January 28, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2650-3, 2630-2, 2596-8, 2570, 2550-1, 2513-5
Resistance: 2675, 2683-5, 2700-5, 2709-10
Summary: Stocks have defied odds yet again, and remain trending higher since late December to the tune of nearly 12% as part of the ongoing downtrend from last September. Technicals had suggested gains might be possible this past week, but now we face a much more difficult situation as January comes to a close. Prices have nearly reached make-or-break levels with a bullish near-term technical trend and momentum sloping higher, yet this remains part of a downward trend with bearish momentum on both weekly and monthly charts. Hence the difficulty in this market of truly finding a trending situation that offers a good risk/reward. The Dollar showed perhaps a more technically significant move than Stock indices this past week, rolling over and sparking jumps in Emerging markets, commodities, particularly the precious metals, and many Materials names. Treasuries meanwhile extended gains, breaking down out of key near-term trends (though last Friday's snapback in yields is worth noting) Overall a difficult rally for many to have participated in over the last month as many pared down risk, understandably, and were left to chase this market higher as it's risen not unlike last January's rally. The issues of Government Shutdown, China Trade , or FOMC worries that were in place in December that many attributed to the market selloff really haven't dissipated, so many who use news to follow markets have been left to chalk up our 12% rally to Earnings alone.
Bottom line, this looks to be a very tough time to initiate new longs in many stocks, or to go short this rally just yet, without any real evidence of stock indices rolling over. The next 2 weeks likely provide some real clarity in this regard, as either S&P gets over 2715 and continues going throughout the Spring. or prices stall out and turn lower starting sometime this week. For now, it doesn't look like a time for big bets, but to simply let this move play out and respect whatever direction it takes. The chart below highlights the S&P's move and how this fits into the larger framework. As can be seen, prices are literally right below make-or-break resistance and have recouped nearly 60% of the entire pullback from September. Within the last two weeks, prices have regained the former lows from February, April, October and November lows, and have strong resistance between 2685-2715. It's thought that another 3-5 days of gains could be possible based on last weeks rally. Yet, it's proper to respect any decline that kicks off next week that undercuts 2596 given that prices have reached a window where changes of trend are absolutely possible. Given the choices mentioned above, the highest probability seems to be another few days of rally which then stall out and turn lower into February. But it pays to be aware and ready for any outcome, as movement above 2715 would be one to follow.
Overview: S&P is now higher by 13.3% from Dec 24, 2018 close, and seems to have defied expectations of most in recent weeks, just at a time when many had begun to throw in the towel on this economy and had begun taking down risk. Making money on V-shaped recoveries is often quite difficult, as it's rare that one avoids losing money on the drawdown, invests at the lows and profits on the rally. Many tend to lose money on longs and divest during some part of the pullback, fail to get in on the rally, particularly with so much ongoing uncertainty, and are left with tough decisions now heading into February with markets up over 6% for the month of January.
Bottom line, the positive factors of early Breadth thrust from December/January combined with recent breakouts in Technology relatively speaking (SPXEWIN/SPX) and lack of any technical deterioration during this rally along with the absence of overbought conditions and Demark exhaustion are thought to be positives right now. These coupled with very bullish seasonality factors heading into Pre-election year argues for gains over the next 3-6 months. However, negatives such as a dropoff in breadth in the very near-term (last week) along with cyclical projections to this time in late January and some flattening in momentum could very well prove to be negatives heading into the new month. The largest potential negative concerns the ongoing bearish technical structure for indices like SPX and DJIA which remain under downtrends from the mid-September 2018 peaks.
Overall, indices are at a real crossroads after this runup heading into the final few days of January into early February. It's not wrong to consider both bearish hedges and/or implied volatlity after this runup, and both bullish and bearish theses have credence, though the positive thinking applies much more to a 3-6 month timeframe than near-term. One can attempt to sell into this rally anywhere from 2685 up to 2715, but over 2715, it's right to think the rally extends and shorts would be wrong. For those bullish, one can't say with a lot of confidence that there's a Zero chance that this recent rally continues moving higher. After all, the first big resistance level at 2630 proved not to be all that effective on the first push higher and prior November lows gave way to strength, in SPX, DJIA and NASDAQ, the latter which now arguably is trying to breakout of the larger intermediate-term downtrend. For those with a long bias, getting or staying long here is not wrong with the potential for movement up to 2685-2715 , knowing that over this level, S&P rallies even more. However, the key level for stops on longs would be 2596 and anything under this level argues that a larger selloff can unfold. SO in both cases, the area for risk is very well defined, and it's thought that the next 2 weeks, a definitive answer will be determined which should shed some light as to what's in store. For now, indices lie at a very important area, and it makes Big bets unattractive until this pattern is resolved, one way or another.
SECTOR HIGHLIGHT: ST- Short-term
BULLISH- Communication Svcs, Consumer Discretionary, Energy (ST) Utilities, Financials, Technology, Real Estate (ST) Materials (ST)
BEARISH- Industrials, Consumer Staples (ST) Heatlhcare (ST)
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Upside limited in short-run- Reversal possible from current levels, or up at 2710-5 later this week- Indices lie at levels now where selectivity is important, until S&P can breakout above 2715. The absence of a breakout of the downtrend from September makes for a poor risk/reward for longs after this push higher. While Demark signals are not yet in place to suggest imminent drawdowns, cycles have importance now that US indices have reached the 1-year anniversary of last year's peak, and prices have pushed up 13% to right below important trendline resistance. So the risk/reward is poor currently until markets show more evidence that breakouts can happen. Bottom line, trend will be bullish until 2596 is breached.
Intermediate-term (3-5 months)- Bullish- While intermediate-term momentum and trends remain negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. While a retest of recent lows certainly can't be ruled out, it should prove brief in nature, allowing for further strength which could allow for a lot higher retracement before more weakness happens.
While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.
S&P Major Sector Review- S&P 500 GICS Level 1 indices & ETFS, shown RELATIVELY vs SPX for purposes of relative weakening, strengthening, and early trend detection
Energy- Bullish short-term, but ongoing bearish intermediate-term downtrend More work needs to be done before thinking Energy will outperform for the year just based on January's sharp outperformance. Weekly charts of OIH vs SPX as a proxy for Energy (more realistic than XOM, CVX heavy XLE) remain short-term bullish, trending sharply higher within an ongoing intermediate-term downtrend. It was thought that rallies could happen early this year in Energy given the combination of mean reversion, severe oversold conditions and bullish seasonality. Energy remains the best performing sector YTD with returns of 9.58%, with Financials close on its heels at 9.03%. Further gains seem likely despite such a robust January performance, and pullbacks should be used to buy technically, as WTI Crude looks apt to move into the 60s which should be an ongoing boon for Energy stocks. OIH remains preferred over XLE, and gains in this sector look possible into trendline resistance, where this daily uptrend will meet its first real test. Overall, despite the weekly downtrend in place, the first month's momentum and performance has been strong enough to endorse favoring further outperformance in Energy during the seasonally bullish February-May period for Crude.
Consumer Discretionary- Short-term and intermediate-term Bullish-Structurally this looks to be one of the more attractive areas in the market right now, having powered higher to the tune of >17% since the Christmas Eve low, the best performing sector off its December lows. While the S&P 500 Consumer Discretionary group does have some high weightings in stocks like Amazon, Home Depot, McDonalds, Nike to name a few, the Equal-weighted Consumer discretionary group is showing a similar level of strength, having just broken out vs the Equal-weighted Consumer Staples. The relative pattern on Discretionary vs SPX shows a rapid rise back to new highs into last Fall with just a minimal amount of deterioration before a push back up to exceed the highs of this consolidation (Shown by resistance line over recent highs ) Such constructive price action out of this group bodes well for additional outperformance, and overweighting looks prudent until this starts to show some evidence of faltering.
Financials-Short-term stretched after a rally in XLF up to important resistance near $26. Intermediate-term bullish given the trend breakout which happened last week. This group, in relative terms to SPX, has just broken out of the downtrend from last Winter, which on a weekly chart, can be seen by relative XLF/SPX having exceeded the trend from the highs made early last year. This should be a bullish development for Financials, and while rates continue to be depressed, Financials have turned up pretty sharply and are only second best to Energy for performance for the year, higher by over 9% for the month of January. While many believe this kind of performance is due to fail, it's impressive that this group has broken out of the long-term downtrend, and is a bullish factor for markets overall this year. One should use mild pullbacks to buy into Financials, thinking that last week's breakout can lead this group higher.
Technology - Short-term Bullish, Intermediate-term bearish- Tech has shown some impressive evidence of rallying back sharply in recent weeks, just at a time when many had given up on the growth trade and Tech in general in favor of Value. Relative charts of the Equal-weighted Technology index vs SPX show the break of the uptrend from 2016 which happened last Fall, but also the ability of Tech to have recovered and successfully exceeded this downtrend from last year's highs. Overall, the Semi results last week helped to bolster this sector, which broke back out vs the broader market relatively. Additionally, many FANG related names have begun to snap back in recent weeks, which might have been expected. Yet, despite the rally from December lows, intermediate-term trends remain under pressure given the snap of the two-year uptrend, and any evidence of Tech stalling in the month ahead likely would cause momentum to start to turn back lower. Overall, this sector looked to have rallied back at a time when it was sorely needed, and the resulting consolidation for Technology proved very much short-lived compared to the extent of its rally last in recent years. Software remains the sub-group of Tech to consider owning, while the Semiconductors have begun to stabilize and now many rallying sharply ,and Stocks like AAPL have begun to slow in their rate of descent and are trying to work back higher.
Healthcare remains near-term bearish, yet intermediate-term bullish. This group has experienced quite the roller coaster ride in recent years, as we saw severe underperformance out of Healthcare from 2015-2018 until this group turned higher and broke out over the longer-term downtrend that caused many momentum indicators to turn bullish. Just this past November, the group turned back lower and has just violated the uptrend which has been in place over the last year. Thus, while groups like Medical Devices and Pharma remain in very good shape technically, this group has been a laggard over the last week and over the last 1 month timeframe and many of the Pharma names have experienced selling pressure. Overall, mean reversion in a strong group like Healthcare was in 2018 is not unusual to kick off a new year, but this should not prove to be a prolonged period of underperformance in these names, and weekly and monthly structure still supports buying into pullbacks technically.
Industrials- Near-term bearish, intermediate-term neutral. This group took a turn for the worse late last year with its breakdown of $71 in XLI which also coincided with longer-term relative charts breaking key two-year uptrend line support. While a snapback in the group has happened along with many other sectors, the near-term view looks challenging given both absolute and relative trends which remain in tough shape. XLI on absolute charts has rallied into key resistance, while the weekly relative chart vs SPX has been range-bound. While stocks like GE, URI, LUV, UNP, FLR, PWR have all rallied more than 15% YTD thus far, others like UAL, DAL, SWK, EXPD, MMM have barely covered much ground, all being up less than 3% YTD. Overall, it's likely that the recent rally stalls out in the next 1-2 weeks and makes at least a minor pullback of its gains since December. And while the long-term trend was broken for industrials, the selloff hasn't gained much overall traction. Thus, the medium-term view is more neutral until additional strength or weakness occurs.
Communication Services - Short-term neutral; Intermediate-term Bullish-This Tech/Telecom combined sector has actually been shaping up quite nicely in recent months, and the broader trend looks constructive for additional gains. Relative charts of the XLC v SPY show this base-building in effect for Communication and the recent pullback should be buyable for movement back to recent highs. It's relative pattern appears like a reverse head and Shoulders pattern with movement above recent highs needed to confirm this formation. At present, the pullback over the last month looks to be stabilizing, but yet still difficult to label the short-term bullish. However, it's expected that Communication does start to push back higher in the weeks to come, so it's worth taking an intermediate-term stab at this group, which is largely Technology based, but yet includes the major Telecom providers.
Real Estate- Short-term bullish- Intermediate-term Neutral- The REITS look to be gaining a bit of steam in the short run, after two successful rally attempts since the broader trend began to breakdown into early last year. The relative trend, as shown above, made one false move higher initially, but has been followed by an even steeper advance which has just happened in the last few weeks. The downtrend from last Fall's peak looks to have been exceeded, while prices are just now beginning to recapture the prior lows that were violated. So there are reasons for optimism technically now with this group which weren't apparent heading into the end of 2018. Yet on a longer-term timeframe, more work needs to be done to help these stocks truly begin a larger bullish recovery. The absolute trend of REIT ETFs like VNQ remain largely neutral since 2016, and this recent bounce has not changed that view. Movement over $86 would likely coincide with the relative charts starting to show much more relative strength. For now, it's right to own the Real estate group, but yet be watchful that gains can continue to materialize and help make up some of its losses from last year before weighing in too bullish.
Consumer Staples - Short-term bearish; Intermediate-term bullish- The breakout in Staples which happened towards the end of 2018 on market weakness coincided with its relative chart v SPX moving up above a two-year downtrend which signified potentially the start of some meaningful outperformance. However, the market rally of late coincided with this turning back lower relatively speaking, and it still hasn't deteriorated sufficiently to think the larger breakout has been nullified. Thus, While near-term trends in Staples are negative, any further decline over the next few weeks would bring this group down to a very attractive area to consider buying dips for some outperformance at some point in 2019. For now this relative chart breakout looks almost completely opposite to what has happened to US stocks. Yet from this reverse position, this selloff should create a decent chance to buy dips given the long-term breakout. Thus, this should be a group to favor owning on a bit more relative weakness into February (broader market strength)
Utilities- Short-term and intermediate-term bullish. The breakout which happened in Utilities on relative charts in January has made this group worth considering yet again, while longer-term charts of the group also remain constructive on both a daily and weekly basis. As weekly XLU/SPY charts show above, the breakdown which happened last year was thought to be bearish for the group, but once yields began to turn back lower, along with the broader market decline beginning last Fall, this resulted in outperformance for Utilities. This group over the last 12 months since 1/25/18 has been only one of two positive groups in the last 12 month timeframe and was the best group in the prior 12 months from 1/25/18-1/25/19. The breakout back into this base shown above was the first constructive sign, followed by the breakout of the downtrend from last year. Combining this bullish picture with the absolute strength in this group, and relatively little technical evidence as of yet of Yields turning higher, it's still right to bet on the Utes in thinking this group moves higher in the weeks ahead.
Materials remains short-term bullish, but yet weekly trends have not yet given sufficient evidence that the trend has begun to turn higher. Thus, a neutral intermediate-term stance looks prudent, until this group can break existing downtrends vs SPX which is shown above. From a broader market perspective, the downturn in the US Dollar should be quite constructive for EM and Materials stocks. Yet, the downtrend in this group has not yet been exceeded. Thus, it remains a tough area to invest in overall just yet. However, evidence of weekly momentum strengthening should gradually help its trend to start turning back higher in the days/weeks to come. Gold and gold stocks in particular have begun to look more interesting given last week's Dollar decline and might be an area to consider for those wishing to get an early jumpstart in investing in this group while the larger relative trend is down.