April 29, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2886-8, 2865-7, 2836-7, 2785-9
Resistance: 2921-2, 2945-9
Summary: Heading into the final two days of April, SPX has managed to push back up to new all-time high territory along with NASDAQ Composite, and NASDAQ 100 index, a process which started last Tuesday. Most of the reasons for market uncertainty have proven to be largely unfounded thus far heading into the end of April, and indices are set to record monthly gains of greater than 2%, helping April's normal bullish seasonality remain true to form. In all likelihood this will be the fourth straight month of gains and Year-to-Date performance has proven to be stellar, higher by over 17.25% for SPX through 4/26/19, more than recouping the losses seen late last year. While non-technical reasons like Earnings success are being touted as reasons for this year's gains, most of the rally has occurred within a very defensive backdrop in sentiment after some major De-risking over the last few months, which still largely looks to be in place.
The biggest technical developments last week, however, occurred not with Stocks, but with Bonds and the US Dollar. We saw a big breakout in the Dollar vs Pound and Euro, while US Treasury yields turned down sharply, largely following what had begun to happen in Europe last week. These need to be watched carefully and particularly the Rate move, given that historically when stocks and bonds start to trend together after large periods of the opposite, it can lead to a change in trend, particularly when coinciding with near-term overbought conditions in equities when sectors begin to implode one by one. Bottom line, last week's rally in both Treasuries and Dollar looks to continue near-term.
Interestingly enough, this last month has proven to be very different than the first three with regards to market health, despite April's gains. While structurally indices have been pushing back to highs, various sectors have been all "taken out to the woodshed" one by one and have made it a bit tougher to make money, despite SPX set to close higher by more than 3% for the month of April. Declines in sectors like Semiconductors last week (INTC) along with Industrials (MMM) and Energy proved to have little to no effect on broader index movement, but Technology has started to tail off a bit as a sector in the last week. If this continues and this sector begins to weaken, that would certainly be something to note that could coincide with markets starting to weaken. Treasuries have begun to rally sharply again, and this also is something not to take lightly. Until proper evidence of stocks breaking the uptrend from late December begins to materialize, it's right to still favor that this market has the potential to push up a bit more.
Finally, the subject of this week's report centers on highlighting some key charts within the Healthcare space. This group looks to be turning higher in the short run and looks to continue, and as the 2nd largest sector within SPX, near-term bullish technicals are present in XLV along with XHS and the DRG index. Following one of the biggest cases of mean reversion this year, last year's outperformer, Healthcare, is now this years worst performing sector. However, the group was last week's best performer, and we've seen some meaningful snapback in some of the hardest hit groups, like Healthcare Services( more on this below)
Key Conviction ideas heading into this week
Healthcare is likely to outperform in the short run, and very well could have begun a larger rally to kick off the seasonal strength that is prevalent during this time. XLV should be favored for more strength and specifically, sub-sectors like Healthcare Services (XHS ) and Pharmaceuticals (DRG index) could outperform and should be overweighted.
Treasuries should extend last week's gains, and TLT and other ETF's like TMF, TMV should be favored for gains with yield targets on the 10-Year near 2.45, then 2.40%. Last week's breakdown in the 10-Year Treasury yield looked important in following European yields and looks likely to continue near-term.
The US Dollar's breakout also looked important technically, exceeding a multi-month downtrend, and should result in further weakness in EURUSD and GBPUSD. One should look to sell Euro and Pound Sterling, thinking both of these move lower this coming week. Dollar/Yen is not as convincing.
Gold's move back up above 1280 is a positive development, favoring near-term Bullish lean in Gold, expecting movement back to 1330-40. Movement over 1370 is needed for an intermediate-term bullish stance.
WTI Crude's decline warrants buying into this initial pullback as part of its existing uptrend. However, the extent of the momentum downturn as a result of Crude's weakness could be important in causing a May top and pullback in the month of May. Tactically, it's right to buy into Crude and Crude ETFs' this coming week on any further weakness, with the thought of selling into gains on any move back higher to test recent highs
DJ Transportation Average late week pullback last week should prove buyable, technically, and it's right to own IYT and also XLI on this recent pullback, expecting a bounce this coming week.
MSCI World index has not moved as sharply higher as SPX and other US indices and shows that globally, most stock indices remain under levels hit back last September, and also under last January's peak (which happened amidst very overbought conditions.) The current trend looks likely to test prior highs in the next few weeks without too much trouble, but this level very well could be important in causing some slowdown to the current move globally. We've already seen some signs of China starting to waver a bit in the last week, which looks to be continuing this week. So, while many have an SPX focus, it's' proper to keep in mind the price action of global indices like MXWO which peaked exactly where SPX did back in January 2018 along with September, for clues as to US markets and what might be in store.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish over 2877, Bearish Under on a close- Still right to have a positive stance, as indices have been able to push higher despite sectors like Industrials, Energy and parts of Technology (Semis) starting to weaken. Sectors like Healthcare, the 2nd largest sector by Percentage, have been able to rally back and participate enough to buoy the market during this time, and it's thought that 2945-50 likely is challenged this week in SPX cash before any stalling out. Movement above 2950 points to 3040-75 before any reversal, while under 2889, and 2877 are both meaningful in SPX cash as support to keep an eye on.
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, which has been higher 12 of the last 13 years. 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.
10 of the most important Charts heading into this week, including Healthcare focus
SPX - Close at weekly highs with lack of any deterioration keeps trend bullish- Movement back to new highs in SPX joins the NASDAQ, while DJIA remains nearly 300 points below, thanks in part to the poor performance of many Industrials last week. (MMM, FDX, UPS) No counter-trend exhaustion is in place, and trends still don't show any weakness with last Friday's late strength carrying price back to new highs. The area at 2945-50 has importance for S&P into the first part of May, but over this level would suggest a move up to 3040-75 before this move stalls out and reverses.
TNX- US 10Yr. Treasury Yields Bearish break of one-month trend suggests additional downside for Yields - Last week saw a breakdown in the trend for yields which had been slowly showing a rebound at work in Yields back up to 2.60%. However, yields did not get back above former yield Lows from last Spring/Summer and then the decline under this uptrend started in earnest last week. Closing down at multi-day lows after the break of this uptrend was a negative for yields, and has since followed through. The break under the mid-point of its Daily Bollinger band likely results in this testing 2.45% if not 2.40% before this stabilizes. For now, it's right to be long TLT, and avoid TBT, preferring to stay long Treasuries and in ETF's that give exposure to long Treasuries.
Dollar upswing might prove temporary, but for now, last week's breakout important and a minor positive Last week's breakout in the Dollar vs major Currencies like Pound Sterling and Euro looks important, and should lead to further USD strength into mid-May before any real turn. This larger pattern was thought to be negative given the choppy consolidation in the last couple months after the decline from last November. Yet, last week's breakout does make this a bit more constructive in the near-term and will need to be reversed and get back down under the area of the breakout. This is thought to be a negative for most Emerging markets, including China, which has started to turn lower in recent days. Some of the Materials breakout lately has been given back, but due to yields also turning down, the net effect has still been largely positive for the Metals.
Crude oil downturn last week could prove important - Last week's decline in Crude looks important in the short run, undercutting the lows of the last couple weeks and a one-month uptrend from late March. While the larger trend arguably is still intact, this decline could take a toll on momentum and prove to be important and negative as Crude gets into May. Near-term, one would look to buy into this recent decline on any further weakness, expecting a decent snapback to test highs, even if Crude has begun to peak out. Most declines take time to develop, and in this case is certainly no different. No counter-trend exhaustion is yet present, and it's difficult making a case for any kind of top based on just minor weakness. Yet, the momentum downshift looks important, and will be important to see stabilization and a turn back to highs sooner than later to have confidence that this move can continue.
Gold- Move back up above 1280 looks important and structurally bullish in the near-term. Move above 1300 would add to the bullish case for an impending rally back to 1360-70. This latter level is considered important in marking the highs of an intermediate-term bullish base in Gold, and getting above 1370 would argue that the next bull market in Gold is underway. Near-term, the ability of prices to have recouped 1280 warrants giving longs serious consideration, and buying in small size, planning on adding above 1300.
VIX- Some interesting resilience in the CBOE Volatility index lately as "vol" managed to hold above the highs of the last two weeks, regardless of indices having closed back at new highs. It's thought that this divergence likely should lead to some degree of snapback sometime in the month of May. However, thus far, no ability to close above the prior week's highs, which will be important, and counter-trend exhaustion thus far is premature. The divergence, for now, is key to observe, with higher implied volatility, despite higher prices.
AAII, the American Association of Individual Investors sentiment poll, has shown two straight weeks of bullish sentiment dropping, despite prices moving higher. The spread between Bulls and bears is just 13.5% as of last Thursday, 4/25/19, and likely means that any correction that happens in May should prove short-lived, given a relative lack of enthusiasm for this rally. The Equity outflows and BaML Global Fund Managers poll has been highlighted in recent weeks given the pessimism shown towards equities while "Cash" has been a big overweight. Until this poll widens back out above 20% bullish, it's seen as indicating a bit of a guarded stance.
Healthcare vs SPX- The snapback rally in Healthcare is very much underway, just at a time when this group normally enters a time of bullish seasonality. Healthcare has been the worst performing group of the year, but the recent stabilization in Healthcare Services and Pharmaceutical stocks is thought to be important, while Biotech will require a bit more to have confidence of a larger bounce. The chart shown above is of the S&P 500 Healthcare sector vs SPX, and the relative downtrend took a steeper more capitulatory turn earlier this year before bottoming out a few weeks ago. Given that this got so stretched to the downside, a snapback rebound was expected to be near and now looks to be underway. To have confidence of a larger rally in this group, the sector strength would need to be sufficient to break this larger downtrend on the chart above. This is very much premature, but would be meaningful when/if this occurs. For now, technicals call for a short-term continuation of this recent relative strength.
Healthcare ETF (XLV-$89.01) Healthcare continues to show signs of rebounding, and the XLV ETF should be able to carry higher this week to 89.80 and then 91.50-92 without too much trouble. This latter area at 92 will be important to exceed to have confidence of a larger rally in the group getting underway as this would represent a true technical positive from a structural perspective. For now, sufficient strength has been seen in the near-term to just weigh in a bit more positive on the rally this week, and it's' right to be long.
Healthcare Services ETF (XHS) - This looks to be a very positive and significant development in XHS last week and Services should be overweighted. XHS has managed to exceed the entire downtrend from February highs last Friday which is thought to be significant and bullish. The act of surpassing this trend which had already been tested twice and held should now allow for this downtrodden sector to push higher and outperform in the weeks ahead. Movement back up to 70 cannot be ruled out and one should use minor dips Monday as a chance to buy.