outperformance last week, while Technology demonstrated additional evidence of trying to rollover. Meanwhile, China's Shanghai composite hit the lowest levels since 2014 while Europe also fell on hard times, as the STOXX50 moved to levels which haven't been seen on a weekly close since late March. Clearly a much different picture than has been seen nearly all year in Equities, and indices going in sharply different directions. Elsewhere, the Dollar showed a few signs of trying to turn lower, while Gold and Crude managed to bounce fractionally into end of week after having experienced a very difficult August thus far. To close out the week, the CBOE Implied Volatility index, or VIX, plunged down below 13 to violate the lows of the last four days, in a pattern many would describe as a Head and Shoulders top on hourly charts.
While factors like Declining momentum and poor breadth were important most of the week (outside of last Thursday), other warning signs included this Divergence highlighted above. Seasonality tends to suggest the period between now and end of month is a negative and indices have just passed the most bullish part of August (the 8-13th trading day) while the rest of the month tends to be fairly negative in mid-term Election year Augusts (Particularly in the NASDAQ which are down nearly 1.9% or the 2nd to worst month of the year) Furthermore, as has been mentioned, the NY FANG index (NYFANG-Bloomberg) peaked out in June and has trended lower, as has the SOX, the Philly Semiconductor index which often can serve as a leading indicator. Bottom line, the MSCI "All-World" Ex-USA index falling to the lowest levels of the year seems to NOT be a positive, and eventually should lead the US to join suit. Heading into this coming week, that might still prove premature, but signs of Technology waning further were present late last week, and this sector seems to the glue that's had the market together for now. When Tech finally starts to turn down (instead of just wobbling and underperforming) one can make a stronger negative case for Equities in the short run. Specifically for early this week, a retest of August 7 highs looks likely, but would cause the first Demark Sequential and Combo exhaustion signals to appear in unison for the first time this year. Upside looks limited given SPX's push to test upper channel resistance highs in a manner which suggests a possible completion to a five-wave advance from the middle part of last week. For this week, early week strength to test and exceed early August highs should be seen as an opportunity to pair down longs into this advance.
The following support levels, specifically are important and should be watched carefully if indices begin to pullback and test/break July and/or June lows in unison throughout September.
SPY- 280.16, 276, 268.49
SPX- 2796-2800, 2755-2760, 2691
DJIA- 24965, 24,000
NASDAQ 100- 7158, 6950
Nasdaq Composite- 7604, 7419
While an upcoming peak is anticipated for stocks, these reasons stand out as reasons why its Impossible to be that negative on an intermediate-term basis yet, and near-term pullbacks would represent buying opportunities when they arrive.:
- "All Stocks" Advance/Decline line still within striking distance of new highs (New highs in early August)
- No evidence of Credit trouble. If anything, high yield has remained fairly calm over the last few weeks. High Yield typically will turn down in advance of Stocks
- Sentiment could turn bearish pretty quickly given the Tariff threats and now EM stress as a 1-2 punch. Thus far, the Turkish situation seems to be idiosyncratic and not as source of systemic risk.
- Long-term trends are still in good shape for most, if not all US Equity indices and sectors, and no real intermediate-term trend breaks
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Leaning Bearish for the week, but expecting that S&P likely challenges early August highs Monday or Tuesday before a late week pullback. Upside should be contained at 2860-75 while initial warning levels on the downside lie at 2833, and then 2821. Under 2821 should lead to a test and probable break of the August 15 intra-day lows near 2800. Key support to look at buying on pullbacks under 2800 lies down at 2750-5. Monday should allow for a final push higher as part of the wave structure since last Wednesday's lows, and it's expected that SPX should test, if not briefly exceed 2863.48, the intra-day highs from August 7, before stalling out and turning lower. Note, to have conviction that a bear trend has begun, prices need to break 2821 on a close, but it's thought that a bullish stance in the last 2 weeks of August should be a poor risk/reward and difficult to monetize given the rampant sector rotation.
Intermediate-term (3-5 months)- Bullish- While there remain ample reasons for concerns in the short run, now that markets have entered August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again. Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor. The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance. Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive. Overall, the 2 month bias is more negative for a 3-5% drop. However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength. so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.
SPX, 10-Year Yields, REIT ETF (VNQ) and 5 Technically Attractive REITS to consider
S&P 500 Index (SPX- 2850.13) Trend bullish, but prices starting to "wobble" a bitwith prices up near highs of this trend channel. The recent price action increasingly suggests that this rally might require some greater consolidation, particularly heading into a rough stretch of market seasonality. Overall, the pattern in SPX remains positive technically and as daily charts show, has been trading within this trend channel for the last few months ever since stocks bottomed in early February. While the trend itself has been positive in recent months, momentum has begun to diverge as a result of this recent failure to make headway above the upper side of the channel, and failed to follow prices when S&P moved up to make its high into August 7/8. While not specifically bearish trend-wise until prices get down under 2800 (with larger support 2750) the upside and risk/reward for stocks appears increasingly sub-par. The risk of a reversal back lower in the next few weeks looks to be very real, and falloff in Technology in particular could be the culprit for at least a short-term decline. This daily SPX chart should be watched carefully for evidence of failure while upside should be limited over the next couple weeks into September.
10-Year Treasury Note Yield (TNX-2.86%) Yields have pulled back in recent weeks to key areas of near-term support just above 2.82%. While a counter-trend bounce is likely, potentially into late August/early September, the long-term chart has grown more top-like given the extent of the recent yield decline, resembling a potential large eight-month Head and Shoulders pattern. The positioning of the non-commercial traders right now adds some credibility to this pattern, as CFTC data shows shorts continuing to build to new records in the last couple weeks (-698k as of 8/14/18) This ongoing "building" of shorts by traders will likely result in this pattern breaking down for yields, potentially in the month of September, as the markets is anticipating another round of tightening in next month's meeting. However, given that long rates have not moved up as anticipated, but are threatening a larger breakdown, it should still pay to favor defensive sectors, and among these, the Real Estate Investment Trusts, which is the focus of this week's Weekly Technical Perspective. Overall, breaks of 2.82 would argue for a quick move down to 2.73, but would result in a larger yield decline before any turn back higher. Note on daily 10-year Yield charts that momentum failed to match the yield spike into May and yields have subsequently made a much lower highs into late july before turning down sharply over the last couple weeks. Technically one should use any minor lift in yields to consider buying Treasuries for an upcoming yield break in the weeks/months ahead, and any support violation should keep yield-sensitive sectors like the REITS as outperformers.
Vanguard Real Estate ETF (VNQ- $84.06) (DAILY CHART) REITS look attractive technically given the ability of prices to have pushed up through the recent one-month "Cup and Handle" pattern started in early July. Further gains look likely with targets up near $86 initially which marked the highs for most of 2017. Daily charts show last Friday's breakout, along with the move in VNQ back over the prior lows that were in place for most of 2017 before this broke down early this year. The act of reclaiming these lows is thought to be constructive in helping VNQ to outperform during an upcoming challenging time for US stocks in September. Dips back down to 83-83.50 are thought to be attractive to buy into after a sharp four days of gains that led to this breakout. Conversely any break of $81.38, last Monday's lows, would postpone any larger rally for now.
Vanguard REIT ETF (VNQ-$84.06) WEEKLY chart- Bullish on break of two different trends back higher. This weekly REIT chart presents a different view from what was seen above and shows the flattening out of this uptrend since bottoming out back in 2009. The minor support trendline representing the flatter pace of advance from 2011 was undercut briefly into this year, but the last few weeks have helped to regain this uptrend, along with exceeding another important trend from 2016 highs. Given that yields are on the precipice of a potential breakdown while defensive stocks have improved, VNQ looks likely to rally up to challenge and exceed 2017 highs near $86 and could make a bit more headway to close in on 2016 highs before any peak occurs. The trend from early 2018 remains positive and this recent progress is thought to be bullish for this sector, and an area to consider for the next 6-8 weeks which might bring about increased market volatility.
VNQ relative to SPX- Bullish near-term on the ability to break the downtrend from mid-2016. This daily ratio chart shows the recent progress in the REITS which have made this sector one to favor technically at a time when many are still focused on Technology. The steady decline last year relative to the market coincided with a period of rising rates when the 10-Year bottomed out at 2% and steadily rose to near 3% into early this year. Now that yields have begun to weaken back to key support and form a potentially larger topping pattern for the next few months, it's thought that REITS should continue to outperform, both from a positive structural standpoint, but also relatively speaking at a time when yield trends have been largely rangebound and more negative than positive in recent months. If when this mild uptrend from early this year gives way, it will be important to address. At present, between now and October, this looks like a sector to favor.
Top Technical Long Ideas among the REITS
Prologis Inc. (PLD-$67.43) Bullish with last week's rally back to new highs breaking out of the consolidation which has been ongoing for PLD since last November as part of the uptrend from early 2016. Interestingly enough, after last November managed to exceed 2007 highs by a small margin, this required some consolidation which has now lasted eight months. Last week's breakout, however, suggests that PLD is exiting this range and starting a new uptrend. This is compelling technically not just for the act of exceeding a prior high, but also that PLD is also making a more meaningful move above the highs from 2007. One should position long in PLD, using any dips to buy, with resistance initially found in the low $70s, but with intermediate-term technical targets up near $80.
Brookfield Asset Management (BAM- $43.98) Bullish, and while minor resistance lies near December 2017 highs, just above current levels, the act of BAM having begun to accelerate at a quicker pace in recent months bodes well for this to trade up to the high $40's without much trouble. The act of surpassing 2015 highs helped BAM show some great momentum at a time which was generally poor for most REITS. The consolidation between December '17 into February of this year proved brief in scope and duration and failed to violate any real support. Pullbacks managed to hold at the former peaks which look to have now served as support to the decline. The last six months have seen BAM rally back to test the former highs and should pave the way for an upcoming breakout to follow the move seen in VNQ last week. Overall the long-term symmetrical nature of this advance which has grown steeper in ascent in the last 12 months combined with it trading right at all-time highs makes it attractive to own for further gains in the weeks ahead. Pullbacks to $41-42 should offer a better risk/reward buying opportunity for strength into the high $40's.
CubeSmart (CUBE-$31.75) Bullish, and CUBE's pullback over the last month now looks to be complete and should offer a push higher to test and exceed recent highs made near $33.18. Looking back at its weekly chart over the last dozen years, CUBE has carved out a very bullish technical pattern with its ability to exceed 2007 highs before consolidating since mid-2016. This former high following the peak in April 2016 has already been tested once into early July, and last week's gains to turn back up sharply to new multi-week highs signify the likely start of gains which ultimately should break out to new high territory in the next 6-8 weeks. The act of pulling back from early July has helped to alleviate the near-term overbought conditions, making for an excellent risk/reward at a time when REITS have begun to outperform given the recent downdraft in long rates. Overall, CUBE is attractive to buy at current levels technically and pullbacks in the week ahead would offer a better suited risk/reward for buying with targets in the high $30's.
Apartment Investment & Management (AIV- $43.91) Bullish for test of highs- Given the recent snapback in Apartment REITS over the last six months, AIV looks appealing to own for a move back to test and exceed all-time highs made back in 2016. The structure from 2007 to 2016 showed a very steep decline followed up by a slow rally back to retest those former all-time highs, which happened nearly 10 years after initial highs were made. The subsequent two years gave way to consolidation within striking distance of these former all-time highs, which now shows evidence of possibly being complete. The rally over the last few months have proven strong enough to help monthly RSI regain 50, and MACD has rapidly been converging towards the signal line. While some might view the break of the eight year uptrend as being bearish, the fact that AIV has managed to recoup the former lows that were breached in the low 40s is thought to be a real positive, structurally speaking. Any push back to test $45-$47.50 will help this recent two-year consolidation take the shape of a "Handle" of a large Cup and Handle from the 2007 peaks. Therefore, this looks attractive to own now as this makes its way back to former all-time highs. While $45-$47.50 should offer at least some resistance, the long-term structure of this pattern is excellent and will grow more bullish on the ability of AIV to exceed $47.50 on a weekly close. Only a pullback down under $40.50 postpones this move, and $37.97 would be an important area for risk that can't be breached without thinking this scenario is wrong. At present, this should advance to test all-time highs technically in the weeks ahead.
SL Green Realty Corp (SLG- $105.86) Bullish given SLG's ability to exceed intermediate-term trendline reisstance that had held this REIT in a downtrend since peaking out in 2015. While progress back towards all-time highs will take time, the fact that this breakout just happened within the last couple months of a decline that had been ongoing for the last three years, SLG should show some above-average gains between now and October at a time when REITS have begun to outperform. This has added attractiveness for those that prefer buying well off all-time highs, as SLG trades over 20% off all-time highs made three years ago, yet has begun to show some excellent signs of momentum acceleration in recent weeks. Initial targets come in near $108, the 50% area of SLG's entire decline from 2015, while above that should pave the way for a test of $118-$120 near late 2015/mid-2016 highs. Pullbacks in the days/weeks to come near $102-$104 should offer an even better risk/reward, while only a decline under $97 negates this pattern and would result in additional weakness. At present, this looks like a great mean reversion candidate at a time when this group has begun to pick up steam.