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Rally extends to Dec highs as China trade truce extended

February 25, 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: 2800-1, 2815-8, 2824-5



Summary:  Equities continue to charge higher, as this past week now marks 8 of the last 9 weeks of gains. While sentiment is growing a bit more constructive from its December 2018 pessimistic levels, it's nowhere near levels of complacency that marked the peak around this time last year back in January 2018, 13 months ago. Trends remain bullish near-term, momentum has turned bullish on daily and weekly basis, and Breadth has been much more constructive of late. Thus, heading into the final week of February, there still seems to be little with regards to price or momentum lately that would suggest this trend is stalling out. Bond yields meanwhile have been churning but largely lower, and have all but ignored the equity gains of late. The Dollar continues to show signs of peaking out, and has turned down a bit more forcefully of late. Meanwhile Commodities have begun to lift along with Materials and mining stocks and Emerging markets have firmed. Most of this still seems quite constructive heading into this week. While it's right to try to pinpoint factors that might allow for a slowdown and/or reversal, price is the most important factor and nothing price wise has yet to show meaningful enough deterioration that would allow for a reversal. Thus, while counter-trend signals are now abundant this coming week in suggesting some type of Reversal should be near, we'll continue to utilize the uptrend from December, and until this is broken, it will be right to still stay the course. The chart below highlights the Value Line

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Overview: Equities continue to be largely "unloved" while trends have steadily pushed higher. The uncertainties of China Trade policy have largely had little effect in causing any ripple to this bounce, and technically speaking it's always been right to lean more on trends then to anticipate what might be factored into the market or not on Trade. Technically it's likely that this trend DOES show some type of stalling as we enter March, given the confluence of both Counter-trend exhaustion now on multiple sectors, indices while Treasury yields remain quite weak. However, trends remain bullish near-term and simply have not given us much reason to want to fight them, regardless of momentum "nearing" overbought levels, or Treasuries rallying sharply as well. Breadth has been quite strong in the last months, and Summation index (chart below) has risen to the highest levels in over 2 years. Skepticism of this rally is also a factor and many who missed the rally are now holding out for pullbacks to buy, as opposed to chasing this move. Furthermore, the "smart" money as per CFTC data shows no evidence of shorting into this move and indicates a bullish bias, which is largely constructive on an intermediate-term basis. This week, the focus this week will be trying to pinpoint what still CAN work, as opposed to trying to fight this move. After all, as discussed, there still has been no meaningful change in this trend from late December. Until this trend starts to give way, it's right to just concentrate on what has an above-average chance of continuing to work in the days and weeks ahead. However, it's not wrong to think that this recent pace of gains will be very difficult to sustain in the coming months. Given the extent of the deterioration which took place in October-December, monthly momentum remains negative and quite a bit below the peaks which were registered near this time last year. Thus, this recent rally has largely had little to no effect in carrying momentum back to near recent highs and this will continue to be an intermediate-term issue for stocks.


Overall, the recent technical damage in the US Dollar looks important and the focus should be diversifying out of Equities after a 17% bounce and into Commodities given their recent stabilization. Metals and mining stocks, and Chemical names look like better risk/rewards than Technology, though selective longs in Industrials, Discretionary and Tech still looks prudent given the extent of the positive momentum of late. Bottom line, the bullish seasonality combined with a less than enthusiastic sentiment situation and recent trend breakouts looks to still favor a bullish view on Stocks overall for the months ahead, with any minor pullback that breaks uptrends from December thought to be short-lived and not something which immediately leads to a retest.


LONG IDEAS: TOL, ITB, STX, WDC, FTNT, CRM, FXI, CLX, CHD, INFO, STOR

SHORT IDEAS: TTWO, ACOR, M, SNPS, HAE


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


Short-term (3-5 days): Bullish until/unless 2731 broken - Raising stops on longs- Markets have flattened a bit but the trend has not turned down sufficiently to think this week will be lower. SPX is now within striking distance of early December highs, which was thought to have some importance heading into Late February. (overnight futures higher on china tariff truct delay) Counter-trend signals will be in place this week. Yet, quite a few indices and sectors have now broken out, and it's thought to be likely prove to be a short-term stalling/reversal only which then should be buyable into this coming Fall. Above 2803 would lead to 2815-8, and this could have importance into mid-week. But important to see evidence of 2731 broken to have any real concern and then this would likely lead down to 2681 the 2/8 lows. Remaining above this over the next couple weeks keeps the trend in very good shape.


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 Charts heading into this week, showing some of the recent Technical developments in Equities, FICC, and Sentiment

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Equal-weighted Technology is now moving back to new highs.Bloomberg's Equal-weighted Tech index on an intermediate-term basis has shown remarkable improvement in the last week vs the broader market during a time when it was thought that most Tech was nearing resistance. While counter-trend exhaustion still looks to be close for Technology, this Equal-weighted Tech vs SPX chart has just broken back out to new all-time high territory. This can't be viewed any other way than bullish in the near-term. While Semiconductor stocks certainly have work to do given the SOX still under 1400 (See charts below) this movement in Tech is a welcome development that should allow for additional Tech strength in the weeks and months to come.

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Industrials breaking out- Industrials when shown on Equal-weighted Basis, are also now just breaking out, with last week's close above the highs of this intermediate-term trend of Equal-weighted Industrials vs SPX. (Measured using Invesco's S&P 500 Equal-weight Industrials index (RGI) vs SPY ) Given GE, MMM, BA weight in index, it's thought to be more accurate to use Equal-weighted Industrials vs just the XLI. Overall, a breakout of the trend which has held since last year is thought to be a positive development for this sector and can allow for additional gains.

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Europe is getting close to its first meaningful area of upside resistanceWhen eying the IEV, the Ishares Europe ETF, additional gains look likely early in the week, but appears to be heading right towards a serious area of trendline resistance drawn from last year's highs. Similar to the SPX, counter-trend exhaustion will form this week and this looks to be a better area to consider selling into than SPX considering the ongoing downtrend which has not yet been surpassed. So while the near-term trend is bullish, one could look to take profits on further gains this week and/or consider shorting above 43.50, as from a risk/reward basis, longs look unattractive going into March with prices still under this longer-term downtrend. 

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Semiconductors- SOX still trending higher, but finally getting to areas of importance which has held since peaking out last March. Similar to European ETF, IEV, the Philadelphia Semiconductor index, or SOX also lies just below important levels. Movement back up to 1385-1400 from 1364 still appears likely, so Semis still appear a bit early to sell into at current levels. Following another 3-5 days higher which gets over 1385, this would be a better suited Sell vs at current levels. Momentum remains positively sloped and this uptrend from late December remains very symmetrical in sloping higher. So given this sectors leading tendencies, it remains important to highlight that the current uptrend has not shown any evidence of peaking, but does look to be close to key levels, which are just 20-40 points above, and Demark indicators will signal exhaustion within 1-2 weeks. This points to an above-average chance of this stalling out into March at a one-year anniversary of last year's peak. 

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Transportation Breakout likely leads to additional gains- Transportation has been one of the driving forces in the Industrial move lately, but yet much of this has come from the Rails. The DJ Transportation Avg has officially exceeded the downtrend from last Fall as of last week, which puts this trend on better terms, suggesting that further gains should be likely. Stocks like CSX, NSC, and UNP have all enjoyed gains of over 9% in the last month, and despite some of the woes in stocks like FDX and UPS which have underperformed along with the Airlines, Transports look like a group to favor given this rally back over key resistance. Transports should have resistance at 11044 near December highs, and IYT still looks to trend higher to 200 from its current 190.

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Bloomberg Dollar index- The extent of the Dollar weakness in recent weeks is an important part of the larger thesis of why Emerging markets might outperform in 2019 along with Commodities finally starting to turn higher for intermediate-term gains. China has strengthened relatively to the US lately and it's thought that this strength can continue and might begin to outperform US stocks. Near-term, this Dollar weakness looks to persist and if 2019 lows are violated, this would also constitute a breakdown of this entire structure over the last year. On a development of this sort, one should consider intermediate-term Pound Sterling and/or Euro longs and also longs in commodities as an asset class that could give stocks some meaningful competition this year as an outperforming asset class. 

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Utilities have managed to engineer a much stronger comeback than many anticipated lately, as this group has turned in strong enough performance to rank fourth best over the last month and the 2nd best performing sector last week. So this recent outperformance during times of market strength is thought to be unusual and something to pay attention to. Technically speaking the last 4-5 weeks have given a snapshot at why further strength might be likely in this sector, as we've seen a move right back higher to test both prior highs in a very short period of time. Thus, when it seemed likely that the peak and selloff into December might bring about further intermediate-term weakness, this ability to snap back as quickly in recent weeks bodes well for an intermediate-term breakout back to new all-time highs. In the short run, there is some resistance directly above. However, this is thought to be temporary and any pullback should be used to buy with targets in the low 60's.

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Breadth much stronger than expected of late- Minor waning proved just temporary- Looking at weekly Breadth, this has risen pretty dramatically in the last couple months, and was thought to be something to keep a close eye on in terms of gauging whether this rally had any "legs" or whether just a minor bounce that should then give way to a move back to lows. As this weekly chart of the Summation index shows (the Smoothed gauge of McClellan Oscillator) this has gotten above all levels seen in the last year, and has reached the highest levels since 2016. Thus, recent strength has been remarkably broad-based in a manner that was initially thought to be very difficult heading into this year. Technically in my experience, breadth surges like this are an impressive guide to what could play out in the next 3-5 months. While momentum seems to be nearing near-term overbought levels, it's becoming increasingly clear that this rally might have more to go on an intermediate-term basis, either into late April/May, or into Late August before a more meaningful top.

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VIX getting down close to levels where it's right to consider owning implied volatility. VIX has now fallen off dramatically from December peaks and is within striking distance of levels that were important all of last year. While this looks to potentially have a final maximum flush down to 10 from its current 13.51, we can see that the area from 9.50-11 has largely held for the last three years. Thus, any further drop in implied volatility would likely constitute an attractive area to buy implied volatility for means of hedging and/or long-dated speculation on Vol levels rising from these depressed levels later in the year.

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Sentiment has gotten slightly bullish, but certainly not at extremes- Sentiment polls are worth highlighting, since bearish sentiment seems to have evaporated, as might be expected with a friendly FED and 17% rally in the last 8 weeks. Yet, DSI and Investors Intelligence readings still haven't lifted AAII Bulls all that dramatically over Bears. (American Association of Individual investors) Last week's reading was a 13% more Bulls than Bears. Thus, positive and a big improvement over the bearish readings from late December. Yet, historically it's only been when both AAII and Investors intelligence both showed readings +30% either Bullish or bearish to really make a difference.