October 7, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2939-40, 2870-5, 2822-5
Resistance: 2978-82, 3021-5, 3027-8, 3041-3, 3050-2
Summary: Pullback in US indices largely held where it needed to in US indices before bouncing sharply to close the week at a just a fractional loss. (Interestingly enough, the NASDAQ closed positive for the week but actually showed worse technical damage in breaking its uptrend) Thus the structure remains that of a large consolidation pattern over the last six months. The highs have been made with lower momentum, but yet, insufficient weakness yet to break the trend connecting lows since Spring. Treasury yields meanwhile have largely failed to turn higher to join and/or lead the Equity rally, appear close to level which should allow for a bounce to unfold. Moreover, the Dollar turned lower and fell for the last four days. With regards to internals, breadth looked to have stabilized and made a strong showing last Friday, something which could help Advance/Decline start pushing back higher after a minor pullback in the last month. Sector-wise, markets remain in Defensive mode, and last week's outperformance largely came from all Defensives except for Technology, which led all sectors, and was important to point out given its huge percentage in SPX.
Overall, last week looked to be the start of a turn back higher, and it looked constructive to see S&P rally nearly 100 points off the lows from early Thursday am. Trend-wise though, more looks to be needed to think indices are officially "out of the woods" While it was a strong bounce, bringing hourly momentum back to overbought levels, pattern wise, this didn't accomplish enough to alter the current downtrend. Thus, overbought nearing the highs of the consolidation while trending down typically is not a good recipe for thoughts of immediate follow-through. However, Technology outperformance is always a good thing and tough to ignore. If Treasury yields can start to turn higher, leading Financials up in the process, while sectors like Transports, Industrials, Discretionary all bounce from lows of their own respective consolidations, then this would be seen as a mild positive. For now, markets remain in the volatile month of October and the back half of the month could prove "interesting" unless a LOT more strength happens very quickly on good breadth an volume.
Looking back, i had discussed the Bullish structure and overall decent levels of Advance/Decline to be constructive factors technically. The lack of a serious decline in September was seen as promising, while enough issues remain with the economy and/or uncertainty about the global economy and/or Fed policy and the ongoing trade war to keep sentiment at a fairly "neutral" reading, despite prices being near all-time highs in the bigger scheme of things. Technology has snapped back and not all that bearish near-term, which was a huge area of focus heading into the last week of the Quarter.
The main concern about last week, was the extent to which 2-year yields fell given some of the weaker economic surveys on Manufacturing and service sector data. While the NFP Jobs data helped to somewhat offset concerns, (after all, as Barron's October 7 issue pointed out, this was real data, not a survey of what people think) the yield curve still steepened out dramatically on the 2 yr yield's decline and seems to make an October rate cut all the more likely at end of month.
Bottom line, it's expected that last week's late week gains can still follow-through this week (though might have to consolidate a bit Monday/Tuesday given how sharp gains were) But it's the ability to get past October 15-20 week without any decline which seems important. Given how volatile indices can often be in October, some real progress is needed for indices and sectors to exceed July highs in unison (Which would be bullish for indices continuing uptrends largely uninteruppted) Until then, it's wise to be selective and use short-term surges in price as a chance to take profits and be a bit more tactical in focus. Charts of various important assets and developments from last week are found below.
SPX --Prices snapped back after holding where they needed to
SPX- Last weeks Weekly Technical Perspective thoughts about trading lows being right around the corner proved correct. Now we face a more challenging call heading into this week. S&P has bounced nearly 100 points off the lows and is back up above 2940. This is important and positive, as the area from 2940 was breached only for about 2 days time and failed to make a weekly close under. Yet, the trend from mid-September remains negative and prices remain well under July lows. (The NASDAQ Composite actually broke the uptrend from Spring lows and has not yet regained) Thus, it's thought that progress can continue over the next week to build on Thur/Friday success of last week. Yet, it's going to be important to see the downtrend from this past September exceeded. A 3-5 day bounce that fails to make this progress and then stalls would be a concern heading into mid-October, a time when cycles historically over the last 20, 30, 40, 60, 100 years have peaked. At present, one should be long for this week, using weakness to buy, favoring specifically stocks like AAPL within Technology.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish - Last week's late surge helped S&P rally nearly 100 points to get back over 2940, while the early week decline failed to show serious deterioration, holding where it needed to. While near-term overbought on hourly charts, we've had some good price action and breadth to end the week, and it's thought that indices can build on this into mid-October. Thus, any near-term early week pullback likely should prove buyable for a further push higher. One should still consider a long bias to be correct in the short run unless S&P were to violently erase both Thur/Friday advances of last week, undercutting 2855. Barring this, which seems unlikely this week, near-term weakness is likely buyable, and given AAPL's technical attractiveness as our key anchor within Technology, further strength looks to happen this coming week.
Intermediate-term (3-5 months)- Neutral- Price trends continue to show a gradually waning long-term trend, and it's thought that October could still potentially experience more downside before a year-end rally. 2 things which are thought to be positives for stocks between now and End of year thus far: 1) a pronounced LACK of weakness thus far.. Markets gave back 6-7% before snapping back and bouncing into September 2) Sentiment remains somewhat dismal, despite prices being near all-time highs. Ongoing trade tension and policy uncertainty along with concerns about global economic weakness, not to mention an impeachment inquiry just ahead of an Election year are factors which are serving to create a cloud of indecision and general bearishness
So given just a 6% decline from late July, we've already seen a fairly pronounced uptick in fear, and this likely results in declines finding support much quicker than normally would happen. Many will rightfully believe that a market decline will start to act as a larger drag on the economy, and they very well could be right into next year, with tariffs serving as the key catalyst for investors and corporations to start pulling back. As mentioned in prior reports, the chief concern on an intermediate-term basis revolves around the "flattening" out of this rally which has been pretty plain to see given momentum indicators on weekly and monthly basis. While longer-term uptrends remain intact, momentum has told a much different story, and slowly but surely illustrates a rally losing steam. Chronic overbought conditions from back in January 2018 have never been revisited, and despite the push to new highs, we've witnessed lower and lower peaks in momentum. Historically this has proven problematic for stock indices and typically is present at market peaks. While Advance/Decline has largely been trending near highs, we have seen some withering in this also in recent weeks and it's thought that the A/D line is topping for the Fall. The Summation index largely peaked out in February of this year, and we've seen the number of stocks hitting new 52-week lows start to increase off low levels in July. Overall, not too much to go on which would cause one to avoid markets just yet, but it's thought that the balance of the year likely turns out to be largely flat with where prices are now. Declines in late October into November should give way to a year-end rally. Yet, the decline likely will be made back by end of year, but not without further damage to the intermediate-term momentum that will continue to plague the market into next year.
10 of the more important charts from this past week
S&P hrly chart- Shows how last Thur/Fri rally fits into the bigger picture
S&P -Bullish uptrend from last Thursday's lows has neared critical point The two day rally has carried prices back to the highs of this trendline channel that has been ongoing since mid-September. Momentum has gotten overbought on hourly charts, but yet it's thought to be a positive that S&P is now back over 2940, which had marked prior August highs. This was breached for two days before being recouped, and the uptick in breadth and volume late last week is thought to be a positive in suggesting Equities might be able to strengthen further
Growth turned down sharply v Value, and despite the minor rally last week in Technology, this breakdown is still very much in effect. Ratios of the Ishares S&P Growth ETF, IVW, ,vs the Ishares Value ETF, IVE, look to have made 5 waves higher, before turning down to break the long-term uptrend from last December. While this ratio has been shown in the past, it's insightful to see that despite the progress in the last week, this barely made a dent in how this ratio appears. We'll need to see some evidence of this deterioration being completely recouped to have confidence of Growth making a bigger comeback. At present, it's right to use any minor bounce to still favor Value.
Social media large Cap Technology, or the so-called "FANG" names, are getting ready for a large move, given how this longer-term Triangle pattern has been constricting over the last year. We've seen 2 consecutive lower highs and one major/two minor consecutively higher lows over the last year. As we reach the apex of this larger consolidation, it should pay to bet on prices extending in the direction of the breakout. Last Friday's success in exceeding the minor downtrend from mid-September could have provided a minor clue which was a positive, and should allow for this coming week to start off to the upside, being led by these Large-cap Technology and Discretionary names. Netflix, Amazon and Facebook all showed evidence of trying to bottom out after steep declines, while stocks like Apple remain quite strong technically, and should be considered for a push higher to prior highs near 233. Overall, this group has come under some pressure of late, but yet still looks attractive near-term for at least a short-term bounce, and the act of getting over resistance highs of this triangle should allow for a more meaningful push higher.
The 2's/10's curve has made some substantial progress higher in the last week, exceeding resistance near 10 bps and as of Thursday was up over 15 bps before flattening out a bit to finish the week. As this chart shows, the yield curve was largely sideways before flattening substantially to inverted level before bouncing. Last week's steepening happened largely on the break of the 2 year yield on weaker than expected PMI data. Given that 2yr yields plummeted down to new lows for the year, this suggested Powell might have been right to cut rates when he did, and suggested an October cut was all but certain. While not immediately expected, movement above 30 bps would surpass the entire downtrend over the last few years, allowing for some meaningful steepening in the yield curve. The near-term takeaway from last week is that a further push higher looks possible, which largely should be led by 2year yields declining further, while the 10-year stabilizes and/or even tries to rally this coming week.
US 10-Year yields have failed to follow the rally in Equities over the last few days, which is important to watch carefully given the prior positive correlation at work. Yields do look very close to support and very well might begin a counter-trend bounce this coming week. Yet the rally would require a move above 1.80% to have a chance of truly extending. At present, this looks like a short-term downtrend nearing support as part of an intermediate-term downtrend. Financials have been affected negatively given the decline in recent days, regardless of the bounce in the yield curve.
Emerging Market ETF looks to be trying to turn back higher and last Friday's success in exceeding the minor downtrend is seen as a positive on an absolute basis. Charts have been negative this year, making three successively lower peaks. Yet, the pullback from mid-September has not gotten down near former lows and looks to be trying to hold. This is the first positive. The second is the US Dollar which has made a minor rollover last week and is starting to weaken. (2nd positive) The 3rd positive concerns the minor trendline breakout last Friday. With prices having closed near the highs of the day, there looks to be an excellent chance of some follow-through up to 41.75-42 to challenge the larger downtrend. This might not be exceeded until a larger decline in the Dollar gets underway. However, it looks right to position for further strength over the coming week given this minor positive development.
VNQ, or the Real Estate ETF, made some good strides late last week, moving back into this base of the triangle which had occurred as part of the larger uptrend. This group has shown some excellent performance this year, second to only Technology, and last week's snapback bodes well for a push back to new high territory. Until we can see meaningful evidence of yields beginning an intermediate-term advance, or some greater weakness in the defensive sectors, which would occur on Equity indices and sectors moving back up above July highs, it should pay to favor groups like the REITS, and VNQ in particular should exceed 94 on its way up to 100.
XOP, the Exploration and Production ETF, looks likely to begin a rally after pulling back to test former lows. Crude oil itself has declined down to meaningful near-term support, and XOP looks like an excellent risk/reward with movement over 22 likely carrying this up to 24-24.50 with resistance near former highs occurring up near 26. Prices have signaled exhaustion based on Demark's TD Buy Setup, from TD Combo, and have done so above the so-called TDST line. For those proficient in Demark analysis, we know that such a signal gives some conviction that the current trend should be ready to turn back higher, in this case back to the upside (or at the very least, stop going down and consolidate) With stops placed under last week's lows, one can speculate that Crude and energy itself is ready for at least a minor bounce into mid-to-late October.
Gold's positioning looks to be near extremes, suggesting that there's a high likelihood that last week's Head and Shoulders breakdown could have been the right move after all for gold. While the so-called "neckline" was recouped a day later, the pattern remains choppy near-term, and has shown some momentum weakness. Meanwhile the Non-commercial "Speculators" have amassed the largest long position in Gold since 2016, and prior to that 2011, both of which were excellent time to sell Gold. My expectation is for a top to be in place in Gold in the days/weeks ahead and for the start of a pullback into late October/November, or even December before another bottoming out. While it will take anotehr move under 1485 on a close, i think its wise not to have on big precious metals longs with positioning so extreme while the rally is starting to fizzle out.
McClellan's Summation index, or the smoothed Advance/Decline, looks to be near levels where this can bottom out after selling off for the past few weeks. As daily charts of this smoothed breadth oscillator show, this peaked in late February and has been lower ever since, but made peaks back in late July along with mid-September at roughly similar levels. Now the lows shown occurred at late May and then August, right when the market bottomed. This is often useful to consider when looking for divergences vs the broader equity market and at present, is well above where it bottomed in August, despite SPX coming very close to testing those lows. Thus, while the trend has been down in the last couple weeks, its been relatively stronger than price. Additionally, counter-trend exhaustion signals show a near completed TD Buy setup which historically has coincided with several prior turning points. Thus, it appears like smoothed "breadth" should be on the verge of turning back higher.