May 6, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2882-4, 2865-7, 2836-7, 2785-9
Resistance: 2921-2, 2945-9
Summary: Bullish trend could be under pressure in the short run with a close under last Thursday's lows at 2900-1 (SPX & ES_F) US Futures have plummeted Sunday evening as Trump threatened to hike tariffs this coming Friday, while China considering delaying the upcoming trade talks. This would represent the first real sign of extreme price reversal from highs. Even if this proves short-lived and tariffs are not hiked and prices move back to highs, it will take an even further toll on momentum which has been tapering off in recent weeks. Bottom line, failure to recoup what's been lost Sunday evening should jumpstart at least a minor correction for US Stocks.
Looking back, the first four months have certainly been one for the record books. S&P has pushed higher by over 17%, representing the best start to a year in over 30 years. US indices have reached new all-time high territory (except the DJIA) ,and have done so largely in tandem with a global bond market rally, while the US Dollar has strengthened, and Commodities have had a difficult time finding Footing. Meanwhile, the FOMC meeting results largely seem to have comforted the market, and prices rose to close near highs of the week. While the net change this past week was only fractionally positive, groups like Healthcare and Financials showed very good progress, each up more than 1% to lead performance over all other Sectors. Meanwhile, Energy turned down sharply, dropping 3.26% as Crude oil's sudden drop resulted in many stocks violating uptrends from earlier this year.
Overall, the two biggest technical developments heading into this past week were certainly the breakout in Treasuries, along with a similar move in the US Dollar. Commodities turned down sharply and have fallen hard now for the past couple 6 weeks. Emerging markets and China have also faltered. Meanwhile many Equity sectors which coincide with Commodity performance have also been hard hit, Materials being one in particular, though with Energy being certainly more popular and a larger percentage of SPX. But the key theme currently is that commodities are NOT the place to be near-term, and that Dollar strength has hurt many commodity specific names.
Meanwhile, Healthcare has come back with a vengeance, as last week's Weekly Technical Perspective discussed. This group makes a lot of sense from a risk/reward perspective after a lousy first four months and then heading into a seasonally bullish time for the group from May-July. Financials also are a group worthy of mention that had underperformed dramatically but have come back strongly given the Yield curve steepening over the last month. We've seen minor breakouts in stocks like BAC and C, very meaningful stocks to the Financial space, while the longer-term downtrend in Financials is now being challenged. ( Some thoughts and charts on this below)
Bottom line, heading into the month of May being overbought certainly gives reason for pause, as market participants know that this rally is likely running on borrowed time, being up nearly 20% heading into a seasonally weak time. (We'll see if Trump's comments prove to lead to action, or whether this is just a rumor and the Trade talks can resume. ) The last few weeks have certainly felt like a stalling out was approaching, with groups like Semiconductors turning down sharply and big gap-downs in key stocks like MMM and GOOGL while groups like Healthcare have been left to pick up the slack. Yet, counter-trend exhaustion is all but non-existent currently after it failed across the board in early April. It's thought that if indices are going to make any kind of meaningful peak, there should be widespread exhaustion across indices and sectors. The intermediate-term momentum is also still quite positive, and many remain under invested, waiting for that first big pullback to buy into. Sentiment polls are largely in agreement with this, whether it be AAII, or BofAML Portfolio Managers sentiment polls, showing a willingness to stand aside and not participate in this largely Tech dominated rally.
All in all, despite some minor negatives with regards to Technology stalling out a bit and lesser breadth now than late February, we've seen some successful rotation without harming price action one bit. Provided that uptrends remain in place, it's right to stick with trends and expect that S&P (when getting over 2950) should have little overall resistance until 3040-70 and should still be trusted. If overnight weakness persists into Monday and can't be recouped, then on evidence of Tech and Financials turning down, along with Healthcare, the three largest percentage sectors for SPX, it will be wise to take profits and/or stand to the side. For now, a long bias still makes sense. If/when SPX gets back over 3025, the time will be right to switch intermediate-term views from bullish to Neutral with any hint of larger decline bringing about a possible negative view, particularly into this Fall. For now, it's right to stick with trends
Key Conviction ideas heading into this week
Technology has shown some signs of waning in the last couple weeks, which should be watched carefully in the coming week. While prices and relative charts have stalled a bit since 4/24, they have not yet turned lower, but any breakdown in Tech over the next few weeks would be seen as a negative and as a bearish catalyst for stocks.
Financials outperformed all other sectors besides Healthcare this past week, returning 1.21% in S&P 500 Financials index vs a return of 0.20% for the broader market. Relative charts look to be very close to breaking out of trends since early last year, and something of the sort would be used to FOLLOW this group, expecting meaningful outperformance in the weeks and months to come. For now, Financials as a sector lies at Make-or-Break levels, but truly important to the market.
Healthcare should reach its first short-term target this week, and for those not involved, I'm expecting some kind of stallout into this coming week on a very short-term basis. Longer-term, I do believe Healthcare outperforms and should still turn in above-average performance for May/June/July. The next week will show whether this group just stalls out, or whether it reverses briefly (which would be a buying opportunity) Healthcare Services (XHS ) and Pharmaceuticals (DRG index) could outperform and should be overweighted.
Movement in both the US Dollar and in Treasuries have proven a bit "choppier" in the last week, and while Treasuries did extend gains down to near the first 2.45% target, the snapback thus far has left Yields near key junctures. The US Dollar meanwhile, broke out and then consolidated gains over the last 2 weeks, and also will need to show some signs of stabilizing here.
WTI Crude's decline looks to be nearing support, but could still weaken towards %$58.50-$59 in WTI this coming week before putting in a short-term trading bottom. As discussed last week, the larger breakdown of this trend from December looks bearish and likely puts in a near-term top that doesn't get exceeded right away. Given the prior Positive correlation between US stocks and Crude (both bottomed on 12/24/18 and moved straight higher) it's important to watch Crude carefully
Energy as a sector should be nearing its first area of support after the breakdown over the last 2 weeks, but this looks meaningful and negative technically. One should use gains in Crude as a chance to sell into this into mid-May, expecting further intermediate-term weakness in this sector. Relatively speaking, Energy stocks violated support last week on Crude's decline, making this sector one to avoid.
Industrials as a sector still look quite bullish technically after the breakout into late April and resulting consolidation. Transportation stocks look like a group to favor and one should stay long Industrials barring a move back under 76.59 in XLI or under 10630 in DJ Transports.
MSCI World index needs to be highlighted again this week, as prices have pushed up to within striking distance of September 2018 highs and are now showing their first signs of counter-trend exhaustion on this rally. This suggests a high likelihood of at least some kind of slowdown over the next few weeks and MXWO should be watched for evidence that prices slow down here and reverse, or managed to successfully get back above this prior level of highs last year. Both would be important developments, but until a breakout happens, the higher probability result is that this rally slows.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Under 2901 on a close turns trend bearish, and could bring about quick move down to 2795-2800. Over 2901 keeps trend bullish. Tech has slowed a bit and Financials are up against important relative resistance, but meanwhile, we have bullish price action out of the Industrials (Transports) and Small caps have come back with a vengeance. Volume, breadth have been largely subpar, yet we haven't seen much evidence of price weakness just yet (And maybe last night's pullback is the start) For now, 2901 is key and under at 2889, 2877. Meanwhile the ability to recover and regain 2950 this week points to 3040-75 which should be an area to sell into.
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, covering indices, sectors and ETFs
S&P Futures- Overnight losses have caused move down to new multi-week lows. While somewhat severe to see losses around 2% overnight, the real key will be whether futures can regain 2901 and close above that level on Monday. For now, this trend has gone higher largely unabated for four months but yet momentum has now gotten overbought while breadth and momentum have begun to taper off lately. So the month of May will truly be important as to whether trends break, or whether S&P finally reaches 3000 and higher before topping out. It's thought that the waning in Technology in recent weeks could be a concern but is countered by Financials trying to break out, while Healthcare and Industrials have both been shaping up. Thus, trade fears are likely to prove temporary to markets and Advance/Decline for "All stocks" remains at record highs. To have real concern, we'll need to see more deterioration in daily and weekly trends. While failing to recoup Sunday's weakness suggests this might be starting, we'll need to see more trend damage in absence of that, then pullbacks should prove buyable.
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.
Russell 2000 has begun to show some real strength on an absolute basis, and relative charts have also stabilized in IWM/SPX that bode well for Small caps in the short run. Weekly IWM charts show prices having extended gains above the highs of the last few weeks and now are at the highest levels since last October on a close. Specifically, this technical improvement looks likely to carry IWM up to challenge August highs at 173.39. While this move might take some time to complete, the bottom line message here is that Small-caps have bounced back sharply and something to favor in the near-term as an area of outperformance.
Technology in Equal-weighted terms has started to wobble a bit in relative terms over the last couple weeks. The Equal-weighted Tech ETF v SPX has broken an uptrend from December, but thus far has shown no major evidence of any real downturn. But given the recent decline in Semi stocks and GOOGL lately, it's worth paying a close eye to Technology for any hint of this turning back lower. While Technology remains the largest sector in SPX and has been the best performing this year, this last week saw the group mid-range in performance, and this relative chart shows the slowdown in the group since 4/24 about two weeks ago. A more material breakdown in Tech into mid-May would give the Bears some additional ammunition regarding the possibility for stocks to weaken.
Financials look to be nearing a real Make-or-Break in their relative trend vs SPX that should allow for a big improvement in relative performance if this area is exceeded. This coming week could bring about further near-term strength, as companies like Berkshire Hathaway (BRK/A), the largest component within Financials, announced a repurchase of $1.7 billion shares in 1Q and its Cash and Treasury holdings now exceed $114 billion. Overall, a relative breakout in Financials would give some real conviction to the idea of SPX being above to exceed 3000 before any stalling out, and this sector is one of the more important to keep a close eye on this coming week.
Energy looks to have completely broken down in the last week after trending sideways since early February. This relative chart of OIH vs SPX shows this sector largely not having participated at all on WTI Crude's rally in recent months. However on the first sign of a meaningful pullback in Crude, like we saw last week, the Energy sector reacted pretty violently in moving lower, with many sector ETFs like OIH showing meaningful trend violation. This suggests further underperformance in Energy, and while near-term absolute charts have gotten stretched, bounces in this group are likely to prove shorting opportunities for pullbacks in the months ahead. Unfortunately the snapback in performance for this group back in January looks to have proven remarkably short-lived and last week's trend violations make Energy bearish.
CCI index, the Thomson Reuters Equal-weight Commodity Index, still looks to weaken a bit more over the next 1-2 weeks, but is growing closer to a key area of support marking lows in CCI since Summer 2017 when this bottomed out last, before embarking on a big rally into May 2018. Given that CCI is approaching a 1 year anniversary of last year's major peak, it's likely that prices could bottom out as we near that date in the next few weeks. Counter-trend exhaustion is within 1 week of forming on weekly charts of the CCI, and former lows which have been hit 2 addiitonal times after bottoming in June 2017, are likely to result in this slowing down in its descent. Therefore, if the Dollar starts to peak out into Mid-May, that could create a perfect scenario for CCI to bottom and for most Emerging markets and commodities to try to form a technical low and bounce. Those who like buying dips should give DBC a hard look into mid-May on any further weakness.
Emerging Markets look to have stabilized in the last week, and ETFs like the IShares MSCI Emerging markets ETF managed to hold ongoing trendline support and make an above-average bounce off the lows. Technically this makes the trend a bit more bullish near-term and still creates an attractive risk/reward scenario given the extent of price right near important trendline support. Any violation of lows near 43.45 would be a big warning signal for declines in EEM down to test March lows. Meanwhile, getting up above $50 would allow this recent bullish bounce from December to continue, targeting $46.50 before any resistance. Overall, EEM looks attractive from a risk/reward standpoint and should be favored for further gains.ç
The excitement towards Cannabis stocks looks to be building, but the price action itself has been largely subdued over the last three months. This index called the BI Global Cannabis Competitive Peers has flattened out after a sharp rally to start the year, and will need to either breakout above recent highs near 240, or violate lows right above 200 to have faith in the near-term trend. However, given the length of the sideways churning, it looks right to monitor this space and simply follow whichever way the breakout takes it.
Bitcoin and other Crypto-currencies look to have shown some above-average strength in recent weeks, which bodes well for further rallies in the short run, with more proof needed for intermediate-term conviction. Heading into this year, the excitement about Cryptocurrencies had nearly all vanished, despite the convictoin about the success of Blockchain. Bitcoin however, has managed to rally more than 55% off the late December lows, an area that represented nearly an exact 1 year anniversary from where Bitcoin had peaked back in late 2017. While the gains off these lows have been impressive they're just a fraction of wht was last in 2018 after the torrential run-up. Last week's close a tthe highest levels since last November is bullish however in the short run and makes a good technical case for further strength up to near 6000 before any minor stalling out. While any larger rally is likely to require some backing and filling, for now, it looks right to hold longs here yet again, with tight stops, expecting further gains are possible.