June 10, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2734-6, 2722, 2712, 2650
Resistance: 2775-7, 2800-2, 2836, 2892-3
Summary: Near-term trends turned sharply bullish early last week with the move back up OVER prior lows from May 13th (S&P 2800), along with successfully eclipsing the minor downtrend from May. (2813-5) This helped US equity indices log the best 5 days of performance for the year. At present, prices are nearing intra-day overbought levels, and it's notable that the last few days have pushed higher on sub-par breadth and momentum. While Technology made a good comeback, we also saw meaningful outperformance in Healthcare which was impressive after several sideways months. Overall, indices could stand to consolidate some of these gains given the extent of the move- Make no mistake, the short-term trend IS in fact bullish. Yet, with overnight Futures gains showing S&P higher by nearly 150 points since last Monday's lows, (DJIA up more than 1000), the risk/reward is growing poor in the short run, and I expecting at least a minor stalling out in this trend this week, which could materialize between Monday and Wednesday, pulling back, but providing opportunities for Dip buyers for a better risk/reward than at current levels.
Important Developments of this past week (Shown in Bullet form)
SPX, NASDAQ, DJIA are nearing their first signs of time-based resistance after last week's rally after signaling Intra-day Demark based sells on 120, 180 and 240 minute charts for the first time since last Monday's 6/3 lows
Indices are only overbought on intra-day timeframes while none of the major indices have gotten to true overbought levels on Daily charts. Even after 1000 point gains in DJIA and 150 points in S&P Futures, this rise is seen as constructive near-term, but just overdone, and requiring consolidation.
Gains last week go directly against what the popular narrative is that Tariffs should be "bearish" for stocks in the short run. While many attribute Equity decline in the month of May to a ramping up in trade tension, very little explanation is available to explain last week's rally. Many technical indicators had suggested indices were getting close to rallying, and sentiment and trend remain more important factors for those that care on near-term direction, than News.
Bearish sentiment remains a constructive factor for Equities, and even after a huge 4.4% gain for Equity indices, sentiment is largely still subdued, with many expressing caution given the lack of any meaningful Trade deal and ongoing signs of global economy cooling. Ahead of last week's gains, we saw the Equity put/call ratio hit the highest levels of the year and last Thursday's AAII sentiment poll still shows a 20% spread of Bears above Bulls. Thus, pullbacks likely find a floor on any decline into 6/20-4 and would be buyable for a move back to new high territory
Treasury yields continue to be a concern as yields have not followed or led Equities higher, as might have been expected given this recent positive correlation returning to the market in May between yields and stocks. Numerous technical signs point to an upcoming LOW in yields within the next 3 weeks, so it looks right to sell Treasuries into this advance, along with TLT and consider TBT, as 2% likely serves as a good floor for yields.
Emerging markets have lagged the move in Developed markets over this past week, and this still looks likely in the weeks ahead. Movement back over May highs in the ratio of Developed to Emerging could lead to a much bigger period of underperformance for the EM space.
Defensive sectors largely underperformed last week, though Consumer Staples did manage to outperform Discretionary by over 100 bps on the week, even on a +4% market rally. Technology meanwhile rallied sharply and has regained its spot above all other S&P GICS Level 1 sectors for YTD Performance.
Healthcare showed a meaningful technical breakout that bodes well for this sector to continue to outperform. This is a positive given that Healthcare is the #2 group in representation within SPX, and this sector looks likely to continue higher as it nears its seasonally bullish time in late June and July.
Crude oil managed to stabilize and begin a minor rally within its downtrend this past week. For any real hope of a larger rally ahead of OPEC meeting, Crude will need to get up above $55.50
Precious metals have rebounded sharply over the last few weeks, despite a lack of the broader commodity space lifting. This rally looks to be nearing meaningful resistance this week and it's still difficult to have a bullish intermediate-term bias in the Precious Metals (Though Gold's pattern is growing far more constructive and over 1365 would be very bullish and a chance to buy for intermediate-term gains.
2's/10s Curve has steepened pretty dramatically in recent weeks, though there are signs that 2-year yields are very close to bottoming out in the short run, and should not get below 1.70%. Thus, a rebound in 2 year yields into July should cause a compression in the 2/10 curve yet again.
Small-caps and Mid-caps have broken down in the last few weeks despite an above-average Equity bounce this last week. This is a bit discouraging, and definitely something to keep an eye on. As relayed last week, Mid-caps vs SPX in relative terms has hit the lowest levels since 2010.
Key ETF High Conviction ideas heading into this week
Short SPY from a trading perspective above 288.85 with stops at 292 and targets at 282.5
Short IYT now at 185-7 for a move back down under 180
Long US 10 Year Treasuries this coming week, with expectations of TNX getting down under 2.06 to a maximum of 2.00% which should be used to sell
Long VNQ (87 or lower) for a move up to 90 and will reverse to short by 6/20
Long XLV (86.65-87.50) for a move to 90 initially- Above 90 should bring 97
Short EEM (40.71-41.50) for a move back to 39
Short XLC at 48-48.50 for a move back lower to 45.50-46
S&P futures have jumped up to near 2890 into Sunday evening as Trump's Mexico tariff idea has been postponed indefinitely. For the first time since 6/3, we see counter-trend signs of exhaustion on 240 minute charts, while momentum has gotten back to overbought levels. Prices have jumped nearly 150 points since last Monday, and while movement back above 2815 resulted in acceleration, this area is thought to be difficult for S&P to make too much more progress. Pullbacks this week look likely technically speaking, but yet drawdowns should be buyable for gains into July.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Expecting a stallout early week and pullback to consolidate gains before movement over 2900 can occur. While the near-term trend is certainly still bullish, it's thought to have moved too far too quickly, and could face weakness over the next couple days or into the next week potentially into end of quarter before gains into July get underway. One of the concerns revolves around 10-year yields still being downward sloping and showing no real evidence of turning higher. Meanwhile the deterioration in both Small and Mid-caps remains a concern. Thus, while momentum did turn higher on daily charts, on the breakout early last week, both weekly and monthly momentum remain negative.
Intermediate-term (3-5 months)- Bullish- May's pullback, has not been sufficient to turn intermediate-term trends negative. 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 and SPX remains just 6.5% off all-time highs. The one important 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. Weekly momentum, has just joined Monthly in being negative, so at present, we have Daily, weekly and monthly MACD all negative. However, for now, price weakness has proven fairly benign, and 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, while the Summation index has been negative since February. 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.
10 Charts of Equity indices, commodities, currencies and Treasury yields
SPX- Gains likely to stall out this week. Near-term gains have recouped more than 62% of the prior drawdown, yet have moved higher literally in a straight line, with little to no real consolidation. This week should put an end to this, given intra-day overbought conditions and some signs of exhaustion. Cycle-wise the time at 6/10-11 has some importance as a timeframe which could produce a reversal of trend. So, while the uptrend looks very much intact, it's unlikely to move much higher without some degree of consolidation. Groups like Healthcare and Utilities and REITS can be favored this week, while looking to fade movement in Communication.
US 10-Year Yields still look to push lower after last weeks' rebound attempt largely failed. Daily and weekly charts, however, look to be on the verge of the first confluence of downside exhaustion in over a year. This could allow for some stabilization and a trend reversal back higher in yields, though it will take another 2-3 weeks for this to materialize. The area at 2.00-2.06% looks important as this is not only a 61.8% Fibonacci retracement, but also lies right near March lows. Bottom line, it appears that this week and next can allow for a bit more yield weakness, yet should be very close to an area which would allow for a counter-trend rally in Yields
Financials gave a minor shakeout in trying to exceed the entire downtrend vs SPX in the last week. (Chart above illustrates the ratio between XLF and SPX) However, if yields bottom on schedule in the next 2-3 weeks, this group should begin to turn back up sharply into July. It's notable that the pattern overall has been upward sloping over the last few months and hugging this area near the downtrend that was thought to give way to a potential push higher. While last week's effort largely looks to have failed, one should look to buy dips in Financials into June expiration, and it's thought to offer a good risk/reward consider averaging into longs within 2 weeks time.
US Dollar showed one of its largest breakdowns in the last few monthslast week, severing uptrend line support and turning lower. This coincided with Precious metals doing well. Yet, most of commodities are still downward sloping, and still have not really bottomed. It's thought that the Dollar likely can continue lower this week, but should be closer to a low, and might snapback into end of month before any further weakness. Heading into this week, another 2-3 days of weakness are possible, but USD should be near a counter-trend rally.
Gold is nearing short-term areas of importance near early year highs, and the area at 1350-60 should offer an initial area to sell into, for trading purposes. While Gold's pattern has certainly grown more constructive, the metal will require a move over 1365 to be bullish on an intermediate-term perspective. At present, counter-trend sells per Demark in the form of TD Sell Setups (9 consecutive trading days where the close is greater than the close from four days prior) It's also thought that the decline in the US Dollar is nearing first support and might bounce in the weeks ahead. Thus, Gold might underperform into late June/July before a larger rally in August-October. For now, it's early to be too bullish on Gold, but worth watching carefully with plans to buy for intermediate-term purposes over 1365.
Healthcare looks to be one of the better risk/rewards to consider buying into, technically, given its breakout of the recent consolidation pattern that has held prices intact since early March. This group notoriously shows decent performance in June and July, so gains should be followed in this case and particularly in groups like the Medical Devices and Pharmaceutical stocks. Other groups like Biotech and Healthcare Services should gradually play catchup, but for now, are lagging the other groups.
REITS have been gaining ground given the Yield decline, but look to have just 2-3 weeks more of outperformance before hitting very important resistance, and investors might consider selling into these gains into mid-to-late June. Treasury yields are thought to be close to bottoming, so this should present an attractive time to consider selling out of some of these outperforming Yield sensitive groups, and overweighting groups like Financials for a larger snapback rally. VNQ has technical targets between $90-91 that should offer good opportunities for profit-taking.
Technology's stabilization and minor breakout back on 5/24 was important in showing that this sector was finally starting to bottom out after a huge period of underperformance in May. While many commented on FANG stocks declining into the first couple days of May, momentum had begun to improve and subsequently turned up sharply as prices began to rally last week. Technology turned in the 2nd best performance of any of the major sectors and has cemented its spot yet again as the #1 performing group of the year. While this coming week could witness some backing and filling, this should still represent a chance to buy this group for a larger rally in July into August.
The Communications Sector SPDR ETF, (XLC) has now reached levels that likely represent good areas for profit-taking into this coming week. This sector lagged all other 10 sectors last week with gains of just +0.93%, vs S&P gains of +4.41%. This current level at $47.57 represents strong trendline resistance and is thought to be a level to consider selling into. Pullbacks over the next 2 weeks would offer a better area to buy, than at current levels.
AAII sentiment contracted substantially last week, based largely on price action which occurred prior to last week's rally. Bears outnumbered Bulls by more than 20 bps, which is close to the levels last seen at December 2018 lows. While this week's numbers are sure to come in a bit better and show contraction in this ratio, it should be noted that Sentiment is still largely subdued and not all that bullish. Therefore any minor pullback over the next couple weeks to consolidate last week's gains should prove to be an excellent buying opportunity for gains into July.