June 3, 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: Bottom line, Equity downtrends should likely reverse course and turn up for a bounce betwteen June 3-15 with a high likelihood of a sharp rebound that could carry prices higher into early September. The combination of oversold territory with excessively bearish sentiment are thought to be key factors here. Additionally, Crude oil along with Treasury yields, which both turned down sharply at the same time as Equities are now both approaching price and time based levels that should be important to watch for signs of lows in Equities. Overall, a bearish stance makes sense heading into the first week of June given Trend, and lack of Demark Exhaustion, but it's thought to be something that could reverse course this week. So i am on the lookout for a Reversal, and important to watch for evidence of early weakness Monday or Tuesday that reverses course. Particularly, any move back up above 2800 now the key area that was violated would be important and bullish.
Important Developments of this past week (Shown in Bullet form)
SPX, NASDAQ, DJIA and many European indices (SX5E) broke Mid-May lows, a technically bearish development that allowed for acceleration lower. Near-term trends remain bearish
Indices are getting close to near-term oversold levels. RSI at a 36 is roughly in line where it was in mid-May, while only 15% of stocks are now above their 10-day moving average. Close to oversold on a daily basis, but certainly not weekly or monthly
There is the start of some minor divergence in momentum building, as the Percentage of stocks above their 10-day ma is not as low as it was last Wednesday/Thursday, despite Friday being a big down day. Additionally, S&P is 60 points lower than May 13 close, but yet, momentum is not below those levels. So the start of divergence, which is a positive
Bearish sentiment is starting to reach levels which can be considered "bearish" The Equity Put/call ratio is now at the highest levels of the year (which would make sense) Daily sentiment index shows a reading of 12 (0-100 scale) (Normally single digit readings provide good entry points for Bulls) Additionally, AAII, the American Association of Individual investors shows 15% spread with Bears greater than Bulls, Yet still below levels hit back in mid-December
Treasury yields have broken down under support at March lows for US 10yr, and have pressed lower to just above key support at 2.06%, which would be a 50% retracement of the prior Yield rally from December lows.
Emerging markets have stabilized a bit in recent days, with minor Dollar weakness, though Dollar strength against Mexican Peso was important and positive for the Dollar and seems poised to rally further this coming week. So it's thought that intervention here is unlikely right away.
Defensive sectors underperformed last week, interestingly enough, with Staplesa nd Utilities finishing near the bottom of the pack. Meanwhile, Technology was the third best (less worse) performing sector, down -1.88% this past week. This indicates two things: The worst has likely been seen for Tech in the short run. And Markets are starting to turn more in favor towards Discretionary, and Financials
Crude oil's breakdown became more severe this past week, with Crude giving up nearly 61.8% of the former December-April rally. Lows in WTI look to occur this week based on a combination of near-term oversold conditoins and counter-trend exhaustion, right at key Fibonacci levels.
2's/10s Curve tried to rebound last week after 3 straight weeks of flattening, ad the 2yr yield fell below 2%. Overall, we've seen signs of 2/10 stabilizing since last Summer. While last Feb/March saw extreme flattening in the curve into September 2018, it has traded largely in range-bound consolidation since.
High YIeld has begun to widen out vs Investment grade bonds, and we've seen the ratio of LQD to JNK, as a ratio of Credit strength or weakness, start to show underperformance in High yield. This ratio has now exceeded the prior highs from last December 2018.
Mid-caps joined Small caps in breaking down to multi-month lows in relative terms and in the case of S&P 400 Mid-Cap to SPX ratio, it hit the lowest levels since 2010. Not encouraging on an intermediate-term basis,
Strangely enough, this recent selling has had little to no real effect on Growth, which remains at new highs vs Value. Ratios of S&P Growth to S&P Value broke out to new all-time high territory in mid-May and have not looked back. Growth should still be favored, and Value remains the laggard.
Key ETF High Conviction ideas heading into this week
Long SPY (274 down to 273.50) for a move up to 280 initially- Over 280 would warrant adding to longs
Long IYT (173-175) for a move up to 181-3
Long TBT..(29-29.50 entry) for a move up to 33
Long XLK (71.50-71.85) for a bounce to 74.50-75
Long VNQ (87 or lower) for a move up to 90
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 FXI (40.37-41) for a move down to 38.50
Sell GBPUSD (1.2647-1.27) for a pullback to 1.25
Sell EURUSD (1.1179-1.12) for a pullback to 1.10.50-.75
Long USDMXN (19.75 down to 19.25) for a move up to 20.50-20.75
SPX trend continues to look bearish near-term, and weekly charts show prices nearing the first important Fibonacci area of the prior Dec-April rally, near 2822 (38.2% ) Prices are 6.5% below the all-time high close from 4/30/19, having dropped in four consecutive weeks. Momentum is not oversold, though indicators like MACD have crossed back over to negative territory, with MACD crossing the signal line, which for the time being, is a negative. Overall, the area at 2722 up to 2735 is thought to have some importance for at least a temporary low this week. Under 2722 is not immediately expected, but would result in a pullback to test 2650, the 50% retracement of the prior rally. To have any conviction about a low at hand, prices need to get back up above 2800,which for now is very much premature.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish for a bounce this week, which should come about when S&P gets to 2722-37 (a bit lower levels) sometime Monday or Tuesday. Momentum is nearly oversold based on a few different metrics, while fear is on the rise. Additionally, other assets which have correlated quite positively with Stocks in recent weeks look to be very close to meaningful support, that being both TNX and Crude. Overall, while trends are bearish, it's thought that SPX has a bit more pullback but does not break 2700 on this first go-around and should begin to turn higher. Movement back up over 2800 would signal the rally is on, and one would hold off on shorting/hedging, expecting a larger move.
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- Near-term trend remains negative and accelerated last week after the break of 2800, representing mid-May lows and thought to be important structurally for SPX. However, there are some encouraging developments that suggest a bounce is not too far off and could come about this week. Momentum is just now nearing oversold levels, but has not yet gotten below Relative Strength Index (RSI) levels hit back on May 13, despite prices being 60 points lower. This is thought to be mildly positive for the prospects of an upcoming bounce, and the area at 2739 would represent an area where both of these "legs" of the pullback would be equal price-wise. (4/30 into 5/13 would equal 5/16 to Present) Demark Buy Setups could appear as early as post Tuesday's close this week, but we'll need to see at least some minor evidence of stabilization and price strength before thinking it's right to be long. The area at early March lows sits at 2722, which also represents a 38.2% Fibonacci retracement of the prior advance. So, Quite a bit lies between 2722 and 2739 that could have importance as support for this coming week, technically.
Mid-caps have begun to show more serious signs of deterioration lately,dropping to the lowest level in relative terms to the SPX since 2010. The chart above highlights the relative chart of the S&P 400 Midcap Index relative to SPX. While much of the focus often is on Small-cap underperformance, the extent of this recent deterioration is notable and should be on the radar of most investors heading into a more challenging seasonal time of the year. At present, it's right to overweight Large-Caps much more than either Small, or Mid-caps.
Credit spreads have been widening lately, and as this ratio chart of LQD to JNK shows, investment grade has just surpassed former peaks relative to High Yield made last December. This is thought to be somewhat problematic if this pace of widening continues in the weeks ahead given the tendency of credit spread weakness to lead equities. Charts going back since 2016 showed the initial breakout late last year during the October-December selloff, and now this rally has really accelerated in the last two weeks.
WTI Crude oil is thought to be close to bottoming after a very severe drawdown in recent weeks. Targets lie at 51.50-52.50 which should be tested on Monday 6/3/19. Prices have nearly wiped away 60% of the entire rally from last year as of last Friday after peaking out on 4/23, near the same time that DJ Transports and NASDAQ topped out. Counter-trend exhaustion is within two days of forming, while momentum indicators like RSI have become deeply oversold. While the extent of the momentum acceleration makes anything more than a bounce potentially doubtful at this time, a low in Crude does seem likely this coming week. Importantly, given that Crude peaked out last October along with bottomed on 12/24/18 right when SPX did, not to mention its late April peak, any signs of Oil bottoming should also coincide with a low in stocks given the recent positive correlation trends.
Treasury yields look to be closing in on strong support where yields should stabilize and turn back higher. Looking at charts of the US 10-Year Treasury Note yield, the acceleration over the last few weeks has now given up nearly 60% of the entire uptrend off the 2016 lows. Fibonacci support along with former lows from 2017 lie between 2.01-2.06%, a zone where one could consider taking profits in Treasury longs and attempting to play a bounce. Movement back up over 2.34% is necessary to call for any sort of meaningful low. Over the course of the next 3-5 trading days, a bit more weakness in yields looks likely.
Growth Vs Value- Surprisingly to some, the ratio between Growth and Value has not suffered along with the equity decline in May. The move back to new high territory in the S&P Growth index, SGX, vs the S&P Value index, SVX, has pushed back to new high territory, indicating a steady appetite for Growth even on broader market declines. One interesting fact is that Technology has actually held up better than most sectors in the last week given some of the advance in Semiconductor names. Thus, the landscape still seems to prefer Large Cap along with Growth.
Further strength in US Dollar vs Mexican Peso in the week to come. The decline in Mexican Peso last week following the Trump announcement of Mexican tariffs might seem to offset some of that news, and USDMXN still looks likely to continue higher in the near-term, with targets up near 20-20.50 before any real resistance. Thus, the thought of any sort of intervention to stop the decline in the Peso, for now, looks premature, and this sharp rise from last week in US Dollar vs Peso looks likely to continue. The larger resistance trendline lies directly above, but exhaustion counts are 3-4 days early. Thus, no reason to expect any sudden imminent reversal.
Corn has now reached a short-term important area of resistance after logging one of the more explosive moves off the lows as has been seen in the last 10 years. In the 13 trading days since May 13, Corn has moved up nearly 20%, a huge move that has helped momentum improve markedly on all timeframes. Given the ongoing flooding int he Midwest, we've seen a very sharp move up in the Grains, in Beans, Wheat and Corn. While June is normally a subpar month for the Grains, this years's seasonal weakness might be delayed a bit given the lack of being able to plant given the rainfall. Overall, 432-40 is important, while over would drie prices up to test prior highs near 500. No evidence of any peak is near, however, so longs are still favored looking to sell into this first move into the high 400's initially.
CBOE Put/Call ratio for Equities has now reached the highest levels of the year after having largely failed to respond to the initial 5% down in Equity indices. Technically this breakout looks bullish for Put/call to still push a bit higher, and is the first sign that fear is finally starting to creep back into the markets after some abnormal complacency.
One gauge that looks close to oversold levels concerns the Percentage of stocks over their 10 and 50-day moving averages (m.a.) While traditional gauges of momentum are growing closer (SPX RSI is at a 36), the percentage of stocks trading above their 10-day has pulled back to 15% as of last Friday 5/31/19. Thus, when this gauge gets to Single digit territory,which looks not too far off inthe distant future, it should coincide with a decent low and bounce in SPX given that an overwhelming majority of stocks are trading under their 10-day m.a. Overall, this looks close and should be monitored for movement under 10 this coming week.