March 4, 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 now risen for 9 of the last 10 weeks (SPX) with late January missing just by a hair in being positive. Breadth and momentum, which had both started out fairly positive in late December/January, has flattened out a bit in the last couple weeks, but we've seen precious little evidence of anything but rising prices with a huge string of higher highs, higher lows and higher closing prices on weekly charts since late Christmas Eve. Overall, Markets will be unable to continue rising at this pace, as we've now seen gains of more than 450 points in 10 weeks time, or 19.2%. It's likely that March brings about some type of trend reversal (at least on a short-term basis) but it's expected to prove minimal and end up being a buying opportunity for further gains into April. Overall, until there is evidence of prices turning down, it's difficult to highlight the negatives over the price structure alone which has proven downright resilient. We'll be on watch for evidence of some stalling out (as given some of the reasons listed below, i do feel there's an above-average probability of this happening) Yet, it still looks proper to use 2764 as the dividing line in the sand for Bull/Bear and being over this level keeps the rising trend intact. With regards to Fixed income, the most technically important move last week seemed to come with Yields starting to turn higher dramatically ,which happened in the 10 and 30 year Treasury, while USD/JPY also followed suit. This had been sorely lacking in previous weeks and was listed as a warning sign, but similar to early January, yields look to be following the bounce in Equities, not vice versa. Furthermore, the Dollar decline looks to have reached a temporary floor and last Friday's gains look nearterm bearish for commodities, particulalry the Precious metals after a big run. Overall, the risk appetite seems to be slowly coming back into stocks, but positioning still indicates that Money market inflows are the highest in nearly two years, and had risen last month to the largest level since early 2016. This BofA Merrill Lynch GFSI Money Market flow index shows net flows into Global money market funds as a fraction of total Equity market capitalization. Since the October-December 2018 decline resulted in such a huge period of risk being taken down, this hasn't all come back yet. Thus, intermediate-term sentiment is telling a different story than some of the recent complacency that's entered the market, suggesting that pullbacks in March still could prove to be buyable.
Most Important Technical Developments of the Past week:
1) TNX and USDJPY both showed very sharp rallies into end of week, suggesting that the recent non-correlation to Equities might be ending. This is seen as a promising sign for Financials as the Yield curve has begun to steepen as well
2) US Dollar index looks to have bottomed near-term. While the patttern in the last few years remains range-bound and the larger pattern suggests a period of Dollar weakness in the years ahead, at least for the short-term, the Dollar looks to have bottomed out.
3) Momentum and breadth which both started out quite positive in early January, have both flattened out in recent weeks. Daily MACD has turned negative based on last week and both the Advance/Decline and Stocks trading above their 200-day ma both peaked around 2/20-5.
4) Sentiment looks to be finally nearing a time when AAII has joined Investors Intelligence in widening out in the spread between Bulls and Bears (It only took 10 weeks and a 19% GAIN !!! ) Bulls/bears now is over 20% in AAII, and is more supportive of a near-term peak in stocks
5) Demark "Sell Setups" should be present this week on a WEEKLY basis for Value Line Arithmetic, SPX, NASDAQ, DJIA, SX5E, along with many major sectors, including XLK, XLI, XLE, XLY, XLB, XLF. This is the first time that Weekly exhaustion has lined up with Daily since late December, and utilizing weekly counts often can add to greater success when looking for reversals.
6) Cycles- This month brings about an important six-month anniversary to last September's peak, while being 90 days from the late December lows, 270 days from the late June 2018 lows, and 120, 135 days from the November turns, which suggest the following periods could be important: Additionally this rally from late December will be exactly equal in time to the pullback from Early October as of mid-month. Looking at March, the following periods have the potential to be important: 3/5-6, 3/15-7 and 3/24-6.
7) Gold and Silver look to be peaking out in the short run and given the 1-2 combo of Rates and Dollar rising, these could selloff more in the short run with targets down near 1250 for Gold and a likely maximum move to 1220 which should be buyable.
8) Sectors like Industrials, Tech and Discretionary are all nearing upper Bollinger Band areas on weekly charts, which combined with the Demark exhaustion, will make for a difficult time pushing too much higher without consolidation.
9) Small-caps have made an impressive enough comeback vs the Broader market that it should pay to own Small caps this year, as the RTY vs SPX managed to break out above its six-month downtrend and RTY also got above three different prior lows since 2016. This looks meaningful and RTY should be favored and bought on pullbacks.
10) Healthcare looks to be on the verge of starting to turn back higher after nearly six months of underperformance. Some of this was due to mean reversion and turning down after a very decent period of performance. But this group is now showing Daily and weekly downside exhaustion and it looks right to position long in Medical devices, and Pharma while still avoiding the Services stocks
LONG IDEAS within Healthcare: MTD, ZTS, VRTX, REGN, SRPT, VCEL, COO, DXCM, SNN, AZN
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Expecting short-term peak this week or next- but until weakness happens, trend still bullish until/unless 2764 broken - Raising stops on longs- Still no evidence of any deterioration, but stock indices and many sectors will show counter-trend exhaustion this week, while momentum and breadth have started to falter. It looks right to consider selling out of Technology to go into Healthcare
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, Recent Technical developments in Equities, along with Healthcare charts
SPX trend bullish near-term, but warnings now appearing on daily and weekly charts suggesting trend should reverse in March, even if short-lived. SPX has now gained nearly 20% in the last 10 weeks from intra-day lows on Christmas Eve 2018. This retracement has carried over 75% of the prior decline and puts prices within 5% of all-time highs. At present, the risk/reward isn't as ideal for new longs heading into March based on the following developments. First, as seen in this weekly chart above, counter-trend "TD Sell Setups" can be formed as early as this week with just a move over 2813.49 in SPX cash on weekly charts. These have been important in the past in signaling exhaustion that has led to trend reversals. Second, the upper area of the 2% Bollinger Band hits just above current levels. This is likely going to provide at least some minor resistance. Third, momentum based on gauges like RSI is now at a 69 on daily charts and has begun to diverge from peaks made in mid-February. Fourth, other momentum gauges like MACD have rolled over to negative now on daily charts. Thus, there seem to be some things in place now which argue for this rally to stallout and make at least a minor reversal before prices are able to reach former highs. Risk/reward is not as favorable and one should be on the lookout for trend reversals in the next couple weeks, potentially as early as this Wednesday/Thursday. Under 2775 would serve as the first warning and then under 2764 allows for a pullback to get underway, which should prove short in nature.
Treasury yields broke out of minor trends last week- Daily charts on 5, 10 and 30 year yield Treasuries show the last few days of gains in yield terms, which exceeded the minor trend of the last month. This looks to be an important development technically at a time that yields had lagged the equity move as both Treasuries and Equities were moving higher in tandem through the back half of January into February. Now Yields along with USDJPY both look to be moving higher to join the Equity rally, not dissimilar from what was seen in early January. While Yields have pushed up above the higher Bollinger band, any minor dip in yields should prove to be a chance to sell Treasuries, expecting higher yields in the month of March.
Gold and Silver have both turned down in recent days as the Dollar and Yields have shown signs of hitting support and turning back higher. As mentioned above the Yield breakout looked to be significant. The Metal trade meanwhile broke down below the uptrend of the last six months. It's thought that Gold could pullback down to 1250 without too much trouble. While the intermediate-term prospects have improved for the Metals given the Dollar weakness, it's recent pullback looks to have additional downside in the month of March before this stabilizes. One should hold off on buying dips until this move plays out.
XLK- Technology ETF- Technology looks to be nearing absolute levels of importance, and could stall out in early March. While as we've discussed in the daily reports about Technology breaking out in relative Equal-weighted terms vs SPX, the XLK itself is set to record signs of exhaustion now on a counter-trend basis in early March, while nearing the highs of its downward sloping Bollinger Band, the 2% standard deviation of price movement. Additionally, when Tech broke down under its 2-3 year uptrend, it was thought to be bearish and did in fact lead lower. Now we're seeing prices on the verge of retesting the area of its breakdown, something which also has importance. Overall, it's thought that the area at 71.50-73.50 has real significance as a key area of resistance, and one should consider either lightening up into this area, or hold off from chasing the Tech rally.
Healthcare looks to be on the verge of trying to bottom out and turn back higher, something which on a relative basis bodes well to consider using recent relative weakness to overweight this group. As weekly charts of XLV/SPX show, we saw a breakout last year of nearly a 3-year downtrend in Healthcare. However as the broader market bottomed out in December, this group undperformed relatively. Now we're seeing evidence of both Daily and weekly exhaustion counts on Healthcare right at a time when this is testing the area of the lower Bollinger Band, just above the area of last year's breakout. This creates an attractive risk/reward to overweight Healthcare and look to add to this on evidence of this confirming these Demark signals and turning higher.
Healthcare might be better to favor in the months ahead vs Technology.Relative charts of XLV to XLK, or Healthcare vs Technology, show a similar pattern of a breakout in this pattern followed by a retracement in the last couple months. This brings about an attractive risk/reward in trying to buy into Healthcare vs Tech, and investors that are too "tech-heavy" might want to consider Healthcare which looks attractive to buy dips after this minor pullback.
Pharmaceutical stocks look attractive given the bullish base in DRG which has grown more attractive in its ability to push higher to test the highs from late last year. DRG peaked out in 2015 and this level wasn't retested until late last year. While a natural area of resistance that resulted in some backing off in this index, we see that prices have immediately pushed back to just below these former highs. The quickness with which prices have moved back higher is seen as a very bullish development for this sector, and should drive prices to make a larger breakout in the weeks and months ahead. Given the signs of Healthcare trying to bottom out relatively, a breakout in Pharma stocks would make good sense, and something to watch for carefully in the weeks ahead.
Biotech likely to stall out near former highs within 1-2 weeks. Biotech, as shown by the XBI, or SPDR S&P Biotech ETF, looks likely to show further near-term strength which should retest former highs. Yet, this sector has already made a large rally in the last couple months given the extent of the drawdown, and weekly exhaustion counts, similar to the SPX, are within 1-2 weeks of forming. Thus, this rally likely should stallout near former highs vs thinking an immediate breakout is imminent. One can still favor many of these stocks on an intermediate-term basis, but near-term, it's more likely that some type of stallout happens in March, so one should look to buy pullbacks if given the chance in the weeks ahead.
IHI, or the Medical Devices ETF, has just pushed back to new high territory, something that leaves this sub-sector in much better technical shape than what's happening with either Pharma, or Biotech. While near-term overbought, the act of pushing back to new high territory should help prices move to 240-5 without too much trouble before hitting resistance. Overall, the Medical Devices sub-sector appears to be the strongest part of Healthcare.
Healthcare Providers, on the other hand, are the weakest part of Healthcare and should be avoided as an area to consider, in favor of Medical Devices, Pharma or Biotech. Charts of the IHF, the Ishares US Healthcare Providers ETF, Weekly charts show the large uptrend in this group being broken and prices recently being repelled after having rallied to test the area of the former breakout. This often is important in suggesting further weakness. Thus, until there is evidence of February highs being exceeded for IHF, it's right to hold off on buying dips, and expect that further underperformance is possible in this one area of Healthcare.