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Materials outperformance looks to continue

April 15, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2886-8, 2865-7, 2836-7, 2785-9

Resistance: 2907-9, 2913-5, 2921-2, 2945-9



Summary: Stocks remain resilient as last Friday's sharp followthrough higher makes a bearish call still seem premature. By end of week, price gains back to new multi-day highs helped S&P and NASDAQ record their 3rd straight weekly gain, after being range-bound most of the week. Technology did show some evidence of stalling out, though Financials looked to have quickly made up some slack with some strong finish on Friday. So while it was thought last week could produce some consolidation to gains, this sideways action looks to have been resolved by movement higher, not lower. There remain issues with breadth not being as strong at this stage of the rally as was seen in January and February, and while it appeared like an attractive area to take profits heading into this week with many prominent sectors up near highs (XLY, XLI, XLK, which often serves as strong resistance to gains) we've yet to see this levels repel prices strongly, but Instead most sectors have begun to push above these levels. Meanwhile, Demark indicators of exhaustion have been present for the last week on SPX, NASDAQ, DJIA, on daily charts (along with a plethora of other Sector ETFs) and were thought to be important in potentially coinciding with an end to this rally in the near-term (or at a minimum, a minor 3-5 day top) However by day's end, these have not worked out yet as planned. Many might take note that when Weekly indicators are not also in alignment, getting any meaningful selloff of consequence from a daily TD signal alone often is quite difficult.



Bottom line, fading this rally looked wrong, at least for last week, and price held up a lot better than many momentum and breadth indicators had suggested. Until price turns lower, it's best to use a "BULLISH OVER 2900/BEARISH UNDER 2900" guideline and keep stops very tight on longs. The one technical rule of thumb is that it's always best to utilize PRICE action over the other factors which look importnat in bring about tops. Factors like waning in momentum, breadth, or bullish sentiment don't mean too much if prices have not violated at least minor trendlines and started to make new multi-day low closes. This in fact did not happen, and yet again when picking a spot to try to sell into this based on very real technical concerns, the market just didn't seem ready.



Negatives:

Last week we listed some important factors which were thought to be "Concerns" on the equity rally Most of these remain important, such as



1) Negative momentum divergence (compared to Feb/March)

2) Breadth concerns (Summation index at lower levels than Feb peaks)

3) Leading Sectors for 2019 performance now up to prior highs (XLK, XLI, XLY) Often this represents strong resistance to gains

4) 20% rally into a seasonally heading into a difficult six month stretch of seasonality



Some new concerns have to be added, such as"

5) Sentiment now showing a wider spread of Bulls vs Bears (Up to 20% on AAII, joining the already wide Investors Intelligence data)

6) VIX down at lowest since last October, near 12, showing very low implied volatility in an environment where the FOMC has decided to table all further 2019 rate hikes and a probability of 47.6% of a CUT by 1/29/2020



Positives:



With regards to bullish factors, most of what we listed last week are also still in place and definitely positives to lean on.



1) April seasonality normally is robust. We've seen gains in the S&P 12 out of the last 13 years, and has averaged +1.7% since 1999.



2) Advance/Decline for "All stocks" still at new all-time highs, so despite some waning in gauges like the Summation index since February, the actual "All-Stocks" Advance decline has shown little to no real deterioration



4) Technology still showing strength, and despite XLK being up near prior highs, we saw Tech turn in the 3rd best performance figures of the week out of the 11. So despite thinking Tech should stall out, there still hasn't been hardly any real deterioration.



5) Lack of broader market Technical damage. After our YTD Rally now has added over 20% for NASDAQ and 15.98% for SPX through 4/12/19, many indices are within striking distance of all-time highs again, rapidly closing in on September/October highs.



6) Momentum is positive and not overbought on daily, nor weekly timeframes. RSI is mid-range, while MACD is positively sloped on both timeframes



7) Seasonality is bullish in this Pre-Election year stretch, and cyclically this decennial "9th" year of a decade is one of the more positive, third to the 5th and 8th years.



8) Financials were the best performing group last week of the major S&P GICS Level 1 groups. While Yields are still in downtrends and the yield curve has not begun to rise meaningfully, the price action in the Financials has been impressive of late and important given a 13% weighting in SPX.

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S&P remains trending higher with prices finally reaching levels that can be considered near-term overbought. Within 2 trading sessions, we'll see the completion of daily Demark exhaustion in all likelihood while 3 different outperforming sectors are all closing in on former important highs that likely cause this to stall out. Overall, the next 2 weeks have the highest likelihood to causing a trend reversal and could be in place by Tuesday/Wednesday. However, given the ongoing trend and momentum, any pullback likely will find support near 2785 in extreme cases, around 100 S&P points lower, before pushing back up and eventually challenging last September's highs.

This week's report focuses on the Materials group, which has gradually begun to show better and better Technical strength following the DowDuPont/Dow Spinoff last month. Most of the Chemical and Packaging/Container stocks have rallied sharply and now the Metals space seems have gotten a jumpstart with the recent Dollar decline. We'll list a few of the key charts to focus on from an absolute and relative perspective and then drill down to some of the more important patterns that could have relevance in this coming week from within the broader Equity space along with Treasuries, commodities and FX.


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

Short-term (3-5 days): Bullish over 2900, Bearish Under- Despite a few short-term technical worries with regards to breadth and momentum, we still haven't seen the rolling over in price near-term that would shift the trend to more negative. While upside was thought to be minimal, taking a stand against S&P and NASDAQ as of last week proved to be wrong. Given that markets have rallied sharply since December 2018 and prices were up against prior highs, this seemed like a good opportunity to take some profits heading into last week. In many things, this was certainly prudent. However, with S&P, there still hasn't been the weakness sufficient to break the uptrend and weaken enough to turn short-term trends down. Note, many of these concerns are still intact, but it's necessary to put many of these on the back burner until price can weaken. If this happens in the next few days, then it will be prudent to mention and discuss. For now, on a very short-term basis, under 2900 is the first warning, and then undercutting 2877-8 would lead to a more meaningful correction. Upside comes in near 2945-50 and above there is not much until former highs which if challenged, should not give too much resistance this time around, with targets up near 3040-75.




Intermediate-term (3-5 months)- Bullish- The nearterm weekly momentum remains positive for SPX and not overbought after S&P completed the best quarter of performance since 1998. While XLK, XLY and XLI were all up near former peaks, it will be right to follow prices should they get above, until some evidence of weakness arises. The one "Elephant in the Room" with regards to a giant Technical Negative remains Monthly momentum which is negatively sloped and at far lower levels than last Sept/October when looking at RSI, and even on this market bounce, this did not push back to highs. For now, this won't be a concern until more breadth divergence starts to happen on daily/weekly charts and we remain in the seasonally bullish month of April. Historically when 1Q has been higher by greater than 10% over the last 50 years, it has added to those gains into year-end 9 out of the last 10 times with a median gain of 8% (Ryan Detrick) Moreover, the breadth thrust combined with bullish seasonality and lack of complacency combined with lack of Technology deterioration could lead to a bit more gains in April before any real drawdown, and it's thought that pullbacks likely prove minor. While gains at this point likely will prove less robust into Summer/Fall and offer some buying opportunities, we'll need to see some evidence of breadth deterioration and more bullishness to have concern on an intermediate-term basis. After all, Advance/Decline for Equities has pushed back to new all-time high territory, and in both prior bear market peaks, we saw meaningful divergence in Advance/decline before the broader market peaked out. 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.


Key Materials charts of importance, along with other important index and sector charts for the week

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Materials breakout (XLB) now following through - Materials are suddenly beginning to show much better technical structure in recent weeks after a lengthy period of consolidation from last Fall. We've seen XLB prices jump higher to break out of the intermediate-term base at work which very much resembles a bullish reversal pattern with Neckline resistance near $56. (See chart above ) Moreover, XLB has also exceeded the entire trend from last year which started a couple months ago. Near-term targets lie at 60-61 for XLB but on any weakness, this should be used to buy dips.

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Materials relative chart v SPX shows longer-term trend breakout- When graphed in relative terms, we see XLB/SPX having exceeded the entire trend from last year. Much of this strength began after DOW joined the Dow Jones Industrial Average following the DowDuPoint spinoff, but proved to be a factors that precipitated further strength in most of the groups within Materials: Chemicals, Building construction, Paper, packaging and containers, and the Metals space. With the US Dollar starting to show increasingly more evidence that a a move lower should happen, not higher, this bodes well for many commodity names that should help to provide good performance for 2019

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Freeport McMoRan (FCX- $13.70) Bullish, and further gains look likely in FCX which could reach $14.92 initially and then $16.18 as first targets on this latest runup. This stock has gradually begun to show more and more strength in recent weeks. Its breakout above the 1 year downtrend two weeks ago was thought to be a very encouraging sign and last week FCX made its highest weekly close of the year, closing up near last October's price levels. As the daily chart shows above, FCX fell over 50% from this time last year when it peaked out near $19.70 in April 2018. However, it managed to stabilize and turn higher along with most of the market and has gradually begun to produce a pattern of higher lows off the bottom. The Specific reason for appeal here though lies with two reasons: First, the recent bullish base that has seen February highs exceeded and then the longer-term downtrend from January 2018 peaks. Both are bullish developments and along with a gradual recovery in the price of Copper itself, which FCX tends to be highly associated with, these factors should help this stock's momentum continue.

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Avery Dennison (AVY-$116.31) Bullish with recent strength likely to carry AVY up to former highs near $123.60 before any resistance. This specialty Chemicals company has turned in some of the best performance among all of the Chemicals group. It's higher by 29.48% YTD, making this the 3rd best performing stock within the Materials ETF, XLB that tracks the Materials sector. Specifically in this case, the gains have broken the downtrend from last year while not having carried AVY to extraordinarily overbought levels. Counter-trend exhaustion is premature, while the ongoing momentum remains strong. Targets initially should arrive near former all-time high peaks which is the first target to look for on this recent rally. Until/unless the trend from December 2018 is broken (which now is still quite premature) , it's right to stick with this and buy AVY as one of the stronger names in the business whose rally doesn't look complete.

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FMC Corp (FMC- $79.97) Attractive, and strength to technical targets near $90 look possible on a breakout of FMC's recent base. Unlike the prior names listed, FMC looks attractive given the stock's potential to break out of the 6 month consolidation range which has kept this stock range-bound since last October. This Agricultural Chemical company had seen its stock triple in the run-up to highs from 2015, and this recent base now looks to be giving way which should allow this rally to continue. The first week of April's close of $80.42 managed to finish at the highest levels since last January, exceeding three prior peaks in the process. Thus, FMC's near-term strength out of this base makes this an attractive stock to consider for the possibility of further gains as part of this larger pattern.

Vulcan Materials (VMC- $122.15) Bullish and its move back up above the downtrend from last year bodes well for further gains up to $130 and then $140 before any real resistance. Technically speaking the act of getting back up above former lows that had held on multiple occasions was the first positive sign, and often results in short-covering and technical buying as the breakdown into this spring looked like a false move. Then this was followed by the break of the actual downtrend. The combination of these technically is thought to be very encouraging for the prospects of further gains. Strength higher to test former highs near $140 is a very real possibility and the first area of real resistance where it's right to sell into gains. Overall, VMC should be owned here in small size with any minor dips being used to add to longs.


Financials ETF- (XLF-$27.14) Near-term bullish and movement OVER 28 would help drive a larger rally. Apart from the Materials focus, it's also important to keep a close eye on what's happening to the Financials sector which has vital importance to the broader equity market, with a 13% weight in SPX. This group had lagged badly over the first few months of this year. However, it's jump last week successfully carried prices to the highest levels of the year and should help XLF push higher initially to areas near $28 which marks a larger intermediate-term trend. Bottom line, in the near-term, this move looks important and positive and should help this group make further near-term progress.


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Pound Sterling v US- GBPUSD- Near-term churning nears breakout as range narrows- Given all the focus on BREXIT these days, we see that the Pound has been slowly consolidating gains within its bounce from last December. The last 7 weeks have been largely neutral/range-bound, but the highs and lows have shown some signs of constricting lately which should give way to an upcoming breakout in the weeks ahead. Overall, the bias is for higher prices given the ongoing four month trend, but we'll need to see movement back up over 1.3167 before pressing bullish bets. This would drive GBPUSD up to test March highs at 1.3381 and likely carry over this level up to 1.36 which is the larger intermediate-term line in the sand from the 2014 highs. On the downside, it's important to watch for any failure of 1.2987 which would postpone the advance


Sentiment has started to grow more bullish, and finally some might say after a 15% + rally off the lows. While formerly we saw Investors Intelligence show over a 20% spread between bulls and bears, the AAII data (American Association of Individual Investors) had remained subdued, with just a small spread between bulls and bears. Last week was thought to be one of the first weeks where this sentiment poll also jumped and showed more than 20% Spread now to mirror what's being seen in Investors intelligence. Thus now we're seeing bulls start to grow which should be a concern from a contrarian perspective.


Smooth breadth gauges like McClellan's Summation index have bounced in the last couple weeks, but still lower than late February. Many discuss Advance/Decline back at new highs in the last couple months as a sign that breadth has been very good, and that's very much true. However, when looking at the Summation index, we see that most of this strength happened in January and early February, while since then, the further attempts at pushing higher in March largely happened with much lower breadth. To put this in perspective, many groups like Financials and also the Small cap arena suffered throughout March and these are important to highlight as areas that have been much weaker through this rally. At present, this has turned up in recent weeks again, but the market breadth at current juncture still looks weaker than what was seen 2-3 months ago. This should be monitored carefully for any evidence of this turning back lower.