Please enable javascript in your browser to view this site!

Materials, Emerging markets likely to outperform in Q4 on Dollar weakness

September 24, 2018


S&P 500 Cash Index
2897-2900, 2883-5, 2864-5,   2830, 2817    Support
2916-7, 2923-5                                             Resistance


Summary:  US stocks remain extraordinarily resilient, and with one week remaining in the seasonally bearish month of September, have defied all odds with indices successfully ignoring all the tariff threats and political drama thus far in the last few months.   This could potentially allow for the sixth straight month of gains for SPX and 5th of 6 for DJIA along with NASDAQ.  However, as we're all aware the NASDAQ has been lower in September, diverging negatively as Tech stocks take a back seat to Recent strength in Energy, Materials and Financials.   Meanwhile, Emerging markets have shown some evidence of snapping back, just at a time when the currency crisis was beginning to sound alarm bells and create uncertainty as it spready in contagious form to most of the continents on the globe.  This chart below shows the relative chart of the MXWO relative to MXEF-Emerging markets which has shown developed market strength since the US Election.  For the first time in nearly six months, we see that this ratio is signaling some counter-trend exhaustion just as the ratio has reached former highs.   The last time TD Sequential signals were seen on weekly charts happened in March of this year within a week of this turning up sharply as Emerging markets fell given the US Dollar strength.  At present, the opposite is happening, and bodes well for a period of Emerging market strength in the final quarter of 2018.  Or as seen in the chart below, this ratio should be likely to turn down, as Developed markets begin to deteriorate vs Emerging in the weeks/months ahead.  This should be a good sign for China which has seen its market plunge 20% at a time when the US has held up resiliently.  While  a new round of tariffs is expected which could amount to nearly half the value of Chinese imports last year, or 250 billion, combined, most charts show Emerging markets on the verge of turning back higher.  This should mean that the trade escalation might prove short-lived, and some type of compromise could be right around the corner.  The next few weeks should be important in this regard, but it's worth taking a stab at buying Emerging markets as the 4th quarter gets underway, thinking they might hold up much better than the first 3 quarters of 2018 thus far. 


Overview:  The last few weeks have proven to be some of the more interesting times for global assets all year.   While many just concentrate on the SPX, and/or NASDAQ  & see a mild uptrend, when digging beneath the surface we see that the internals have gotten significantly worse on this push back to new highs, a discouraging development that takes away from some of the positives on a move back to new high territory.  Meanwhile we've seen the Dollar begin to rollover in the last two weeks, along with Treasury yields breaking out of ranges on the long end, with yields climbing ahead of this week's FOMC meeting.  Emerging markets have begun to stabilize which is seen as an encouraging development and is the subject of this week's Weekly, along with the Materials sector which has begun to show some evidence of turning higher.  Even if this next week adheres to seasonal tendencies and weakens, it's thought that Materials and Emerging markets overall should start to outperform and show better than average relative strength in the weeks and months ahead.

As of Sunday evening, we've seen some evidence that futures have weakened with the threat of tariff plans being accelerated yet again, with nearly 250 billion of tariffs, or half of China's imports, and index futures in US are down -0.50%.   However, we'll need to get down under 2883-6 area to have concern, with 7400 being key for NASDAQ 100.  The lows hit back on September 7 will the dividing line between bull and bear territory.  Breaks of this level over the next two weeks would necessitate a negative stance for a 3-5% correction in stocks. 


The following seem important heading into this week:
1) Dollar rollover-US Dollar made discernible breakdowns vs both Euro and Pound sterling last week
2) Treasury yield breakout extending into FOMC-10,30yr Treasury yields continuing higher into FOMC
3) VIX holding up firmer than expected given push to new highs by Equity indices
4) Emerging markets have begun to show some outperformance and EEM is challenging key trendline resistance
5) NYSE new 52- week highs have dropped to levels nearly half of where they were a month ago
6) NASDAQ broke down vs SPX, snapping an uptrend that's lasted most of the year
7) McClellan's Summation index, fell to the lowest level on a weekly close since May. 
8) Equity put/call ratio fell into the low 50's using a 5-day ma which seems overly complacent
9) TRIN fell to the lowest level since January last week, with negative breadth but volume still more positive than negative.  This is a near-term warning sign for equities at extremes, similar to high TRIN levels during pullbacks
10) 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 (3-5 days):  Despite overnight Futures weakness on Tariff concerns heading into Monday, the trend will remain bullish until 2886 is broken, which would violate the trend from late June, causing a pullback to 2817.   Internals by and large all worsened last week, which despite equities gains, make for a poor risk/reward picture now with prices towards the top of the channel.   Heading into the final week of September, seasonality warrants a defensive stance, which when combined with overly bullish sentiment, near-term overbought conditions near the highs of the range while breadth has failed to keep up, should make Equities vulnerable in the near future.  So despite recent resilience, still very little confidence that this market should extend too meaningfully.  As we've discussed however, it's a must to await signs of weakness holding before thinking markets have reached a pivotal time.  Implied volatlity seems like a smarter way to play for any drawdown until technical trends change. 

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.

Materials and EM space-  5 important charts to watch, followed by 5 attractive Materials stocks

EEM strength has tested key trendline, but further strength and outperformance likely in the months ahead.  EEM daily charts above have shown increasing evidence of stabilizing in the last couple months, with its gains since early September having carried this to important make-or-break resistance on this rise.  Despite being in an ongoing downtrend from late January, it's importnat to see the degree to which momentum has begun to improve lately, starting with the rally attempt into July but also the lack of decline since that time.  EEM has shown several failed breakdown attempts in the last couple months which are key to notice and have helped momentum indicators like MACD make a string of higher lows which pushing up to test trendline resistance at $43.25.  While  EEM could very well stall out after this push initially, the degree of stabilization in the EM space lately while the Dollar begins to rollover suggests that EEM could begin to show greater strength vs Developed markets in the weeks and/or months ahead.   Climbing over $44.50 initially would be a meaningful amount of strength that suggests the start of a more gradual lift and outperformance for Emerging markets.  Bottom line, pullbacks in the days/weeks ahead should be buyable at $41-$42 for the start of more meaningful EM outperformance going forward.  


S&P upside might prove limited in poor seasonal week, but UNDER 2883 is necessary for the Bears-  SPX has pushed back to the highs of its trendline channel after last week's gains and now faces one of the toughest weeks of the year seasonally speaking.  Given the track record of finishing down 22 of the last 28 weeks with an average loss of -0.96%, we're on the lookout for the possibility that stocks might pullback to the lows of the recent channel.   Breadth and momentum have weakened lately despite last week's rise and we've seen NYSE new highs fall, despite gains in the averages.  Overall, trends will remain positive until/unless 2883 is breached and it's important to see some evidence of trend failure before turning too negative.  However, internally, it's important to note that the technicals have gotten worse in the last week, not better, despite the price rally.  Sector rotation has helped to cushion the indices despite some weakening in Technology, and for now, none of the bearish arguments will mean too much until we see that trend from June lows give way.  


Materials bullish on breakout-  Long XLB looking to Buy dips-   The Materials sector as shown by the XLB Select SPDR ETF, has just broken out of a symmetrical triangle formation that has been intact since January.  This happened initially back in late August before consolidating and then giving way to another push up to test the highs from early June.  Technically this is a real positive for this group after months of consolidation.  The rolling over in the US Dollar index should help most Metals, mining and commodity oriented stocks to begin showing better outperformance in the days and weeks ahead.  Pullbacks to 59.50-61 would create a very good risk/reward area to buy given the degree that momentum has begun to improve lately.  Upside technical targets lie near January highs near $64, making this sector seem like a good risk/reward to own and buy dips in a market where Technology is slowly but surely beginning to rollover.  


The Materials sector relative to SPX has given its first real indication that outperformance is just around the corner given the sectors minor relative breakout to SPX which happened last week  The longer-term downtrend in Materials relatively speaking remains intact, but the last few weeks have shown noticeable evidence of this starting to lift, breaking the three-month downtrend while momentum has gotten noticeably stronger (Upward sloping MACD)  The rolling over in the US Dollar last week along with the signs of Emerging markets possibly starting to turn up vs Developed markets looks to be a big deal for this group and should help Materials begin a larger rally in the weeks ahead.  A pullback in Treasury yields post FOMC would start to help the Metals stocks in bigger fashion, which have all begun to show a bit more strength just in recent weeks.  Overall, this move might take a bit longer as bottoming out after a lengthy downtrend is definitely a process, and doesn't usually happen overnight.  But the incremental progress shown by Materials makes this one to consider overweighting and adding on weakness as the group's stabilization efforts look likely to continue and will eventually lead to a larger rally in the group.  


Growth vs Value-  Signs of possible Reversal which would favor VALUE in the months ahead This chart of the S&P Growth (IVW) vs S&P Value (IVE) has given some important signs of an inflection point just as this ratio has reached former highs from 2000.  The indicators of exhaustion shown by Demark's TD Sequential system have produced the first "9-13-9" pattern since the shift to growth began back in 2006/7. Momentum indicators on this ratio have gotten overbought based on RSI rising over 70, but yet not as high as was seen back in 2015, thus, creating the start of some negative divergence that suggests this ratio might start to rollover.  This would favor the Value scenario vs Growth in the months ahead, and increasingly suggests that favoring Value makes sense after this record run that now seems to be stalling out.  

5 Technically Attractive Risk-reward Long Candidates within Materials


Ashland Global Holdings (ASH- $85.67) An attractive technical play within the specialty Chemicals space, as ASH move back to new all-time high territory on a weekly close last week  should allow for further gains in the weeks ahead.   The act of getting above $75 back in May allowed for some real acceleration out of ASH, which looks to close out September with five straight months of gains.  Its success in making a new weekly closing high last week was not met by any evidence of exhaustion, and its consolidation for the last seven weeks makes this attractive to buy for a stock that should now play catchup for a move up to $90.  Minor pullbacks this week should prove buyable with support at $83-$85.  Until this demonstrates some evidence of weakness, it's thought that ASH is a compelling risk/reward to continue to outperform within this space, and longs are recommended technically.  


PPG- (PPG Industries - $115.98) Bullish given PPG's movement back above the uptrend from 2016, a constructive development that allows for a likely test of multi-year high resistance just above $120.  This stock has been basing for nearly three years after a huge six-year lift which saw price rise over five-fold.  Now momentum has begun to kick in to high gear in the last few months with PPG showing outperformance and has been one of the top performing names in the Materials sector in the last month.  Most of the appeal for this name is on an intermediate-term basis, vs as a near-term play.  Structurally its success in coming back lately bodes well for a push to highs.  Given that this area has been tested once already, this is typically a very good risk/reward for expecting an eventual breakout which should take PPG to new all-time highs.  Pullbacks to $110-3 should be used to buy dips.


China Petroleum & Chemical Corp (SNP- $97.13) Attractive given the base buildingwhich has occurred this year at levels just below the highs from 2014.    CNP managed to double in price from 2016 into early this year,  rising up to $105 to test 2014 highs before consolidating.  However the extent of the churning over the last few months has proven miniscule and SNP's 10% lift in the last two months has bought this again to within striking distance of new highs and seems like 2014 levels won't prove too difficult to exceed before a larger lift to push up to 2007 highs.  Overall, this is partially a play on a China rebound along with the US Dollar rolling over.  Both should allow for SNP to begin to improve.  Technically the act of stalling and consolidating for 4-5 weeks near a prior high without any deterioration is looked upon as a bullish omen and one would position long here, adding above 100 for 104.50-105.50.  However, the larger move should be in store once most of this group starts to hold and turn higher.  Given that SNP has outperformed despite prior China weakness, once the EM space starts to kick into full gear in turning higher, SNP should be likely to outperform at an even quicker rate.  Bullish thesis looking to add on minor pullbacks as well as a weekly close over 100.


CF Industries (CF- $52.81) Bullish, but extended- One of the top performers this year in all of Materials, CF began its comeback in the fall of 2016, more than doubling in a year's time before consolidating into this past Summer.  The last three months have seen CF push up for six straight weeks, and at $52.50-$54 looks likely to stall and might offer some consolidation to this move.  However, on any pullback down to $49-$51, this becomes very attractive from a risk/reward perspective given its current strong momentum.  It's thought that even on a minor correction in the weeks ahead, this should be one of the top names to own within Materials and on any pullback, this would allow for long positioning for a push back higher to eventually challenge prior highs from 2015.  


Sherwin Williams Co/The (SHW- $469.96)   One of the top performing stocks within the S&P 500 Materials sector this year, despite the underperformance, SHW has returned over 14.6% YTD and still looks like a compelling intermediate-term long.  Last week's pullback has helped to alleviate some of the overbought conditions on daily charts and pullbacks to near 460 would create a very attractive risk/reward profile to buy dips in SHW for a push back to new highs.  Despite last week's move to multi-day lows on Friday, SHW has managed to turn in positive gains for the last five straight weeks.  this might persist for 1-2 weeks, but SHW would be one of the stocks to consider on any weakness given its ongoing stellar technical structure.