May 20, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2840-2, 2825-7, 2800-1, 2785-9
Resistance: 2900-1, 2921-2, 2952-4
This week we discuss 10 charts of equity indices, Treasuries, commodities and currencies, as we've seen some important moves in the past week. As always, we'll highlight some of the more key developments which occurred and then suggest some attractive risk/reward ideas and how to play them.
Important Developments of this past week (Shown in Bullet form)
SPX near-term trend looks to have bottomed where it needed to, right near 2800 and then made an above-average push higher on decent volume and breadth last week. Prices remain only -2.8% off all-time highs
The Monday morning low 5/13/19 coincided with a big uptick in Put/call spikes intra-day, which proved to be a meaningful signal. Markets also showed huge volume into downside vs upside stocks, marking the first 90% down day that we've seen since 12/4/18. After the prolonged decline from 4/30, this was instrumental in giving clues about a potential short-term low.
Fear seems to be on the comeback, as Equity Put/call ratio moved to its highest level of the year +0.81%, while AAII sentiment now shows more Bears than Bulls by nearly 10%
Emerging markets continue to face downward pressure, and relative charts of Developed vs Emerging show the potential for this recent underperformance to continue in the weeks ahead.
Defensive sectors showed their second week of strong outperformance, while Financials, Tech, Discretionary and Industrials all lost 1% or greater in trading. REITS, Utilities, Consumer Staples, and Communication Services were positive for the week
US 10-Year Treasury yields declined for the fifth consecutive week, yet with a meaningful retest of the 2.33% yields from March that looks to be trying to hold. Movement back over 2.50% is necessary to call for a bottom in yields.
The US Dollar broke out sharply vs many Developed and Emerging market currencies in the last couple weeks. This strength looks to continue short-term, and should put further pressure on commodities and Emerging markets.
Commodities look to be breaking down under 2017 lows, per the CCI index, and given US Dollar strength, look to weaken further in the short run, before bottoming.
Growth stocks have climbed back to new highs vs Value, exceeding former relative peaks made back in September 2018. While stretched on daily charts, this looks to further postpone any transition into Value.
Percentage of stocks above their 10-day ma has risen slightly to 45.15%, while those over their 50 day and 200-day ma have dropped to 48.61, and 47% respectively.
Key Conviction ideas heading into this week
Look to be long Equities, unless SPX gets back under 2840, which would switch positioning to short for a move down to 2775-85, or a max near 2723-5
Treasuries could be peaking out, and Yields look to be stabilizing near prior lows from late March. Shorting Treasuries looks to be a good risk/reward for the US 10-Year Treasury unless rates move under 2.33%.
The US Dollar's breakout looks to have further to extend and it's right to avoid buying dips in GBPUSD, or EURUSD. Lat Am Currencies such as Brazilian Real, Columbian Peso and Chilean Peso all look to extend losses vs US Dollar
Small caps can still work, provided prices remain above 151. This looks to be a better risk/reward for buying into IWM, but important that last week's lows are not violated.
Financials and Healthcare are two sectors to favor, both of which could show better performance than Technology in the coming months. Charts on both XLF and XLV look to be attractive
China, Taiwan and Korean Equities should be avoided near-term and look to underperform further on US Dollar strength. EEM and FXI both still appear like attractive shorts.
Commodities look to extend down further, and it looks premature to buy dips just yet
SPX trend on a weekly chart shows the index's uptick in volatlity since 2016, where the index made substantial peaks both in January and September 2018, only to recoup all of this damage into late April. This weekly chart still depicts bullish momentum per the MACD indicator, which failed to get derailed on weakness in early May. The pullback moved to within 20 points of the 2785 target, bottoming just over 2800 before recouping about half of the losses. Unless S&P were to get under 2722, which is a 38.2% retracement of the rally up from December 2018, it's thought that this pullback is one to buy into, and rallies can happen into Mid-June without too much trouble. Sentiment has shown some pretty severe contraction in the last couple weeks, perhaps understandably so, with this trade war not producing any meaningful results thus far. But this combination of ongoing uncertainty coupled with just minor weakness in the index is seen as a positive for now. Until/unless SPX gets down under 2840 this week (which would produce a pullback to 2775-85) or under the first 38.2% Fibonacci retracement of this four month advance, SPX still has an above-average likelihood of moving back to new high territory. Upside targets lie at 3040-75, and any further weakness this week should be buyable for additional gains, as this rally does not seem complete.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish barring a move under 2840 on a close,which should lead to a pullback to 2775-85 before any bottom. The move late last week back to multi-day highs was seen as constructive for SPX, as it happened on decent volume and breadth. This broke the one-month downtrend from early May, and goes along ways towards thinking the pullback over the last few weeks is likely complete. Sentiment turning quickly bearish is another reason for optimism, and even if 2840 is broken, it's thought to prove short-lived, and lead just down to 2775 before rallying back sharply. Overall, weekly momentum is positively sloped, so the combination of a pullback to buy into which doesn't change momentum, but which does cause an uptick in bearish sentiment, is thought to be something to consider buying into. Getting back over highs set between 43/30-5/1 would set the stage for a move to 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 and through April, the best four-month kickoff to a year in over 30 years. While near-term momentum has rolled over a bit and breadth has faltered since late February, we haven't seen much damage, if at all, to the larger trend thus far. 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. 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 into the Summer/early Fall 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 more important charts for this week
Dollar near-term bullish- Could continue to put pressure on Emerging markets- Daily charts of the Bloomberg Dollar index (above) looks to have made one of the more technically significant moves last week after its highest weekly close of the year. This exceeded the minor consolidation from April and has coincided with strength against Majors like Euro, Pound Sterling and Aussie Dollar, the latter which dropped to the lowest levels in over 3 years. Moreover, this strength has been even more pronounced vs many of the Emerging market and LatAm currencies, as we've seen breakouts in the US Dollar vs Brazilian Real and also Columbian Peso just in the last week. In the short run, this Dollar strength looks likely to persist into June, which could put further pressure on Emerging markets and commodities.
Ratio charts of Developed vs Emerging market indices show the potential of a larger breakout in relative terms for Developed markets which could play out in the weeks ahead. This recent Dollar strength has caused Emerging market underperformance, and this chart seems to suggest it very well could get worse. A move above April highs in this ratio would result in meaningful outperformance in the short run for Developed v Emerging, and this monthly chart above has formed a Cup and Handle pattern which normallly are resolved by breakouts to the upside. Overall, this helps to add conviction to the idea that Emerging markets are likely to get worse, before they get better, with China, Taiwan and Korea all being chief culprits which have begun to weaken substantially of late.
China vs the US looks to weaken further in the short run, and could weaken further relatively speaking to test 2018 lows before showing any real stabilization. This chart of FXI to SPY produced a false breakout back in 2017 that was promptly given back last year. While there was some meaningful outperformance in China spanning six months from last October until April of this year, this was given up in a period of roughly one month coinciding with US Dollar gains along with trade uncertainty ramping up. Overall, further weakness looks likely in China which should underperform into June before trying to bottom out. One should avoid trying to buy dips until weekly Demark exhaustion is in place, which will require a move back to last year's lows before being complete. FXI appears like a better short near-term, and additional pullbacks look likely before this can bottom out.
India is one Emerging market that's Technically appealing to consider.While many emerging markets have experienced quite a bit of technical deterioration of late, India is one of the few that looks attractive just as Elections are set to conclude. The uptrend in the Ishares India 50 ETF, INDY, has been very bullish as shown on weekly charts since lows were made back in 2013 and now recent weakness last week should represent an excellent buying opportunity, technically speaking. Momentum remains positively sloped, and structurally this has improved after having retested and now pulled back from early 2018 highs. Longs are favored with expectations of gains back over 40, while only a move down under $34 would postpone this rally, so this looks to be the risk to the downside.
Commodities look poised for a near-term breakdown after repeated tests of support, but this could lead to a final pullback in this downtrend and represent a chance to buy into this weakness for gains in the months to come. The CCI index, the Thomson Reuters Equal-weighted Commodity index, has slipped sharply in the last week given the strength in the US Dollar, and looks apt to show further near-term weakness as Dollar strength continues into June while Treasury yields attempt to bottom out. This could put pressure on precious metals, while the Grains could suffer additionally given poor seasonality coupled with lack of a trade deal. Technically speaking a retest of prior lows made last year looks increasingly likely, and should be an area to consider covering shorts and being long. Interestingly enough, Weekly charts showing Demark indicators look to be within 4-5 weeks of having buy signals line up on the CCI index. Yet, this would require further drawdowns into early June before these would materialize. For now, the commodity space looks like a tough place to be. However, one could consider buying on any further weakness in the weeks ahead.
Treasury yields have shown some signs of stabilizing near prior lows over the last couple days in TNX, and any ability to turn higher here would be seen as a sign of comfort to risk assets, and specifically to the Financials sector. As this daily TNX chart shows, yields peaked out near 3.25% in the US 10Year last November. We've seen a steady slide in yields with an ongoing pattern of lower highs and lower lows. Last week, however, there appeared to be some stabilization over the course of a few days right near prior lows at 2.33% for TNX, a key support level. Some evidence of positive momentum divergence has been in place for the last few months, and Demark indicators showed signs of downward exhaustion late last week (TD BUY SETUP) While it will take a move back over 2.50% to break the downtrend and climb above 2.57% to have real certainty of a low in yields, we appear to be nearing a juncture where this can occur. One can sell Treasuries with a limited downside risk, as if 2.33% is broken, this would postpone the yield selloff and serve as a stop for Treasury shorts.
Financials have begun to show more signs of strength in Equal-weighted terms, which could be bullish for this group in the months ahead. Looking back to last week's performance, Financials certainly didn't appear too strong on the surface. This group underperformed all other 10 S&P groups with returns of -2.09%. However, last week's pullback directly followed a very sharp period of gains for Financials in the month of April, which saw ETF's like XLF reach the highest levels since last September. Looking at relative charts of the Equal-weighted Financials index vs XLF as a ratio, we see some definite signs of progress lately, which look far more constructive than what last week's performance might suggest. This group appears to definitely be at a key juncture relatively speaking, and it wouldn't take much before this group would begin to show some real outperformance. Relatively speaking, breaking out of the downtrend from last Summer would be a very good sign and in absolute terms, this would occur in XLF with any gain back over $28.14, made the first day of May. Much should depend on whether Treasury yields and the yield curve can stabilize here and begin to turn higher. However, this looks to be right around the corner and should be watched carefully for evidence of confirmation of this strength.
Technology- Monthly Negative momentum divergence is a concern for this group . Overall, Technology has definitely started to show some evidence of slowing lately, which daily charts showed last month after the breakdown in 2-3 month uptrends for the group. At present, this near-term momentum shift has largely been substituted by strength in other sectors. The monthly chart above, shown as a relative chart of Invesco's Equal-weighted Technology ETF (RYT) vs the broader market still looks to be in good shape based purely on trend alone, with last month's pullback in Tech appearing like just a small "blip" on the charts. However, gauges of momentum like MACD show the highest peak in momentum having been made last year, with this year's early price runup occurring at lower levels in momentum. This is important and a negative for the intermediate-term perspective for Tech, and serves as a warning sign. Any break in the trend would suggest an intermedaite-term decline getting underway, which likely would be negative for the broader stock market given Tech's representation in SPX. For now, this appears as a warning only, but would take on much greater significance on a break, and is something to watch out for going forward.
AAII Sentiment Survey- Back to inverted levels as the bears outweigh the bulls after last week. Such a Flip-flop in sentiment quickly should be viewed quite positively from a contrarian perspective. While the percentage Bears leads Bulls by 9 percentage points, this has gotten to the most bearish point in sentiment all year. Thus, it's thought that despite the wobbling in stocks over the last couple weeks, the larger trend should prove to be fine, for now, and lead to a buying opportunity back to new all-time highs.
Equity Put/call ratio has just hit the highest level of the year after last week's spike, signifying a definite uptick in fear. While indices remain below all-time highs by just a fractional amount, it's thought to be comforting to the bulls that there remains such a level of uncertainty. Whether it be due to trade tension, or the dimming of the global growth outlook, it's typically important to watch gauges of sentiment like this closely. In this case, the recent escalation in fear should put a floor into stocks on any further weakness, and likely limit the extent of any further stock index deterioration, for now.