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Financials should be favored for Outperformance

February 18, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2727-31, 2678-81, 2672-5, 2622-4

Resistance: 2780-2, 2785, 2800-1, 2824-5



Summary:  Ongoing resiliency for US Equities and none of the catalysts that were thought to be potentially warning signs given the uncertainty have brought about any real weakness of late. Much of the slowdown which has happened a couple different occasions during this runup from late December proved to be 2-3 days maximum before trends pushed back higher. Specifically, equity indices remain trending in bullish uptrends and managed to close out the week near weekly highs. Bond yields have been largely under pressure in recent weeks and still no real evidence of yields turning back higher. The real news this past week concerned the US Dollar having begun a potential larger move back to the downside, which served to help commodities strengthen. While a bit more weakness is thought to be necessary to call for a larger decline in the Dollar throughout the spring and summer, this turndown looked important last week. Moreover, the breakout in commodities reached multi-week highs and cleared a multi-week sideways base which had kept the group largely churning sideways of late. Heading into this current week, technically we'll need to see some evidence of price weakness to think that the Bulls don't carry indices even higher into early March. Momentum is not yet overbought while Demark indicators still haven't lined up in an ideal fashion to signal a reversal. The Chart below shows prices having shown little to no real damage thus far. So bottom line, we'll need to see a break of this trend for concern, and until then, trends remain bullish.

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Overview: Equities head into this current week having trended higher for seven of the last eight weeks. We've seen a snapback higher in Technology Industrials and Financials, while momentum has been strong enough to push back to positive territory on weekly charts. Structurally, SPX remains in much better shape than this time two months ago, and has managed to rally over 400 points off the lows, or greater than 17%, nearly 1/2% a day for 34 trading days. Breadth, which started off strong in late December/January, has gradually waned somewhat, but has not turned lower as thought might be the case in mid-February. Additionally, markets continue to trade within a thick cloud of uncertainty as many still express doubts that the Government shutdown can be averted all together after the initial funding, while many are skeptical of a true Chinese deal that would satisfy what was agreed upon last month. However, the prospects of a deal of some sort seems to be helping to underpin an ongoing bid in Equities as few believe that a true deal has been completely discounted by stocks. Thus, while many are hopeful that a deal of some sort can be put into place by March 1, many are not willing to buy into this rally without a pullback of some sort. But trends remain near-term bullish and momentum is now positive on both Daily and weekly charts.

Specifically, two things have improved in the last week which were mentioned as negatives but seem to have recently fallen by the wayside. First, we've seen Defensive strength largely start to reverse course in the last week, as groups like Utilities, Staples and REITS have all begun to flounder and weaken back to former weekly lows. This past point in particular is often an important harbinger of gains in stocks and normally it's important to see the Defensives really start to gain ground before expecting too much of a correction. Second, breadth has failed to show any real weakness which was thought to happen last week and start to show a negative reversal. Last Friday's gains happened on nearly 3/1 positive breadth, and this has not turned down as might be expected. Finally, it's worth pointing out that Demark indicators have not confirmed any type of exhaustion just yet and while both TD Sequential and TD Combo are in place, the Setup count has been pushing higher in another count,(which is now a 4) which very well could lead to 9 daily bars before registering a 9-13-9 pattern. (In plain English, this simply means we might very well get another 4-5 days of rally before this move is complete)



In terms of the negatives that remain, and are important to highlight, the chief concern revolves around Yields remaining quite weak and not following suit and/or leading Equities higher. Given the past positive correlation, this was thought to be important, while a divergence in Yields and stocks should be cause for suspicion. At present, both Bonds and stocks have been persistently strong. Additionally, Technology seems to be nearing resistance, both with SOX near key trendline resistance at 1385-1400 and also Equal-weighted Technology right near former highs. Without at least some proof of Technology starting to weaken, however, it's tough using this point as a real negative for now.


This week we tackle the Financials, a group which was largely weak for most of last year, having peaked at nearly this exact time in February 2018, while this February we've seen the group start to emerge. Specifically, Financials have made sufficient technical improvement of late by means of trendline breakouts in XLF, KRE and Relative breakouts on a short-term basis to expect further near-term strength out of this group. On a weekly basis, it should be mentioned that longer-term relative charts of XLF/SPX have not improved sufficiently to make the case for a year-long rally in this group. Therefore, a near-term bullish call only is appropriate for now. Though given some divergence in Technology in following Equity indices lately, one can make the case that those who are long in Technology might benefit from a move into Financials. One should position long in Regional banks, along with the Credit-card processors, while expecting the larger banks to start gradually joining in on the strength. Longs to consider at this time technically are found in V, AMTD, JPM, WABC and PRU. Charts and analysis of these are found below.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:



Short-term (3-5 days):  Bullish until/unless 2681 broken- The trend heading into February has failed to show any signs of weakness thus far in the uptrend from late December. Thus given S&P has gotten up above 2760, and given last Friday's strength, prices still look to have the possibility of pushing higher within this trend, but likely have maximum upside to near December highs near 2800. On the downside, we'll need to see weakness down under 2731 at a minimum to have any sort of inkling of an impending pullback. However a move to new multi-week lows under 2680 would break the uptrend from December and give more conviction. As mentioned, several of the negatives have not played out to stall this uptrend, and it's important to see the weakness in Trend before weighing in that any decline should get underway.


Intermediate-term (3-5 months)- Bullish- While monthly momentum remains 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. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. 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.


10 important Financials Charts heading into this week 5 Sector, index, relative charts and 5 technically attractive Long ideas

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Financials relative to SPX (S&P 500 Financial index vs SPX) We've begun to see some definite stabilization in Financials in the last month after a very poor showing in 2018. The group peaked out in relative terms nearly at this exact same time last year, while arguably now bottoming relative to the SPX. Daily charts showed a minor trendline breakout from the last month, while weekly (shown above) highlights the bottom made late last year, the rally, and now what appears to be a higher low. While we'll need to see movement now back over January highs in relative terms to have conviction of an intermediate-term bottoming in this group, the stabilization to this downtrend from last year as seen above, (with the downtrend having given way to sideways trading) is a definite positive to weekly momentum. It looks right to favor Financials to strengthen further in the weeks and months ahead given the absolute breakout in both KRE and XLF in the last week, which has helped momentum improve on near-term and also intermediate-term timeframes. 

SPDR S&P Regional Banking ETF (KRE- $55.97) - Bullish near-term after KRE broke out above the downtrend that had guided the Regional banks lower in recent months. This strength has helped this group recoup nearly 50% of the damage done since last Fall, and counter-trend exhaustion remains premature to sell into this move. Thus, KRE still looks attractive to own here with thoughts that a move up to near $60 is possible before any stalling out. KRE has outpaced the recent gains in XLF and should be favored relative to the group as well (Additional charts on this below)

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KRE v XLF (Regional Banks relative to Financials XLF) Regional Banks should be favored for additional outperformance. This relative chart of KRE to XLF shows the recent breakout that happened with Regional banks when compared to the XLF, which had been trending lower since last June. This looks to be a very favorable development for KRE which had underperformed much of last year but seems to have rebounded nicely in the last month. Thus, when deciding how to play this Financials move, Regionals look like the better bet after coming back to life following a very tough 2018. 

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SPDR S&P Bank ETF (KBE- $44.92) Constructive given recent bottoming and technical improvement. KBE is bullish given the rebound from key support and rally back over the downtrend that held this sector under pressure for the back half of 2018. This monthly chart helps put the decline into perspective, as the Bank weakness failed to get down sufficiently to turn the intermediate-term trend negative. The corrections in this sector over the last 10 years found key support near a giant uptrend line connecting lows going back since March 2009. As can be seen, the pullback into 2011, 2016 and now late 2018 all held where they needed to in order to avoid violating this giant uptrend. Additionally, the rally back over the prior lows which had held throughout much of last year was an important and positive technical development. Thus, while momentum did turn down sharply from last year, this rebound has begun to help weekly momentum begin to stabilize and weekly MACD has started to converge again from its negative state. Bottom line, a rally up to the high $40's looks very possible given the technical improvements in the last month. Only a move back down under December lows would cause the intermediate-term picture to worsen. 

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XLK vs XLF (Technology vs Financials)- Tech looks to be peaking out relative to Financials. This daily chart of XLK to XLF shows the relationship of Technology to Financials over the last couple years. While Tech has indeed been positive over the last few years relative to Financials, this ratio turned more neutral starting last year and the recent lift from December in Equities has brought this ratio up to levels where it makes sense to consider switching from Tech to Financials for the weeks and potentially months to come. As can be seen, relative ratios of XLF/XLF have hit trendline resistance and begun to stall in the last couple days. Thus, while the longer-term trend in Tech has been in good shape, while Financials have been falling for the last year, it looks like a good risk/reward time to favor Financials after a very sharp rally has taken place within Tech. Despite much of the focus on Technology these days, some sector rotation appears to be in order, so it looks right to favor XLF and in particular Regional Banks- KRE, over Tech in the short run.

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Visa Inc. (V- $144.91) V is attractive technically and the Credit card processors continue to be one of the more attractive subsectors within the Financial space. This stock broke down nearly $30 from last year's highs before regaining the area near prior lows back in late December. Similar to the SPX, this represented a structural positive that has allowed prices to trend higher sharply over the last month. While prices have gotten a bit stretched vs its most recent uptrend off the December lows, no evidence of any counter-trend exhaustion is now present. Additionally the stock has exceeded an area of trendline resistance drawn from last Fall (not shown) Overall a rally back to 150-2 looks likely in the short run before any stalling out, or nearly 5% higher from current levels. One should consider any minor pullback to $140-1 as a chance to buy dips for further gains in the months ahead.

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JPMorgan Chase & Co. (JPM- $105.55) JPM looks attractive technicallygiven the stocks breakout last week above the last four week's highs. This area also coincided with the lows made throughout much of 2018, so last week's strength was important and positive for JPM's structure. Additional gains look likely in the short run to 108-110 and over 110 would help to drive this stock back higher to test former highs made last year. Overall, this has lagged some of the other Financials lately but the move back over 105 should help this begin to show better strength in the days/weeks ahead and makes this more attractive to own technically.

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TD Ameritrade Holding Corp (AMTD- $56.86) AMTD is bullish given the breakout of this downtrend which has held since last Summer in 2018. While the stock had been under quite a bit of pressure last year, not dissimilar from the whole group, this breakout back over its downtrend near $52 has helped the structure improve tremendously from a technical perspective. While the stock has seen a bit of consolidation in the last couple weeks, this has helped to lessen recent overbought conditions and last week's strength likely results in AMTD pushing up to the low $60's without too much trouble. Overall, this stock looks attractive to own and buy dips in the weeks ahead.

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Prudential Financial Inc (PRU- $94.15) Attractive from a risk/reward basisafter PRU's 30%+ selloff late last year failed to violate importnat support that would have turned the larger structure negative. As weekly charts show going back over the last 10+ years, the stock's pullback last year managed to hold 10-year trendline support and has successfully bounced back over $90 in recent weeks. Thus, last year's breakout was nearly 100% retraced from the pivot area near 90, and now the stock has turned up sharply to test the downtrend from last Year's peak (shown in Green) Rallies back over $97 should drive PRU up to at least $110 with a good likelihood of a retest of former highs. Dips can be used to buy with stops placed at December lows, as any break of last year's lows would also violate the uptrend line going back since 2009. For now, this looks like a good risk/reward and can be owned here technically with the plan of adding on an additional trend breakout or on any minor pullbacks in the weeks to come.

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Westamerica Bancorporation (WABC- $63.30) This Western Regional bank is appealing technically given the lengthy bullish base this has formed since the beginning of 2017. The stock's recent churning in recent months does not take away from the stock's attractiveness and its rebound from late December has managed to carry the stock again back to key resistance between $63-$65 which has held for the last two years. However, the quickness with which this has regained recent losses makes this bullish to buy at current levels, anticipating a breakout of $65 in the weeks ahead. The Regional bank breakout as seen by KRE should help WABC to make its own base breakout in the weeks to come. Thus, buying here ahead of the breakout makes sense, as this area should lead to an upcoming move in the near future