September 17, 2018
S&P 500 Cash Index
2897-2900, 2864-5, 2830, 2817 Support
2916-7, 2923-5 Resistance
Summary: US stocks have managed to successfully dodge most of the weakness being seen globally thus far, rallying back to within striking distance of new highs as both S&P and NASDAQ showed signs of snapping back from prior week declines. Treasury yields look to have broken out of recent ranges on the upside, while the Dollar has begun to rollover. This provided some much needed relief within the Emerging markets space, and Turkey's rate hike combined with the general EM currency stabilization helped soothe some of the anxiety about currency weakness turning into a larger issue. Now seasonally speaking markets enter what could be their most difficlt two week stretch of the year, as bearish seasonality kicks in for Equities which historically has taken markets lower during the latter part of September during mid-term election years. However, the degree of the strength and resiliency of this market is seen as an intermediate-term "Plus" for now, and declines into late September likely coincide with sharp rallies back into the 2nd-3rd week of October ahead of this year's Elections. The chart below focuses on the tendency of markets to weaken two months ahead of the mid-Term elections followed by a sharp rally as this time grows closer. We'll look to buy implied volatility early in the week on any drop in the VIX under 12, expecting that this Equity rally cannot continue uninterrupted into October, but utilize any Market weakness into this month's Fed Meeting to buy dips.
Overview: Near-term trends turned bullish on move back over S&P 2900, but now are facing some seasonal headwinds which combined with near-term overbought conditions and some lackluster breadth could make it difficult for US indices to push higher and extend last week's rally. Last week's bullish close still looks to extend early this coming week, but one needs to be on the lookout for any evidence of reversal mid-week and particularly one which takes S&P back under 2864 (2900 initially a warning for S&P) with 7400 being key for NASDAQ 100. The lows hit back on September 7 will the dividing line between bull and bear territory, and the recent Financials weakness can't be overlooked with XLF having pulled back to new multi-week lows. Overall, i'm expecting weakness over the next two weeks before a low and rally into October. Look to still favor more underperformance out of Europe while Asia looks to have begun a bottoming process given the EM stabilization. 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 seem important heading into this week:
1) Financials fell to new multi-week lows last week, making this group the worst performing sector and the only one negative on the week despite the yield rally
2) As mentioned, long rates broke out of multi-month ranges last week, with both 10 and 30-year Yield breaking out
3) Healthcare moved back to new all-time highs and on a relative basis, broke out of a three-year downtrend on weekly charts vs SPX
4) NASDAQ barely reached half of the prior week's pullback, still under 8/29 highs while DJIA managed to exceed these former levels, but overall has been weaker, still not back at new all-time territory, and roughly 500 points away
5) McClellan's Summation index, fell to the lowest level on a weekly close since May. This smoothed breadth indicator is often important to pay attention to as it can give advance warning on signs the rally isn't all that strong internally
6) Emerging market equities and currencies jumped late last week, as the Dollar decline coincided with a move in EEM to the highest level in over six days. While this is near-term encouraging, much more work needs to be done
7) Defensive groups fell on hard times late last week, with the yield sensitive groups like Utilities, REITS, falling as yields broke out. VNQ, the REIT ETF, broke down under trendline support vs SPX, suggesting more weakness to come. Staples underperformed the broader averages as well which might have been expected given market strength
8) While non-technical in nature, the threat of additional tariffs happening early this week could serve as a negative technical catalyst for prices to drop, even if it proves short-lived. China has threatened to skip trade talks with the US if additional tariffs are announced, and something of the sort would likely cause the global mood to sour and potentially coincide with weakening in equities heading into late September.
9) Seasonally speaking, as discussed below, markets are entering the part of September which has a distinctly negative bias and has been down more than up for the DJIA since the latter part of the 19th century.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish above 2900, Bearish below, with upside targets at 2920-5, and movement under 2865 leading to a 3-5% drop into late September before stabilization. The combination of overly bullish sentiment, bearish seasonality, near-term overbought conditions while breadth has failed to keep up, should make Equities vulnerable between 9/18-9/19 into 9/26 before rallies take hold. However, given the extent of the recent strength, it's a must to await signs of weakness holding before thinking markets have reached a pivotal time.
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.
5 Important charts to keep an eye on for this coming week
September seasonality tends to turn negative mid-month with the average returns on SPX lower by over 1% and have been lower 74% of the time since 1980. The DJIA performance going back since 1885 has been positive fromSeptember 16-27th only 42% of the time. Thus, while seasonality has traditionally been positive for the first half of the month, on average we begin to peak around this time and selloff into end of month. Holding up above 2900 will be important for S&P and under should cause a pullback to test and likely breach 2865.
NASDAQ 100 could be vulnerable given the lack of prices to recoup prior highs. Looking at last week, NDX managed to snap back and regain about half of the prior week losses, but unlike the DJIA, it has begun to diverge negatively and remains well under the 8/29 highs. On any move back down under 7400, this would violate the trend from this Spring, coinciding with a drop which should take NASDAQ down 3-5% before recovering into October. Importantly perhaps, for the first time since mid-July there is the presence of a counter-trend sell signal on daily charts which might make further progress difficult to come by this week. The key for the Bears will be a drop under 7400, while the Bulls should need to see prices get up to challenge prior highs without much hesitation. However, the trend right now still lies firmly in the Bulls favor. Barring any breakdown of this trend the NASDAQ remains firmly in an uptrend.
Healthcare breakout worth mentioning as this sector has exceeded the three-year downtrend vs SPX that has kept the sector under pressure relatively for the past few years. The 2018 Annual Technical outlook discussed this sector as being a favorite given the presence of counter-trend buy signals present last December, and its success has helped Healthcare claim top spot as the best sector over the last three months. Additional gains look likely, and this should still be an area to favor ahead of Technology.
McClellan's Summation index managed to drop to its lowest level since early Augustbut is within striking distance of the lowest levels since May . This smoothed version of breadth is a disappointment given the market's success lately and higher readings would certainly bring about much more confidence in this rally vs looking back and seeing that breadth largely peaked out in June given this index.
VIX- Close to Bottoming-The CBOE Volatility index has gotten down to attractive levels to consider buying implied volatility early in the week if/when VIX gets back down under 12. Momentum has gotten oversold again, while counter-trend indicators are set to line up this week on any further weakness (which would occur on Equity market gains Monday) and line up with similar signals that were present back in early August that drove the VIX higher from under 11 to near 17 in a short period of time. Such a move cannot be ruled out again given the weak seasonal tendencies directly ahead of markets into late September, and owning cheap calls as Stock replacement and/or considering protective puts on longs that have gotten stretched might make sense. Others who are more aggressive might consider long positions in volatlity based ETFs between now and late September.
5 Technically Attractive Risk-reward Long and Short Candidates
Planet Fitness (PLNT- $51.57) PLNT looks quite attractive technically following its breakout above the minor one-month consolidation that had been in place since early August. The daily chart by Investors Business Daily's MarketSmith shows the recent "backing and filling" following the breakout on heavy volume in early August and the stock has consistently maintained very good structure going back over the last 10 months since it broke out on heavy volume last November. Movement up to the mid-$50's looks likely while any move back below $49.50 would postpone this rally, shifting the structure back to near-term neutral on the failed breakout. For now, between Monday and Wednesday of this week, it looks likely that last week's move should extend, and long positions are preferred.
Dave & Busters Entertainment Inc. (PLAY- $62.23) Bullish breakout on high volume Last week's success in getting over $58.86 managed to surpass not just August and June highs, but highs going back since January of this year, making this a solid breakout of a near-term Cup and Handle pattern which can be argued is part of a larger Reverse Head and Shoulders which has been in the making since last September, one year ago. Volume spiked to 5-times average as this moved back to 52-week highs, and suggests that further gains should occur between now and end of year. Given that markets are entering a seasonally challenging time and PLAY became stretched on Friday's move, pullbacks would offer better risk/reward areas to buy, ideally from 59.50-61.50 in the weeks ahead. However the pattern remains compelling and this high volume breakout should be watched for any signs of backing and filling which would create a very attractive time to add to longs.
Cigna (CI- $194.77) CI's breakout above 191 should help the stock gain further ground in the weeks ahead with technical targets near $202 initially. While the stock has gotten a bit extended given Thursday and Friday gains last week, CI managed to exceed the former area which had given way to breakdowns this past March, and the act of exceeding this area is considered to be quite important technically Its base from early August proved to be a bullish symmetrical triangle pattern and now that this area has been exceeded, this should help to jump-start this stock which has managed to advance as part of the bullish Healthcare space which has outperformed all other sectors over the last three months. This group remains attractive and this stock in particular looks like a good technical long for more gains in the days/weeks ahead.
Apple (AAPL-$223.84) Short-term Bearish for move down to 205-208 AAPL's trendline break into early September has not been fully recovered and the near-term technical pattern remains negative and can allow for further losses over the next two weeks before this stock reaches support. Momentum remains elevated on weekly charts with RSI readings over 70, while daily MACD has turned negative as AAPL started to stall out over the last couple weeks. The stock had gotten very overbought after more than a 35% rally just since late April a bit less than five months ago. Additionally, from an Elliott perspective, the pullback into early September looked to resemble a perfect five wave decline, while its counter-trend bounce should be complete as of last Friday on the rebound. Technically if this recent pullback is equal to the first one into early September, this would target $215 for a possible support low where this could stabilize. However, more important technical targets lie down at $205 up to 208 which would make for an attractive area to buy dips. Overall, given the start of a weakening in other names within this group, AAPL looks to be in need of consolidation before this can make further upside progress. While the stock remains quite compelling technically on an intermediate-term basis, this recent churning and minor technical weakness still looks to need additional downside before it's complete. Bottom line, one should hold off on buying dips too aggressively until this can get down under $210.
Mallinckrodt PLC (MNK- $30.50) Short-term bearish, with targets initially at $27.10which would represent an 11% decline from current levels. The reason for the near-term concerns are three-fold. First, prices have managed to undercut last week's lows which had been an initial area thought to represent stabilization. The Demark TD Buy Setup thus failed to lead to any real rally and now a new count has begun with the pullback down under $31. Second another Demark signal just appeared as a "sell" on weekly charts, shown as a TD Combo 13 countdown that was confirmed on last week's close. Third, volume spiked on both last Tuesday and last Friday's declines while prices managed to close right at the lows of the week. Overall, while some bullish intermediate-term reasons exist given some positive developments with long-term structure which began to improve this past June, the extent of the rise since that time has carried prices to levels that are too overbought in the near-term. Pullbacks to intersect the uptrend from this past Spring would create a much better buy opportunity for this name, and near-term the technical damage looks likely to persist.