February 4, 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: US Equity indices remain in in steep near-term uptrends as January came to a close last week, having risen over 7% for the month of January, putting last month's performance in the top 10 January's of all time. Momentum remains positively sloped on a daily basis, while negative on monthly charts, but the recent uptrend has been strong enough to now cause momentum to turn positive on a weekly basis. Neither daily, nor weekly momentum is overbought and prices have broken downtrends from last Fall while having regained over 60% of the decline from last September's highs. Globally we've seen some attempts at both Europe and Asia stabilizing after their own drawdowns from last Fall, Bonds have followed stocks in the last week, showing some rare divergence from their recent negative correlation, but the yield curve has largely gone sideways since early December after having been cut in half since October highs. The Dollar, meanwhile has pulled back sharply in recent weeks to an area of nine-month trendline support which looks to be a temporary holding area for this correction. Commodities meanwhile have largely begun to act much better in recent weeks, with precious metals turning up sharply and Crude oil continuing its recent stabilization after last year's decline. Overall, a very good start to the year thus far for both Equities and Commodities with Emerging markets acting well as the Dollar has begun to weaken after peaking at nearly an exact two-year anniversary of former highs. The chart below highlights the Value Line Arithmetic index, the Equal-weighted index of 1700 names, which has made a constructive breakout of the downtrend from last Fall, similar to SPX, NDX and DJIA. This broad-based gauge gives some reason for optimism in the months ahead. While approaching areas which could result in a temporary stallout, the combination of improving momentum, bullish seasonality and ongoing skepticism about the economy, China, FOMC, and earnings should help stocks fare better than many expect this year. Some charts and a few good risk/reward ideas in stocks are presented below.
Overview: S&P has now rallied for five straight weeks, rebounding over key areas thought to be potentially be problematic near 2630 (Nov lows) and turning in performance of greater than 7% for the month of January. This ranks in the top 10 January's of all time and data from Stock Traders Almanac shows us that the 20 top January's since 1950 with 4% or greater performance all led to positive performance for the year as a whole. Every one. So while some might be skeptical at the power of the so-called "January Effect" (which has been right about 75% of the time in showing that a positive January can lead to a good year) history shows Zero "down years" in the top 20. So this is definitely something to give some consideration.
The following seem to be pertinent issues and highlights, technically, heading into the first full week of February.( Each point is followed by whether this is a positive, or negative)
1) Trendlines from last Fall's highs have now been exceeded by SPX and DJIA to join the NASDAQ, while Value Line Arithmetic index has also broken out above this key resistance. (Positive)
2) Weekly momentum indicator MACD has now turned back positive. So now SPX has positive momentum on both a daily and weekly basis, while not overbought, and structure has improved. (Positive)
3) Financials have turned lower relatively speaking in recent days after pushing up to key relative trendline resistance vs SPX (Negative)
4) Treasury yields and USDJPY have both been trending down over the last week, diverging from Equities. This happened also back in late November and it was right to follow Treasuries as they ended up leading Equities down(Negative)
5) US Dollar seems to have found good initial support after its recent pullback. Technically I expect a bounce, which might negatively affect Emerging markets and Precious metals in the month of February
6) Counter-trend Sell signals to this uptrend on indices like SPX, NDX, RTY and others can all appear this week on strength, which would be the first signals to show up since the rally began in late December. (Negative)
7) Summation index as a smoothed breadth indicator, has now reached peaks seen last Fall and is due to stall out this week or next. Counter-trend exhaustion has also appeared on this indicator also. Bottom line, this indicates a good likelihood of a breadth slowdown/reversal, and that should be a temporary negative for stocks (Negative)
8) Sentiment still looks to be muted at best and certainly not all that enthusiastic despite a 13% rally in 5 weeks. This is bullish, in that any minor drawdown would cause investors to get pessimistic far more quickly than normal, and is a reason to support a larger intermediate-term rally (Positive)
Overall, my recommendation last week was to look to sell into rallies at SPX 2710-5, an area which has largely been reached. Structurally patterns are better than a few weeks ago and momentum is not overbought. However, the presence of counter-trend sells appearing this week is important (they have been in the past) and the divergence of Treasury Yields and USDJPY is also a concern. Financials turning down relatively speaking represents about 13% of the market, and has to be watched carefully. Yet, markets still have shown little to no signs of reversing course however, and this truly is important before betting on any pullback after five "UP" weeks. The key issue for bears early this week centers on the fact that some time factors still look a bit premature to suggest any imminent downturn. But I do recommend increasingly a more cautious stance to this bull move in the short run (While not advocating shorting indices here, I think buying implied volatlity for February/March makes a ton of sense) Risk is very well defined for those that are negative and positive in that one has a difficult time being short over 2715. Meanwhile stops for longs are largely down at 2596, which might be a bit more than some wish to risk. Flattening out in Market exposure makes sense over the next 1-2 weeks, but one should look to buy into dips, as the improvement in structure at this point likely does NOT give the Bears the gift they want in seeing indices get back to December lows. Additionally, non-technical factors like a China deal seem to be approaching. While many believe China will never concede to the issues demanded of them, it's logical to expect a deal of some sort to materialize and my thinking is the market will still view this as a positive, and has not been priced in.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Upside limited - I'm expecting markets to stall out either this week or next, and for now, there are still a few time-related aspects which are not perfect to sell right away, and also price has given us precious little indication of rolling over. Thus, after a five-week rally, it's a must to have at least one reversal day which makes a multi-day low before thinking any pullback is imminent. Near-term, I do like exiting longs on indices at 2710-5 and would await weakness, and prefer buying stocks that are just breaking out and offer a bit better risk/reward than the indices themselves here.
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.
5 important Charts heading into this week along with five technical long ideas to consider
McClellan's Summation index- This recent bounce has caused breadth to expand rapidly, but we've now reached an area that's caused resistance on three separate occasions since late 2017. Additionally, counter-trend Demark exhaustion is now present for the first time on this bounce. Thus, I expect markets slow and begin to make at least a minor pullback in the upcoming weeks and this looks to be an early warning sign of at least a partial slowdown and/or upcoming reversal in market breadth.
US 10yr.Treasury Yields- It's always important to monitor if yields and stocks have been trending together (they have in recent months) and when this starts to diverge. Treasury yields have now been falling for the last two weeks and we've also seen the Yen higher in the month of January. This is at least a minor warning that all might not be what it seems. Previously we saw yields turn down in November and stocks followed, so this is an important chart to pay attention to heading into this coming week.
Financials- The last week has seen the Financials turn down pretty sharply on a relative basis, and relative charts of XLF/SPX show this to be a pretty major area to monitor which looks to have been resistance on this bounce. While a move back above would be very positive, this is not likely going to happen until yields can stabilize a bit more. Near-term, this downturn in Financials is seen as a minor negative, given the 13% weighting in this group within SPX.
US Dollar seems to have found initial support - The recent downturn in the Dollar looks to have arrived at its first real area of importance after the pullback from last Fall. This drawdown coincided with Emerging market strength along with precious metals outperforming. Both of these could now be subject to at least a minor trend reversal after their recent runups. The Dollar vs the Pound specifically looks to rally after recent BREXIT-inspired weakness, but yet as we've discussed, a big bounce in the Dollar into February should be something to sell into. Charts, momentum and cycles all suggest intermediate-term Dollar weakness. However, heading into February, it does look like a minor reprieve is here.
Gold looks to be near its first area of resistance on its rally, which could produce some stalling out in the metal after its decent bounce in the last couple months. While technical trends and momentum have both improved in Gold in the short run, Gold has gotten overbought and now shows evidence of upside exhaustion. Moreover, the Dollar is showing some evidence of wanting to rally near-term, so the combination of these could be a negative for Gold into February. However, dips should be used to buy in Gold in the weeks and months to come, as the larger pattern has been slowly improving. As i've mentioned in recent weeks, gold needs to get up over 1375 to jumpstart the intermediate-term rally, something which will be important and quite bullish when it happens.
5 Technically Attractive Long Ideas to Consider
Medpace Holdings (MEDP- $65.73) This recent breakout back to new highs is quite bullish technically as the move exceeded both prior highs of a bullish base going back since last Fall. This looks like an excellent risk/reward to consider for longs and a move into the low 70's is possible into the Spring. Pullbacks should be used to buy dips if this occurs anytime in the next two weeks. For now, this is a an attractive long.
Trade Desk (TTD- $145.24) Trade Desk is bullish technically and last week's breakout above the entire trendline connecting highs should allow for further strength to areas of resistance near $165. This entire consolidation from last Fall is seen as a corrective move and now should allow for a rally back to new high territory sometime this Spring. Near-term, the breakout from last week doesn't show any evidence of near-term exhaustion and the fact that TTD has been sideways since late last year has helped to alleviate any near-term overbought readings in momentum.
Atlassian Corp PLC (TEAM- $99.27) TEAM just managed to push back up above former highs back to new all-time high territory last week, which puts this stock on very good ground, technically. Additional gains are likely to targets near $105 and then $110 before this faces much resistance. Similar to many names, this peaked out last Fall. Yet, the recent rally has been strong enough to break back out to new all-time highs. Technically this is a very constructive development, and bodes well for TEAM to continue to push higher to targets mentioned above.
Finisar (FNSR- $22.66) FNSR has gradually been showing better technical strength after pushing up to new monthly highs in December. Its weekly pattern shows a formation that looks to be bottoming out after the pullback from last year. Gains up to $25 look possible after the recent strength this stock has shown, while any movement back under recent lows would serve to stop out longs. Overall, this looks to just be trying to push higher and weekly charts closed at multi-week highs after this recent consolidation, which is a positive.
Intelsat SA (I-$24.90) Bullish breakout bodes well for follow-through- This Satellite services company has seen some impressive ability to turn back higher after losing 50% of its value from October into December of last year. The act of climbing back above January highs is quite constructive technically speaking and should allow for further gains up to the low to mid $30's. Overall, this looks quite attractive given the recent breakout while remaining well down off all-time highs.