March 11, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2764-5, 2727-31, 2678-81, 2672-5
Resistance: 2815-8, 2824-5
Summary: Equities have begun trending lower as of last week, marking the first weekly close at multi-week lows of 2019. Asian indices also fell to new weekly lows, while Europe began a minor drawdown, but arguably held up much better than the rest of the world. Treasury yields fell back to prior yield lows though held prior support, while the US Dollar's gains hit new three-month highs, resulting in meaningful weakness for Emerging markets along with most commodities and China. Overall, it was thought that the breadth and momentum slowdown might finally catch up with stocks, and last week's early Reversal on Monday proved to be the technical catalyst, with a key reversal day on huge downside volume. Given the extent of the move off the lows, which in many indices and sectors has proven to be 15-20% within the last 10 weeks, the upside for the next few months is likely to be not nearly as robust, and selectivity will be very important. To review, in the short run, there were a few reasons to suspect this recent rally might be susceptible into March. Technically speaking, breadth and momentum deterioration, a lower than average Equity Put/call ratio, Demark exhaustion (daily and weekly), defensive outperformance in Utilities, and limited upside based on Weekly Bollinger Bands (2% Std. Deviation) all stood out as potentially having importance, along with the fact that markets peaked out near the 10-year anniversary of 2009 extreme lows (which started this 10 year Bull) All of those looked important.
However, on an intermediate-term basis, we've seen some very constructive signs that still warrant a bullish outlook on an intermediate-term basis for this year. Those concern : 1) Greater than average market breadth on a weekly basis starting with late December/early January breadth thrust /Advance Decline for all equities back at new all-time highs 2) Pattern improvement (SPX getting back UP above areas of important resistance 2630 and then 2715, exceeding trendlines from last Fall 3) Ongoing skepticism about a China deal and overall subdued sentiment after many drew down risk into this decline in December/January and have been slow to add risk back on 4) Bullish seasonality stats going back since 1950 about the time following mid-term election year troughs and the resulting push back higher 5) Technology breaking back out to new all-time highs on an equal-weighted basis (20% of SPX) 6) Decennial cycles of years ending in 9 coinciding with bullish pre-Election year cycles- Both of these suggest this year has a higher than average tendency to be positive 7) Bullish January and February which produced some of the best early year gains in years (while near-term overdone, this factor alone argues for intermediate-term strength 8) Bullish momentum on a weekly basis
So after these negative and positives, we're left with a constructive trend on a weekly basis, yet near-term concern. Last week proved to be the first down week that largely undercut prior lows.. so now what? The daily chart below serves to put this move into perspective. Last week's decline managed to sell off sufficiently to nearly reach the lower Bollinger Band on daily charts. Counter-trend exhaustion now on the downside has nearly completed, and we've seen a contraction in Bullish sentiment in the last week, with AAII gauges (chart below) pulling back to see just a 10% spread now between bulls and bears. So after a huge 15% rally, last week's pullback alone was sufficient to turn sentiment back down and show some meaningful contraction. This looks to be important, as declines that cause sentiment to rise this quickly likely should prove to be short-lived. Thus, it's likely technically in my opinion that this first draw-down is near completion and should not get under 2700.
Most Important Technical Developments of the Past week:
1) The Arms index, or TRIN, (Advance/Decline divided by Advancing Volume/Declining volume) produced a very high reading after its rally into last Monday's close, with that reversal day bringing about the highest reading of volume into declining vs advancing stocks for 2019. While TRIN readings over 2 often can bring about capitulatory lows in the market, when they occur following steep rallies on reversal days, the effect is often the opposite (See late 2017)
2) Sentiment seems to have contracted quite rapidly on last week's pullback. Popular gauges like AAII sentiment contracted last week to just 10 percentage points of Bulls over Bears, in a rapid about face to the previous widening. Thus, while Investors Intelligence remains showing a high 30+ spread between Bulls and bears, AAII is now just a tad above neutral. Furthermore, the Equity Put/call ratio showed a steep gain up to .75 which is the highest since mid-January. Overall it's thought that bearish sentiment spiking is a bullish sign for stocks.
3) US Dollar index bottomed out and turned higher sharply to the highest levels in weeks. This looks to have hurt commodities and EM of late, though these might prove temporary once the Dollar turns back lower.
4) China and EEM pulled back sharply given the Dollar rise. The move in China had been delayed and had not followed the US or European move, so last week's late breakdown looked meaningful.
LONG IDEAS within Utilities: PNW, ETR, NI, DTE, AEP
Short-term (3-5 days): Expecting that last week's pullback is nearing support and weakness under 2700 is unlikely before this turns back higher. While Friday could have marked the low, one can't rule out additional near-term weakness given the recent pullback, but should not prove widespread given both the breadth acceleration and some signs of fear coming back quickly. Look to buy into dips this week and expect that markets should start to turn back higher.
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 on Utilities and Sentiment/Breadth
Utilities bullish for further outperformance XLU looks to be on the verge of a 3-5 week period of outperformance given the breakout above prior highs from both December 2018 and also late 2017. This is considered to be a constructive technical development and a pattern widely considered to be a giant Cup and Handle spanning the last 16 months. Utilities is the only one of the major sectors showing such a bullish breakout pattern at this time, and should be considered as a Technical overweight, particularly considering last week's selloff after such a lengthy run. Movement up to $59-$59.50 looks likely, and one should use minor dips as something to add to existing longs.
Utilities bullish near-term, but upside likely limited to $60 in XLU. The weekly XLU puts this recent Cup and Handle pattern in perspective. While the 16 month breakout is certainly constructive, the intermediate-term trend channel should be important in holding this rally on gains over the next month, which lies up near $59.50-$60. This has held this rally on two separate occasions since it began in 2015 and likely should hold on this go-around as well. Thus, it looks right to be near-term bullish, but one should temper enthusiasm about this proving to be anything more than just a 5-7% rally given this meaningful resistance.
Utilities vs SPX in relative terms appears attractive- XLU v SPX looks to be bottoming out given the breakout, pullback and rise to the highest levels in the last few weeks. Relative charts show a very good chance of this rising further in the weeks ahead, and should rally to challlenge prior highs made earlier this year. Many times these relative charts tend to show movement far before the absolute movement occurs. In this case, this appears like an attractive breakout, pullback and now turn back higher, while the absolute charts were more of a traditional breakout.
The breadth correction started in the last week after recent push back to new highs. Advance/Decline on "All stocks" has just pulled back to violate the trend from late December. The strength of the move from late December is thought to be a real positive but yet now has begun to correct this move to new highs. Overall, this pullback and trend break is a minor negative but overall should prove short-lived given the positives of the push back to new highs.
American Association of Individual investors Sentiment (AAII) has contracted to just 10.6 points of Bullish vs Bearish spread as of last week. This is a pullback from earlier 25 just a couple weeks ago and shows the extent to which this recent weakness and signs of economic slowdown have taken a toll on sentiment. This goes to show that further intermediate-term weakness could prove short-lived as sentiment might turn bearish too quickly.
Pinnacle West Capital Corp (PNW- $93.16) PNW has formed an attractive Cup and Handle pattern in the last 16 months that makes this appealing to buy the breakout, expecting further gains ahead. Similar to the broader Utility space, PNW has just gotten up above prior highs from December 2018 along with November of 2017. Weekly momentum is not overbought, and Demark exhaustion is still premature on monthly charts based on TD Combo, requiring another 2 months of gains before this should begin to stall out. This looks precisely like an appealing time to own this near-term given some of the recent market volatility which began again last week. Gains up to $100 look likely and one should use pullbacks to 90 to add to longs given the improvement in its technical structure. While near-term targets lie near $100, one can use trailing stops and own provided this remains above $92.64 on its advance.
Entergy Corp (ETR- $92.49) Bullish- ETR has broken out to the highest levels since 2008 just in the last couple weeks, exceeding the highs of a bullish base which had begun in early 2015. This should allow for additional upside in the weeks and months ahead, and targets the 61.8% retracement zone of its 2008-9 decline near 101. Specifically the appeal for ETR here despite a 10%+ move YTD has more to do with its intermediate-term pattern shown above, and exceeding this larger 4 year triangle is thought to be quite constructive technically. While ETR has reached the 50% level of its prior drawdown from 2008, no counter-trend measures of exhaustion are in place that would suggest this should peak out here. Thus, additional upside looks probable given this recent technical improvement, and this should be overweighted for the weeks/months ahead.
NiSource (NI- $27.42) NI just starting to show evidence of breaking outafter having trended neutral/range-bound for the last few years. Last week's rally managed to exceed the trendline guiding the highs of the recent short-term triangle pattern. This likely carries NI back above $30 and could extend given the extent of the longer-term range-bound pattern which has been intact since 2015. Overall this appears like one of the better risk/rewards given a breakout in Utilities given that NI has not already made its move but has been basing. This recent push to new multi-week highs should serve as the technical catalyst for further acceleration.
DTE Energy (DTE- $123.20) Bullish- Move to 130 likely Similar to the broader Utility space, DTE has appeal given its move to just exceed prior highs of this recent base which has been intact over the last couple years. The act of making a weekly close above $121, specifically given the trend connecting this high to the prior from 2017, should allow for upward continuation in the weeks ahead. Movement up to near $130 looks likely, with stops on longs put near $118. Overall, it's worth following the Utilities that are breaking out coinciding with the larger sector making a similar move, and this should lead performance in the weeks ahead.
American Electric Power (AEP- $81.95) Bullish given the act of pushing back up above areas of resistance that have held since late 2017. While similar to the broader Utility space, AEP has made a series of higher highs within a larger channel starting in 2015, it's been the most recent bullish base formed since 2017 that gives reason for the near-term optimism. Given that both weekly highs occured between $877-$80 and AEP has just gotten above this area, the pattern reflects a Cup and Handle which likely propels this up near $85 in the weeks ahead. Thus, while broader market volatliity has come back over the last week, this Utility has just broken out to new highs and should offer some outperforamnce into April for those looking for selective longs. Stops on longs under $78 on a close with upside targets near $85.