May 27, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2800-1, 2785-9, 2762-4, 2734-6
Resistance: 2892-3, 2900-1, 2921-2, 2952-4
This week we discuss 5 key defensive and yield sensitive stocks to consider, along with 5 charts that highlight some of this recent Defensive positioning and whether it can persist.
Important Developments of this past week (Shown in Bullet form)
SPX as well as NASDAQ, DJIA broke down to test meaningful support near mid-May lows. Trends and momentum have worsened near-term and volume has been heavier on down days vs Up. This largely supports the notion that further selling could happen the last week of May.
Only 39.80% of stocks are above their 10-day moving average, 43% of stocks are above their 50-day moving average, and 41% are above their 200-day moving average. This shows the extent of some of the deterioration in the broader market lately, despite stock indices still trading within 3% of all-time highs.
Bearish sentiment continues to build, for a variety of reasons (Fear of Economic slowdown, Ongoing Trade war concerns) Equity Put/call ratio remains elevated at 0.76 and AAII sentiment now shows more Bears than Bulls by over 11.5%
Treasury yields have broken down under support at March lows for US 10yr, which could be detrimental for Financials, and an ongoing concern that the bond market has no conviction in the economy. Technically, lower yields look likely for 5, 10, 30-yr Treasuries
Emerging markets remain underperformers near-term, and the MSCI Emerging Markets ETF, (EEM) has lost more than 10% of its value since mid-April, dropping 4 out of the last 5 weeks. Counter-trend exhaustion is premature for EEM, and a retest of last Nov/Dec 2018 lows looks likely before any stabilization.
Defensive sectors outperformed yet again, with good strength in the Utilities and REIT sectors, the latter which has now taken Technology's place for Best performing sector of the year. Healthcare has also made a resurgence. Staples handily beat Consumer Discretionary, and Tech finished near the bottom of the pack for the week, dropping another 2.79% (S&P 500 Info Tech index)
The US Dollar broke out in Trade-weighted terms to the highest levels since 2002 and remains technically attractive as a long vs EURUSD, GBPUSD and vs many Emerging market currencies. The strength vs Brazilian Real and Columbian Peso looks to continue, and last Thursday and Friday's dip should be a chance to position long in USD.
Crude oil's breakdown looks important and negative, and should lead to further intermediate-term losses in WTI Crude. While stretched at current levels, any bounce should lead to further selling in Crude and the Energy complex should be avoided near-term given the recent spike in volatility.
2's/10s Curve has flattened out appreciably in recent weeks after peaking near 25 bps in late April, right when many global Equity indices peaked out. Additional flattening looks likely this coming week down to 13-13.50 from current 15.40.
Small caps have fallen in relative terms to Large Cap in US markets to the lowest levels of the year, and the stabilization in April looks to have been temporary only. Large cap should be preferred over Small. and Growth still favored over Value. Developed markets meanwhile are on the verge of larger breakouts vs Emerging.
Key Conviction ideas heading into this week
Look to buy into any Equity decline this coming week into end of May into early June. While short-term trends and momentum are negative, intermediate-term momentum is still positive and insufficient damage has been done to turn bearish for the next few months.
Treasury shorts should be covered given last week's plunge in Yields down under support. Additional gains in Treasuries look likely for this coming week and it's right to be positioned long in 10-Year Treasuries and TLT, avoiding TBT for now.
Sell Developed and Emerging mkt currencies vs US Dollar. EURUSD, and GBPUSD still look likely to fall in the coming weeks and lows here look premature, regardless of Thursday/Friday gains. The US Dollar mild pullback wasn't sufficient to think the Dollar is peaking just yet. It's right to be long for a final push higher into June
Small cap deterioration makes it imperative to wait for evidence of stabilization before buying after this breakdown in IWM. Await better setups with regards to Demark based exhaustion
Both Technology and Financials look to have broken down in the short run, which represents 40% of the SPX. It's right to hold off on getting too aggressive in buying dips until evidence of more stabilization occurs.
Stick with Defensive this week- Buy XLV, XLP, XLU, VNQ. Healthcare increasingly is an overweight, and has broken out in relative terms. This should be favored for the next few months, while Utilities, REITS, Telecom and Staples should still be good bets and overweights for this coming week as the Defensive trade continues. (I list some of my favorites, below)
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. No Change here. EM space remains weak, and right to hold off on buying
Commodity space showed brief stabilization, yet maintains strong downward pressure in momentum. It looks early to buy into this space at large. Any hint of Dollar moving back to highs would cause another leg down for this space, and Crude and most of Energy looks to have started that last week.
Sell any further escalation in Implied volatlity into June. Given the rising levels of fear given lack of a trade deal, and rising pressure on the Administration to act, it's likely that some kind of deal gets done. Sentiment has gotten more bearish, and given the lack of real deteriroation in the indices, this pop in volatlity likely marks a sale between now and August/September.
Trends in broad-based equity gauges like the Value line Arithmetic index peaked out largely when breadth did back in late February. As the chart shows, price failed to exceed last September's peak, so a very different picture in indices like these as compared to the SPX or NASDAQ and stock gauges have lost ground down to near key support over the last week. Momentum, as per RSI, has gotten near oversold levels and will show some positive divergence on any further breakdown into end of May. Yet, it's important to watch this index as a guide for "stocks" vs just the SPX which is in far better technical shape.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish for this coming week unless SPX regains 2892. It's thought that the lack of volume and above-average breadth on gains vs Declines this past week coupled with the short-term deterioration in Technical structure, still has the chance to lead stock indices lower into end of Month/early June before a bottom. While bearish sentiment is rising, we haven't seen proper signs of any real capitulation, by means of VIX backwardation(Spot VIX well above 2nd/ 3rd month VIX futures), capitulatory volume into Declining vs Advancing stocks (HIGH TRIN or ARMS index ratio >2), Equtiy put/call ratio at extremes (Getting there, but not yet) or counter-trend signals and/or divergence in VIX v SPX ( SPX goes lower, but VIX fails to rise) Above all, key sectors like Tech and Financials don't look to be stabilizing just yet and these are the building blocks for SPX. As long as Utilities and Staples are showing good strength, while XLK hits new lows, this minor selloff can extent a bit more. Gann -based targets for this coming week lie near 2734-6 at extremes up to 2762-4 on any decline down under 2800. This would make fear escalate, and should provide good risk/rewards to buy dips.
Intermediate-term (3-5 months)- Bullish- Near-term deterioration, even after 5 straight down weeks in DJIA, has not been sufficient to turn intermediate-term trends negative. 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. 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 more serious breadth deterioration and more bullishness to have concern on an intermediate-term basis. Advance/Decline for Equities did peak out with indices in early May, yet the resulting decline has not been all that severe. 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. However, the time period from mid-September into November could set the tone for 2020. Stay tuned.
5 Defensive charts that show ongoing positioning in this group, along with 5 names to focus on that are attractive
The Consumer Staples group has turned up sharply in relative terms vs the broader market which began in mid-March as markets have continued to show evidence of Defensive positioning. Over the last three months, this group has outperformed all other S&P GICS level 1 groups with performance of 5.34% vs a broader return of 1.20% for the SPX. Staples now leads Consumer Discretionary in performance over the last 1 and 3 month periods, and is only 180 bps behind on a Year-to-date basis. Near-term this strength looks to continue as the relative chart of XLP v SPX has produced a rounding bottom formation and has turned up higher to show some good momentum. Many stocks like HSY, KMB, SJM, PEP, STZ have shown multi-month breakouts which have taken these stocks to multi-month if not yearly highs. The two stocks featured in this report, GIS and MNST, are technical standouts that look like better risk-rewards than the stocks hitting multi-year highs and are not as overbought. Overall, Staples still looks to show good relative strength into June, but it will be come a bit more selective as this rally starts to mature.
VNQ has shown some excellent technical strength in recent weeks that has helped to lift this group out of its funk after multiple weeks of consolidation. REITS now lead all other Sectors on a year-to-date basis with returns of 18.01% vs S&P at 12.73%. Much of this recent uptick in relative strength has come as yields have broken down under recent support, but does not seem complete. Weekly charts show this lengthy base which had been a critical area for VNQ between $85-$87 that now looks to have been exceeded. In the short run, a move to the low $90's looks possible given this recent progress in the last couple weeks. However, it's thought that yields likely should stabilize and turn back higher in June, and this might mark a time to sell into this group within 3-5 weeks. For now, it's right to favor upside in VNQ and position long in the REITS.
The REIT sector has achieved a weekly breakout in relative terms, which could allow for some near-term outperformance in the days/weeks to come. As weekly charts of the VNQ v SPX show, this group has been largely range-bound in recent months, yet began to trend up sharply when rates broke down last week. Given that Treasury yields still look to trend a bit lower near-term, it's likely that the REIT sector can show a bit more relative strength in the short run. Apartments still look to be an attractive way to play this space, and for now, this is a defensive group to consider given the uptick in volatility.
Utilities have been "HOT" lately, trending higher, though this weekly chart suggests the group should be nearing a peak in the coming weeks. The Utes have now outperformed every other S&P sector in the rolling 1 month period since 4/24/19. As yields have broken down, this group has gained in relative strength and still looks likely to outperform into end of May/early June. However weekly charts going back since 2015 show prices approaching very formidable resistance which has now held on two former occasions on rallies. The third test is approaching and looks to be within 3-4 weeks of producing solid resistance based on a combination of Demark weekly exhaustion, along with overbought conditions. However, we'll need to see some evidence of yields bottoming and showing some degree of uptick to think this group starts to falter. For now, it should still be favored for gains, but given this chart, it looks right to consider this group a safe haven only in the short run. Using strength to sell into gains into June looks wise from a technical perspective.
Summation index- Breadth has faltered since February. This smoothed version of the McClellan Oscillator has been trending down over the last few months, not dissiimilar from what happened last year when many stocks began to fall, yet, indices held up into late September/early October before peaking. While breadth overall is still favorable, with Advance/Decline near all-time highs, there has been some dropoff and it's important to be selective if this index is dropping sharply. When this can begin to stabilize and turn higher, it will give more conviction about being "long" and expecting stocks to rally back.
5 Defensive Stocks which look technically attractive for further gains
Verizon (VZ- $59.32) This appears like a good risk/reward in theTelecom space and likely pushes higher to the mid-$60's in the weeks/months to come. VZ right now continues to base, with a bullish technical structure which has consolidated its first breakout over the last couple months. This recent churning has taken the form of a bullish Triangle pattern which would be broken on a move back up above last week's $60.54 high on a weekly closing basis. Getting above March highs at $61.19 would serve to add conviction for what should be a bullish push higher to the mid-$60s. While other competitors like T have begun to strengthen as well, VZ remains the more favorable of the two and should be overweighted here as a stock to consider during defensive times.
AvalonBay Communities - (AVB- $205.40) Breakout back to new all-time highs still looks to have upside. AVB successfully managed to exceed April highs coinciding with yields starting to break support last week. The breakout in VNQ on both an absolute and relative basis should allow for additional strength to occur near-term, and REITS like AVB have been consistent leaders and are technically well positioned after the recent move back to new high territory. Given that the Treasury yield decline looks to have more to go, Apartment REITS like AVB look to show even further strength. Weekly charts show counter-trend exhaustion to be at least three weeks away, and AVB looks to have upside to near 210-5 before this stalls out, but could trend up to $225 before hitting resistance. Given the extent of the consolidation near March/April highs, there will be some evidence of negative momentum divergence which would be a negative, but AVB should be given strong consideration given its recent push back to new highs as the REIT sector outperforms.
First Energy (FE-$42.86) Bullish for gains to the mid-to-high $40's before stalling out. While not the most attractive technical name based on traditional trend following strength or momentum, FE appears like a good risk/reward as a former laggard that's now trying to play Catch-up. This Utility stock broke a lengthy three-year downtrend early this year and has accelerated ever since, trending higher, though not getting excessively overbought. This looks to be an ideal "Safe" name to consider technically given the deteriroation that's been ongoing in the Tech sector. While the Utilities overall look to be nearing peaks in the next 3-5 weeks time, this still has some room to move between now and mid-June, and should be favored for further gains as a way to take advantage of this recent upstart in performance.
Monster Beverage Corp (MNST- $63.42) Bullish- Position long technically ahead of the breakout- MNST is one of the more attractive stocks within Consumer Staples right now given its technical setup as this has NOT yet broken out like many of its peers. The range-bound trading over the last couple years has set up an attractive bullish base that likely should lead to a breakout back to the upisde in the weeks and months ahead with the stock trading up to the low to mid-$70's. The tight base is particularly attractive as part of the intermediate-term uptrend as multiple decline attempts have failed and have led right back to near former highs. One should look to consider this here, technically before the breakout has occured and then add to positions when this has been confirmed.
General Mills (GIS- $52.81) GIS looks apt to play catchup after the first real evidence of its intermediate-term downtrend being broken over the last few weeks. This is a bullish development and should lead this higher to the low to mid-$60's. As monthly charts of GIS show, this underwent a massive pullback after having become quite extended ino Summer of 2016. While the stock shed half its value over the last two years, it recovered nicely starting last December, which appears to be an ongoing process. Given the breakout, one should bet on continued gains in the weeks ahead and looks to be an attractive play within the surging Staples space as a stock that is defensive and could play "Catch-up"