September 10, 2018
S&P 500 SPDR ETF Trust- SPY
283.59-284, 281.62, 280.16, 279, 278.19 Support
291.17-292, 292.40 Resistance
Summary: Last week finally saw US stocks starting to weaken to join the deterioration being seen in the rest of the world, suggesting that the long-awaited September correction is starting to get underway. However, certainly not a very powerful or convincing pullback by any means thus far. After the last 4 of 5 days of decline, S&P had barely given back 1/3 of the prior rise. Indices like the DJIA have held up admirably, with above-average strength in both Industrials and Financials. And the Growth trade is still largely holding up vs value. Yet the Technology sector specifically began to show some real selling last week, and Semiconductor stocks along with most of the "FANG" names and Hardware have weakened rather substantially in recent days. Stocks like Facebook and Netflix have both rolled over, each being down over 17% from recent highs. Yet some further pressure "should" start to take place in other sectors over the next 1-2 weeks, or else this pullback will prove very mild indeed. The fact that Financials, Healthcare, and Industrials (Transports) have held up in the last few weeks has helped to cushion the market during this rotation out of Technology. Of all the global Equity markets, Europe began to break down the most last week, violating recent monthly lows to close down at the lowest levels since March. Additionally, the Dollar's recent bounce has continued to put pressure on Emerging markets. While an oversold rally in this space looks near, it still appears to be 1-2 weeks away from where this could bottom out. For now, it's right to stick with the defensive game plan, and buying into this market still appears premature. SPX, as shown below, sold off during much of last week and lies just above initial trendline support from late June. However, bounces likely prove mild and a larger decline could be likely which takes S&P down to 2800-2807 into late September before a rally gets back underway. For now, its not wrong to think this pullback in S&P should be buyable into end of month given a lack of weakness, and US remains one of the stronger, most attractive equity markets in the world. Yet, at present, it's though to have a positive stance technically in US without having some short exposure elsewhere.
Overview: Near-term equity trends remain bearish and early to buy for anything more than a 2-3 day rally. Additional selling likely over the next 1-2 weeks before a low of any magnitude. Look to still favor more underperformance out of Europe and Asia while the US Dollar rally could make commodities weak a bit longer along with Emerging markets and Materials stocks. Transports, Financials and Industrials should begin to show evidence of peaking this week, and expect each of these groups to begin weakening to join some of the recent underperformance seen in Technology. Staples have shown some recent strength, and this push into Defensive sectors should continue for the next couple weeks and on any evidence of Long-term yields weakening, would occur even faster into late September. For now, yields have pushed up to near resistance in the 10-Year, and some backing off should be likely ahead of this month's Fed meeting. Bottom line, it looks right to expect further equity weakness, but this might prove complete by the 9/26 FOMC meeting, and one should consider buying dips into this time.
The following are important to note:
1) Financials, Industrials, Transportation have largely still held up, despite Technology weakness and is one of the key reasons why US equities have proven so resilient in the face of a larger global equity decline.
2) Technology's underperformance has NOT yet been sufficient to expect intermediate-term weakness, but it has knocked Tech out of 1st place in YTD standings, and its one-month performance heading into 9/10/18 has been negative
3) VIX managed to break the downtrend from early April, finishing at the highest levels since early July.
4) DJIA has still not joined the SPX, nor NASDAQ at new highs
5) EEM, the ETF for Emerging markets, has signaled initial downside exhaustion on Daily charts while weekly is still a bit premature.
6) Materials sector looks to be 1-2 weeks away from bottoming and should also bolster the case for an EM bounce
7) Growth still hasn't really broken down vs Value, and while most charts show this ratio to have slowed meaningfully, the uptrend remains very much intact.
8) WTI Crude weakness was unexpected last week, and Counter-trend indicators on weekly charts suggest Crude's time will prove short-lived as markets get into late September.
Bottom line, the move to the upper part of the trend channel seemed to be important this past week, causing a stallout and minor trend reversal. Excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality were already important and negative. The divergences have merely gotten bigger between US and rest of the world, while indices like DJIA still have not reached new all-time highs. Technology seems to have taken the lead in turning down, but if other sectors join suit between now and the FOMC meeting, the selloff could start to accelerate during this seasonally bearish time. Overall, one should own implied volatility, diversify, and hold off on buying dips too aggressively until this correction has played out completely.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish into 9/19-20, and potentially into 9/25-7- Negative- Look to sell rallies- Break of 2860 should lead down to 2807. Recent weakness has gotten near initial support, but bounces should prove sellable for a break under 2860 down to 2800-7 into 9/19-25 timezone before a reversal back higher occurs. Risk/reward remains poor for new longs, and one should consider adopting a defensive tone and not buying into recent pullbacks too aggressively during the month of September.
Intermediate-term (3-5 months)- Bullish- (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished 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.
10 Important charts to keep an eye on for this coming week
DJIA- No real evidence of any damage- DJIA should be highlighted for the degree of its resiliency lately, as despite the NASDAQ and S&P having showed weakness in the last week, DJIA remains within striking distance of its highs. Thus, something will have to change in this in the next couple weeks to make a stronger case for the bears, such as a break under 25500.. Lack thereof would cause a strong move back to new highs into October, putting the bull market back on track. Technically, it's thought that a 400-500 point selloff is more likely than not between now and the FOMC, but it's a break of this trend from late June which would allow for more broad-based market weakness.
Europe far weaker than US at present, and breakdown looks serious- Europe's STOXX50 index, meanwhile, looks far weaker than many US indices, and last week's break of June/July lows puts this at the lowest levels since March, and within a hair of hitting the lowest levels since early 2017. Structurally it's possible to make the case for SX5E to pullback to 3100, or nearly 200 points from here without breaking intermediate-term trends, but this recent weakness needs to be highlighted as being a real negative structurally, which has just begun to get underway as of last week. FEZ, and/or VGK are ETF's tracking Europe which might be considered as technical shorts to take advantage of this weakness, and should underperform in the month of September.
DJ Transportation Avg- Consolidating near highs is more bullish than bearish-Similar to the DJIA, it's important to point out that the DJ Transportation Avg has also not really weakened in the last couple weeks, and remains within striking distance of all-time highs. To have a bearish bent on US stocks, we'll need to see breaks below 11200 in the next 1-2 weeks. Lack thereof into late September would argue for a much stronger trend that has further to go into mid-October before any peak. Technically, it's still right to expect TRAN, along with DJIA to start to weaken by 9/13 at the latest to begin at least a 1-2 week correction, but increasingly this is being thought of as mild for the time being and could lead to additional intermediate-term strength.
Materials looks close to trying to bottom out- Following a sharp lift in the US Dollar from early March, the Materials sector turned down to break key support from late 2016 that had held as support for the last 18 months. The chart above highlights the S&P 500 Materials sector vs the SPX, which allows one to see a relative picture of how Materials are performing. Interestingly enough, the damage has been sufficient enough that relative charts are within 2-3 weeks of producing counter-trend signs of exhaustion that should allow a meaningful bounce back to occur into the month of October. This bottoming out looks likely between next week and the end of September, and Materials should be scanned for evidence of stocks that could offer an attractive risk/reward to bounce in the weeks ahead. Stocks like PPG, DWDP, ECL, look attractive to consider trying to buy into in small size here, and one would look to add on any weakness, with more stocks appearing on the hit list within the next 2-3 weeks.
XLP- Consumer Staples -Near-term Bullish, while still intermediate-term Bearish- Own/buy between now and end of September, looking to sell into strength. Given the outperformance in Food, Beverage & Tobacco and Staples Retailing last week, the Consumer Staples turned higher to end the week at the highest level in the past few weeks. Daily charts of XLP show a completed TD Buy Setup a Demark exhaustion sign that has allowed for a meaningful snapback. While the intermediate-term prospects for this sector remain poor, the next 2-3 weeks should show some outperformance in Staples as the defensive trade starts to gain more traction. Stocks like COST, CLX, HRL, SYY, K, CL, should be favored for relative and potentially absolute strength in the weeks to come.
Industrials still bullish, but evidence of time-based resistance hits this week, which could be important. Industrials, along with financials, is yet another Bullish sector which has shown above-average signs of strength after the breakout of the downtrend from January back in late July. While Technology turned down sharply late last week, we still haven't seen this weakness take hold in Industrials. Demark wise, this coming week will have some importance, as XLI will show TD Sequential sell signals on Industrials while forming a completed TD Sell Setup, given 9 consecutive weekly closes above the close from four prior. Overall, one should be on the lookout for signs of Industrials starting to stall and reverse this coming week, and the lack thereof would be a larger bullish argument for strength into October. Downturns which break $76 would be a technical negative, allowing for weakness back down to near $74 into late September before stabilization and rebounds take place. For now, it's just important to highlight the degree of strength in this group, and focus on Industrials as a key group to watch this week given the presence of counter-trend Signals which have been absent for the last seven months up until this coming week. Stocks like TXT, LII, ENS, AMR, ROP, EMR, AWI, are to be favored within this group, while CMI, ITW, CX, SWK, MHK, OC, DE, SPR are laggards to avoid.
OIH vs Crude Oil- Ongoing weakness in OIH has now reached Spring lows, while WTI has moved sideways in the last few months. The chart above highlights the degree to which Energy has turned down since mid-May while WTI Crude began a neutral consolidation. While the structure in Crude is arguably still constructive, Energy has been a very difficult sector to embrace, and OIH has fallen as of last week to the lowest levels since March. While a counter-trend bounce looks near with OIH near Spring lows, the XOP and XLE are both better longs at this time, and OIH should be avoided until it can demonstrate much better signs of strength. Stocks like HAL and SLB have been ongoing underperformers to avoid, while the E&P and Refiners have been much preferred for strength.
Growth vs Value- IVW / IVE- Still right to favor Growth, until trends are officially broken. Growth has yet to truly rollover vs Value and the act of making it through September with no meaningful trend breaks bodes well for further strength into October. While ratio charts of the S&P Growth ETF vs S&P Value ETF (IVW to IVE) have dipped slightly in the last week, ratio charts are still trending up strongly from this past April, and still very little degree of any real weakness. While this stalling out very well could lead to weakness, it's tough to call for this to happen in absence of any trend breaks. At present, it still looks like the Growth trade is on, and value is to be avoided.
Developed vs Emerging- Developed still leading the charge, but nearing key levels in both price and time which might cause a reversal. Demark signals have consistently shown the turning points in Developed vs Emerging markets over the last two years, and yet again markets seem to be nearing an inflection point, which should lead to Emerging markets to start to bounce which could be in place over the next couple weeks, allowing for a large snapback in EM at a time when most have been slowly but surely starting to give up on this trade. Demark counter-trend TD Sequential and TD Combo buy signals were present back in March when Developed markets turned higher vs Emerging for the first time since early 2017. This coincided with the upswing in the US Dollar, which has persisted in recent months with little to no real evidence of any deterioration. Now this ratio chart is approaching 2016 highs, and is within 1-2 weeks of producing a counter-trend TD Sequential 13 countdown Sell, which should stop prices just as this ratio chart is nearing prior highs. Bottom line, while no signal can be acted on until the reversal begins, one should give Emerging markets a close look at the end of September, as the currency and Equity weakness very well could bounce in the months of October into November.
WYNN Resorts - The Casino stocks continue to be very hard hit, and this area offers opportunities for shorting stocks as the seasonally bearish month of September enters its second week. Stocks like Las Vegas Sands (LVS) were hard hit in recent weeks, yet the other Casino stocks like WYNN, MGM, CZR have also been weakening substantially, with many of these undercutting the intermediate-term trend from early 2016. Bottom line, for those in search of attractive risk/reward shorts among the Consumer Discretionary space, the Casino area is one to pay special attention, as many of these stocks remain quite weak and are showing no real signs of stabilizing. WYNN, in particular is bearish, and likely to drop down to $115 in the weeks ahead.