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equities

Top Stocks to Consider Technically

 

February 6, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2280-2, 2273-4, 2264-5               Support
2300, 2310-2, 2318-20                Resistance

 

SPX's surge back to recent highs managed to help the index close positive for the week and eliminated the short-term concern about this recent consolidation experiencing a downward break.  The ability to close back over the prior week's highs should help S&P push up to at least 2315-20 in the short run, and pullbacks should be used as buying opportunities.

 

What a difference a week makes
Last week's ability to push back to make new all-time weekly closing highs confirms the prior week's breakout as being "legit" and gives much conviction towards the thinking that a rally back up to 2315-2320 is underway.  While volume came in less than prior sessions on the latest Breakout, we did see breadth expand to nearly 4/1 positive.  Financials showed very strong performance, which despite the early Bond strength, still managed to move back to multi-day highs (and by end of day, Rates had moved back higher) Healthcare also managed to further its recent outperformance, and despite the ongoing rhetoric on Drug pricing, sub-sectors like Biotech, & Pharma still have managed to stabilize and turn up sharply.  Meanwhile the US Dollar index's decline still looks to be ongoing, while yields have also continued their recent upward trend.

While there were notable negative reasons of late to think this recent consolidation could in fact lead lower, and many were betting that the low Vol levels coupled with this stallout should in fact lead prices lower, the combination of the structural positives in terms of the pattern improvement coupled with the heightened tension and uncertainty which the Inauguration has brought about, still seems to favor being long for a move back up over 2300. 

When considering the possible negatives, the lower number of stocks trading above their 10 and 50-day moving averages (m.a.) seems to be something that merits attention, as these gauges were at/near yearly highs back in early January and even last March-July while being quite a bit lower of late (2/3/17) value of 65% of stocks trading above their 50-day ma vs 85% back last year.  Additionally, the fact that Small caps have been declining in relative terms since December of last year is also worth mentioning as a concern.    Additionally the Summation index remains lower than it was in late January, and still well off the highs seen last Summer.  What this means is that the momentum of the breadth has slackened off severely in recent months, and despite the Advance/Decline near all-time high territory, the dropoff in participation in some sectors seems to have hurt the recovery effort to some extent.  Despite the fact that indices are at or near all-time highs, we still have fewer stocks participating, which will need to be monitored closely in the weeks ahead.

For now though, last week's breakout looks solid, backed by good breadth numbers while Demark exhaustion counts still remain premature to form on daily charts.  Therefore, movement back to new highs represents a better time to consider selling into this rally than now.  Given that Healthcare has begun to join the fray and Financials are showing some evidence of trying to break out again of the recent consolidation, the combination of these along with a noted lack of weakness out of Tech are definite near-term positives. 

Given that yields continue to be resilient, the key message should be to favor the Financials, Healthcare, Tech, while being more selective on what to own in Industrials and Materials.   The US Dollar index's decline still looks to have a bit more to go on the downside, so this should favor Metals and Mining stocks still showing more outperformance in the near-term. 



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Push up over 2300 likely in the near future given last week's surge to exceed the highs of the recent consolidation.  Breadth expanded on the push, and indices improved their near-term structure in a manner that makes rallies much more likely than declines in the next 1-2 weeks.  Use pullbacks to buy with initial targets near 2315-2320. 


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Overbought conditions combined with counter-trend sells and waning participation all look to be important in signaling that this year might turn out far differently than the Bulls expect.  For February, Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


Charts of 10 Technically attractive stocks to consider following last week's breakout
 

 


Bank of America (BAC- $23.29) BAC has quickly gone from one of the worst Financial stocks in its sector to one of the best in the last few months, and currently is primed to break back out to new highs in the months ahead.  Financials leapt higher post FOMC this past week, helping BAC to close back near the highs of the range that's dominated since the middle part of December.   BAC's 40%+ gains from Election time into last December look to have been fully consolidated, with momentum pulling back to less overbought levels, while the stock's "flag" consolidation is likely to be resolved by a quick move back to new highs (which could have begun late last week)  Long positions are favored, looking to press longs over $23.55 which should allow BAC to move to at least $25.  Only a move back down under $22.50 would negate this rally potential, which for now, looks to be an alternate and less preferred scenario.
 


Citrix Systems (CTXS- $76.70)  Another interesting risk/reward from within the Infrastructure Software space is Citrix Systems which has just broken out above highs that have held since 2011.  This brings CTXS up to the highest levels since 2000, and should allow $CTXS to move back to the low $80's at a minimum, with intermediate-term targets back near all-time highs in the high $90s from March 2000.   In the short run, momentum has neared overbought levels given the recent surge over the last couple months, and CTXS maintains a steep uptrend from last year's lows.  While many might be concentrating simply on the last few months, it's important to put this move into context of the stock's long-term structure.  Quite often, breakouts of this sort allow for additional follow-through sooner than later, and it's wise to stick with this, rather than holding out for pullbacks.  At any rate, longs are favored and any weakness back to the low $70's should constitute an excellent buying opportunity.

 

 


Norfolk Southern (NSC- $120.46) NSC's ability to weather just a minor pullback attempt since late January and push immediately back to highs bodes well for this to continue its recent acceleration since November, and push higher up to $125 in the near-term with intermediate-term targets at $135.   While the Industrials sector has stalled a bit in the last month, the Rails have consistently shown very good outperformance and structurally remain one of the better parts of this group.  NSC exceeding late 2014 highs looks important, and despite being overbought, should help this continue higher in the short run.  The act of getting back above a former high from 2+ years ago often can serve as a source of near-term acceleration for a stock, and in this case, longs are favored with thoughts that little resistance lies in the way now that NSC is back at new all-time highs. 

 


Union Pacific (UNP- $108.51)  UNP has been a consistent leader since early 2016 but remains still roughly 13% under all-time highs from early 2015.   Its pattern is not unlike other Rail stocks like NSC, but the trend of higher highs and lows has begun to take a steeper rate of ascent of late, and should help this get back to new all-time highs in the weeks ahead.   Initial resistance lies near $111 with movement over leading this up to near $120.   Stops for longs lie near $101, but the path of least resistance for now remains to the upside, and longs are favored.
 


Fluor (FLR- $55.66) The near-term pattern of FLR is more bullish technically than the long-term, but the stock's recent basing following the late 2016 breakout is positive and should let this trend up sooner than later to test and exceed late December highs at $57.77.  Momentum remains positively sloped, and the fact that FLR moved up to the highest weekly closing level since mid-2015 creates an attractive risk/reward situation in a stock which is not terribly overbought.  FLR remains nearly 50% off its all-time highs from 2008 and over 30% off highs made just three years ago in 2014.  Overall, the combination of the near-term pickup in momentum coupled with the lack of overbought conditions bodes well for further gains in the months ahead.  Upside technical targets lie near $61.70 initially with intermediate-term targets between $65-$67.  This represents a 50% retracement of the stock's 2008 high to low range, along with a 61.8% retrace of the stock's decline from 2014.  Overall, FLR looks attractive to buy here and pullbacks to the low $50's would afford better risk/reward opportunities as part of this near-term uptrend from 2015.

 

 


Newmont Mining (NEM- $36.76) NEM looks attractive as a Gold mining stock given the combination of its recent breakout of the range since early January coupled with the fact that it's been such a dramatic underperformer during this recent Gold runup.   While the top-tier of the S&P Metals and Mining ETF constituents are up 24% or more in the last six months, stocks like NEM are down more than 18% during this same time span.  However the jumpstart in momentum of late is noticeable and bodes well for additional gains in the weeks/months ahead.  Its close last Friday finished at the highest levels since November, breaking out of a minor pattern as well as having already exceeded the downtrend from last Summer.  Momentum is not overbought and NEM looks like an excellent risk/reward to continue this recent surge in momentum considering Gold could rally to near 1245-55 before any bounce is complete.  For now this looks appealing.

 

 


AmerisourceBergen Corp (ABC-$89.28) ABC looks appealing technically given the recent improvement in structure and momentum following its breakout of long-term downtrend line resistance coinciding with the gradual improvement in Healthcare in the last couple months.  ABC successfully bottomed out right near its 50% retracement of the runup from 2008/9 into early 2015.  While monthly momentum gauges like MACD remain still slightly negative, they're improving rapidly given this recent breakout and are on the verge of turning back positive.  Given that ABC remains more than $30 off its all-time highs, the stock looks like an excellent technical long for a 3-5 month basis given the jumpstart in momentum of late.  Longs preferred here, looking to buy any dips given the chance, down in the mid-$80s for a move up to $95, then $100.70 which represents a 61.8% retracement of the prior pullback from two years ago. 

 


Merck & Co. Inc. (MRK- $64.29) Yet again, MRK finds itself back up towards recent highs after a recent stalling out on the retest from 2014 levels.  The stock remains quite attractive technically, having formed a massive long base which began over 15 years ago.   The pattern since the late 2007 highs alone represents a massive intermediate-term Cup and Handle pattern and movement over $65 on a monthly close should help MRK to accelerate up to near-term targets in the low $70's.  While many might look at MRK as being still largely range-bound, the near-term improvement in momentum on last week's gains should help the stock to break-out of this pattern sooner than later, given that its made its way back to highs in just a relatively short period of time following the recent stallout.

 


Halliburton (HAL- $56.58) HAL looks well positioned to continue higher in the months ahead following WTI Crude's ability to stabilize during a time of traditional seasonal weakness.  Given that Oil typically tends to turn up into the Summer months, a move higher in Crude should help Energy to continue its recent gains, with targets on HAL up near $70 with July 2014 highs near $74 being important.  The uptrend in HAL has not shown any signs of wavering in the last 12 months, and this remains a solid technical risk/reward within the Oil Service space.  Pullbacks to the low $50s would offer attractive opportunities to buy HAL, and only a move under prior months lows on a close would represent a cautionary sign that could lead to possible weakness.  For now, additional gains look likely, despite some recent signs of waning momentum as the monthly charts still look quite attractive.

 

 


Valero Energy (VLO- $65.51) VLO's minor weakness of late represents a likely good opportunity to buy dips, given the ongoing strengthening in the Refiners in general since last Fall.  This stock's weakness has failed to severe meaningful Ichimoku Cloud support, and the decline looks to be stalling out.  This should represent an attractive opportunity to buy with targets up near $71.40 and then $73.88, the highs from late 2015.  What most weekly charts don't show, however, is the presence of a large Cup and Handle pattern, when going back since 2007 highs, so any move back up through $73.88 would be extremely bullish, and not necessarily the opportunity to sell into the move which investors wouldn't notice who haven't scanned the long-term charts.  Gains back to the low $70s look likely, with a keen eye on 2015 highs.
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

 

NEWTON ADVISORS WEBSITE

 

 

Newton Advisors, LLC. info@newtonadvisor.com 203-339-2944

 

S&P Sector Review, and stocks to favor technically

September 6, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2167-8, 2155-7, 2141-3, 2119-20, 2086      Support
2184-6, 2191-2, 2210, 2214-6                     Resistance

 

S&P resilience last Friday following the less than stellar Jobs report is seen as a real technical positive, eclipsing a minor downtrend and rising to new multi-day closing highs.  Additional strength looks likely in the days ahead.

 

Key Takeaways

US Equity trading range ongoing; Rally continues to be selective, but last Friday's close argues for additional upside near-term.  If this sideways pattern since mid-July has taught market participants anything, it's to expect the unexpected.  We've had at least 3-4 breakout attempts over the last couple months which have failed.  Equities along with Treasury yields, continue to be range-bound, though with a decidedly upward bias since late June.  These types of trading ranges following large upswings rarely prove to be topping patterns, and traditionally tend to follow-through in the direction of the original move.  Given a lack of counter-trend exhaustion on numerous timeframes for SPX along with Advance/Decline still within striking distance of highs, it doesn't seem like a trend reversal is all that imminent.  The dropoff in breadth since early July is not unlike what happened back in March-April after the initial spike from mid-February and isn't necessarily bearish. For now, it should pay to stay long and anticipate a move over 2200, though potentially with limited upside to 2215-2220, or 2250 maximum.

Sector-wise, the dropoff in Healthcare and Consumer Discretionary are somewhat concerning, and if Clinton's gap on the Presidency widens, this very well might continue to pressure Healthcare.  For now there's only so much that Financials and Technology can carry the market, and there is some evidence of a bit more selectivity in stocks, despite the Advance/Decline near all-time highs.  For now, this ongoing sector rotation seems to continue to bail the market out, and really no signs are there that this will change, regardless that the market has entered September.

The rotation out of Defensives looks to be nearly complete now, which was written about over the last couple weeks.  Specifically, the positive momentum divergence seen in Utilities over and in Telecomm recently is encouraging for these sectors after backing off to near key support.  Much will depend on Treasury yields NOT breaking out though to argue that these should work, and over 1.63% for example, on TNX, would be likely quite negative for both sectors.  Additionally, a move up towards 2200 and above would likely also not be led by the Defensives, so this needs to be taken into consideration.  For now, these sectors seem to be stabilizing after dropping off from June, so rallies should happen in the next 30-60 days, which would coincide well with potential negative US stock seasonality. 

The US Dollar's rip and reaction post Jobs report last Friday was telling, and despite all the weak economic data, the Dollar still finished quite strong while Treasury yields closed well up off the lows, in a rapid roller-coaster style reversal for both.  Quite a few came out to bolster the case for rates to go higher, and some of this was based purely on the stock market's resilience, i.e. "Dow Dependency" vs "Data Dependency", which can't really be ruled out these days(If the Fed has a "window" where the market has held up amidst Election uncertainty or otherwise, it very well might choose to hike, if the market comes to expect it)  Last Friday saw a huge swing in Fed Fund Futures incorporating all this data and by end of day, the chances stood at 32%, up from the low 20's.  If this continues to move to 50 on lack of a market correction ahead of the Equinox FOMC meeting, and/or various other Economic data come in strong, one can't be surprised that the Fed very well might hike, which would cause further spikes in Yields, and the US Dollar index, and be negative for Commodities, but also for these Yield centric sectors which have been stabilizing.  We'll see.



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- As stated above, it remains difficult to have a real bearish stance on stocks given Advance/Decline data being strong and ongoing trading ranges for SPX and others after the late June surge, while sentiment remains largely skeptical.  The latest data came in with More bears than Bulls for AAII, and while just one datapoint Sentiment-wise, it's certainly important to not exclude this in making an opinion.  Overall, as has been said here in the past, a move up to 2200 and over towards 2210-2215 remain legitimate upside targets to consider possible before any larger top appears.  Use any early week decline under 2157 to buy at 2141 with thoughts that a snapback to 2200 and above should occur.

Intermediate-term Thoughts (2-3 months): Bearish-  No change in thinking here, and despite the short-term view being inconclusive and largely still positive on move back to new highs, i still view a selloff to be a possibility in the latter half of September into October.   The combination of the divergences in indices hitting new highs the uptick in bullish sentiment along with markets entering a notoriously bearish time seasonally makes it likely that any pullback over the final five months of the year likely takes place in August-October.  While momentum and breadth remain quite positive, most of the argument for fading stocks at this time is more of a counter-trend argument, which hasn't yet materialized in the form of index weakness.  However, Most cycles along with Demark indicators highlight the possibility of a stalling out/reversal in August.  Given the fact that indices have moved higher into this period argues that the upcoming turn should be a reversal from market highs, not lows.  Additionally, another intermediate-term concern which should be mentioned is the degree of deterioration in momentum which began last year into August lows.  Even a rally back to new high territory won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks possible into mid-August, with key targets at 2180-5 and then 2250.

 



Attractive Technical Long Ideas per Sector:

Energy:  PXD, VLO, CXO, NFX, SLB
Industrials:  UPS, PH, TYC, MAS, GD
Technology: ATVI, FB, TTWO, GIMO, AVGO
Financials: AFL, RF, NDAQ, GS, DFS
Consumer Staples: TSN, SYY, KHC, MKC, STZ
Consumer Discretionary: BURL, CMCSA, CASY, SBUX, HD
Materials: PX, IP, AVY, MLM, APD
Healthcare: VAR, MRK, ZTS, HUM, DVA
Utilities: EIX, LNT, NEE, PNW, WEC
Telecomm: T, TMUS, VZ, S, EGHT


 

 



Relative charts of the 10 major S&P Sectors shown vs SPX in ratio form.  

 


Technology remains the most bullish sector right now technically as gains in the last few months have helped the group climb back to new highs vs SPX, and while stretched near-term, there remains little overall evidence of any real deterioration.  While the group does not show sufficient performance to rank among the top five for YTD Returns, the 3 month performance beats all other nine sectors handily, as Semiconductors have outperformed all other 23 groups that make up the S&P Level 2 GICS sectors.  While Semis have lifted to overbought levels relative to both Hardware and Software groups within Technology, any pullback in the weeks or months ahead should give the opportunity to buy dips in this sub-sector.    In the short run, some of the software stocks like ATVI, EA, TTWO, GIMO have begun to show excellent momentum and structure, and might be preferred over the Semis.  Overall, until some evidence arises of Tech beginning to slow, it's right to use dips in this sector to buy, technically speaking.
 


Financials breakout in the last couple weeks is a step in the right direction after nearly a full year of underperformance as part of a three-year pattern which has also consistently lagged.  As the chart shows above, the Financial sector managed to breakout of its downtrend vs the SPX formed last year.  The technical deterioration that resulted when the group cracked three-year support was nearly directly linked to Treasury yields, which have recently begun to show more strength.  This in turn has led to strength in this sector, which outperformed all other nine S&P GICS Level 1 groups last week, with returns of nearly 2% on the week, regardless of Friday's weak Jobs report.  Going forward, there needs to be additional strength to break back into this former range which was violated early this year, in order to have additional conviction of Financials working.  For now, the group remains near-term attractive, and any TNX move over 1.63 should help the group show continued strength, despite September being a lackluster month for stocks.

 

 

Industrials have stalled near former highs from 2014 relatively speaking in the last couple weeks, but the sector remains attractive given its strength in recouping all these losses since June 2014.   The two year relative decline has been nearly 100% recouped in the last seven months, and the act of stalling in the last few months right near all-time highs is a bullish sign which eventually should allow for this group to push back to new highs.   Transports steadying would be a step in the right direction (which has already occurred) while the act of exceeding former highs from a relative position is proper technically before expecting prolonged outperformance.  Similar to Technology, Industrials had finished near mid-range of all the major sectors in YTD performance, while their 3 month performance has shown near 5% performance, outperforming all other sectors outside of Technology, so this remains a sector to favor, until proven otherwise.

 

 

The trend in Materials leveled off a bit in the last few months, but remains the top performing sector in the past six months, higher by 14.88% since 3/2, vs SPX performance of 9.74% during that timeframe.  While many of the Metals and Mining stocks have lagged in the last couple weeks, stocks like CF, MOS, SEE, BLL, FTI have all turned over 2%, helping this sector to outperform all but one.  While the near-term trend looks choppy for now, there has been some recent evidence of this sector turning back up and this would improve if Materials were to take out the resistance highs vs S&P which has been in place since April. 

 

 

Consumer Staples has been one of the more attractive of the Defensive sectors over the last couple months, broadly outperforming Utilities and showing nearly 500 bps of outperformance over the Consumer Discretionary group, despite the broader market being up nearly 7% thus far this year.  The relative chart vs the S&P shows this group holding a level of support near former lows after its pullback from June, but has gradually been stabilizing in the last month, despite US Equities having risen sharply higher since late June.  For now, this is a group to FAVOR within the Consumer space , over Consumer Discretionary, and could be positioned long in even bigger size on evidence of any sort of weakness in US Equities which would help this group outperform even more.  For now, stocks like TSN, SYY, KHC, STZ, MKC, are all showing stellar signs of strength and should be overweighted within the group.

 

 

Consumer Discretionary has been a laggard this year, owing much to Autos and Media weakness, while groups like Consumer Durables have recently moved back to new all-time highs.  Stocks like HD, NKE, AMZN typically have huge weightings within the Discretionary sector, but even the Equal-weighted Consumer Discretionary ETF (RCD) remains trending down after peaking out last September.  Overall, one must be quite selective when buying stocks within Discretionary and stocks like HD, SBUX, CMCSA, BURL and BABA are ones to consider for the space (despite BABA not technically being a US Discretionary member)  Some evidence of Consumer Discretionary turning higher relative to SPX would give far more conviction to the market rally which for now, is getting more selective in its advance.

 

 

Utilities has shown some minor evidence of stabilizing in the last week after its huge pullback since late June which has erased about half of the groups performance since last November.  looking back, this recent underperformance has caused the group to underperform all other groups on a one-month basis with returns of -4.79% through 9/3/16 vs an S&P return of 1.06%.  Some of the reason why Utilities underperformed was due to rising rates and the perception of a Fed hike this month.  However, the other reason however had solely to do with the market showing "risk-on" tendencies which helped sectors like Technology and Financials lead the charge.  Over the last 12 months, Utilities have been the best group of any in the SPX, with returns of 20.11%.  If evidence arises that the FOMC likely does not hike this year, this group should yet again start to turn back higher, and would also outperform on any downturn.  At present, there is some technical evidence of this showing positive divergence when looking at momentum indicators like RSI which have made higher lows since its recent bottom in mid-August.  For now though, insufficient strength is there to consider a full overweight, but merely some evidence of any upcoming bounce.  Utilities should be watched carefully for signs this starts to trend back higher, which would give a possible warning sign of flows back to defensive sectors.

 

Energy remains a technical laggard after peaking out three months ago in early June.  The relative chart of OIH vs SPX shows the breakdown which violated this entire uptrend attempt from early January lows.  Its bounce attempt into mid-August failed to regain the prior area of the trend violation, and has since pulled back to within striking distance of lows made five weeks ago when Crude briefly broke beneath $40.  While any decision to cap output by Saudi Arabia and Russia might result in a snapback rally, for now, Energy is not attractive technically and appears to merit further near-term selling before any low is at hand.  Given that OIH's relative attractiveness seems to mirror WTI strength, we'd need to get back above $49.36 to have optimism that Energy could rally.

 

Healthcare's attractiveness also took a turn for the worse in the last month after peaking out in early August and breaking a four-month uptrend which had been in place for the group.  As the relative chart of XLV vs SPX shows above, Healthcare as a group peaked out back in mid-2015 and has formed two separate lower highs since that time.  While it's right to look at buying dips from an absolute basis near $71 in XLV given the ongoing uptrend in place, we'd need to see some evidence of relative charts turning back higher to have confidence on a relative basis.   Four straight "down" weeks for the Healthcare group amidst a growing chorus of Drug Price escalation fury" has cast some real negative sentiment on the group of late.  Signs of Clinton gaining further ground on Trump in the weeks ahead would likely prohibit this group from making too large of a bounce, given her focus on reigning in Drug prices.  (Her speech last month coincided with the huge setback which was seen in many of the Biotech stocks.)

 

 

Telecom looks apt to bounce in the months ahead given its sharp pullback to near initial support over the last two months.  Similar to Utilities, this defensive group began to suffer as rumors of a possible Rate hike helped Fed Fund futures price in a much higher likelihood for September rate hikes.  In the last week we've seen some partial evidence of Telecom stabilizing, and Sector ETF's like IYZ for Telecom have held near $31.50 on the drawdown from July which coincidentally marks the former highs from September 2015 into April 2015 when this group began to stall out.  (Former resistance now becoming support on declines) Snapback rallies from $32.36 back to $34 or higher look likely for Telecom, which should help this group outperform the broader market during September/October.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

10 Breakout Stocks on the radar after S&P's move to new highs

July 11, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2084-6, 2073, 2057-8, 2043       Support
2104-5, 2119-21, 2131-3            Resistance

 

 

US indices have led many other world indices back to new all-time highs, when looking at the SPX's surge late last week. 

 

Key Takeaways

Last week's push to new all-time highs in SPX is a bullish technical development near-term and shows no real signs that immediate reversals should occur.  This move should be followed by DJIA(which is only ~200 points away), while NDX, CCMP remain a ways off (5-6%) and RTY, TRAN are even further away (10-15% off all-time highs.)   However, to think this is just an SPX phenomenon is misguided, as the A/D lines for S&P 400, 500 and 600 are now back at all-time high territory.   The move back to new highs happened on some of the heaviest Volume A/D stats in history, with over 95% of stocks rising vs falling, and groups like Healthcare and Industrials showing good participation last week while Consumer Discretionary led all sectors, being up over 3% on the week.   Over 96% of stocks are now above their respective 10-day moving average, something which suggests potential upside exhaustion, but until there is ample evidence of this, it's right to stick with longs, looking to add on dips in the days ahead.  Key developments which were cited as reasons markets could in fact breakout had much to do with the ongoing bullish momentum and breadth, with the NYSE Advance/Decline having recently pushed back to new highs.  While Europe along with most of the Developed and Emerging market world remain far weaker and well off the highs, this divergence is not something that suggests S&P should immediately reverse.  Many investors have remained on the sidelines and were defensive, and will now be forced to chase this move in stocks to new highs


The bond market should start to selloff in the days ahead.   Bonds showed only scant signs of rolling over last week, but still look primed to do so in the days ahead, based on factors such as overly bullish sentiment for Treasuries, stretched oversold conditions for bond yields,  and a confluence of Demark indicators such as TD Sequential and TD Combo lining up to suggest an upcoming rally in yields should be getting underway soon.   ETFs such as TBT could be considered technically and/or selling into TLT longs

Sector-wise, Healthcare, Technology and Consumer Discretionary could start to show real outperformance after a strong week last week while these sectors have underperformed substantially on a year-to-date basis.  So these are definitely ones to selectively buy, while eyeing Financials for more evidence of this sector turning up as well, which would happen with a reversal higher in Bond yields. 

The US Dollar still looks more bullish than bearish at current levels as gauged by DXY charts, which are largely vs the Euro.  But upcoming BOJ stimulus should have some effect on turning the Yen back lower given the massive Spec Long positions in the Yen, now that world equity indices have stabilized.  Pound Sterling also has done sufficient damage to think that bounces here likely prove short-lived vs the US Dollar and that Sterling weakness is a better bet than serious comebacks in the months ahead.  Finally, the uncertainty regarding the BREXIT and possible additional countries joining suit should make the Euro face considerable pressure vs the US Dollar.  Some of this was evident after the breakdown of the six-month uptrend.  Pullbacks under 1.10 should lead down to 1.0822, while DXY could push higher to98.  While precious metals are extended and ripe for at least some consolidation, this might be put off until Gold gets up to near 1400-1425 given the ongoing strong momentum.


Short-term Thoughts (3-5 days) : Bullish- Breakout to new highs has little resistance until near 2182-2187 for SPX cash after this breakout, so near-term pullbacks on Monday/Tuesday should still be buyable for a further push higher.  While intra-day charts are overbought across many spectrums, neither daily, nor weekly charts are all that overdone, and with Advance/Decline lines back at new highs, it still warrants participating in this move, being long and buying dips.

Intermediate-term Thoughts (2-3 months): Bullish- Last Week's breakout to new high territory for SPX likely should soon be followed by other indices such as DJIA while NDX, CCMP should push up to test former all-time highs from last year.   While the ongoing lagging in Transports and Small caps is a concern, as these remain 10-15% from all-time highs and similarly, most of the world remains well off all-time highs, it's right to stick with US stocks until some evidence of counter-trend sells arise or breadth starts to falter meaningfully in a way that would lead to a top in stocks.  Both daily and weekly momentum as per MACD are positively sloped, while monthly is sloping upward and close to turning back positive for the first time since early 2015.  Bottom line, with Advance/Decline at new highs, it's difficult to fade the market, and the lagging sectors have all started to bounce in a way that should lead to some mean reversion in these sectors.  Key cycle dates for trend change lie in late August, and very well could lead to a peak in stocks, but for now, it's right to stick with this trend on an intermediate-term basis until ample signs of weakness arise.  The other concern is that given the degree of deterioration in momentum last year into those August lows, even this push to new highs won't allow momentum to get anywhere near where it was back in late 2014/early 2015 and this is a 12-18 month concern.  For now, for this time frame, additional intermediate-term strength still looks probable with key targets at 2180-5 and then 2250.

 


10 Breakout Stocks To Consider after last week's SPX move to all-time highs

 

 

Fidelity National Information Services, Inc (FIS- $76.03) Bullish and the ability to reclaim early June highs very quickly after this minor selloff attempt is a real positive for the 4-6 week prospects for FIS.   It's pattern resembles a Cup and Handle pattern following its initial peak back in 2015 which lead to a nearly $25 loss in the stock into early February of this year.  However, the act of reclaiming these highs after just minor consolidation is seen as a good sign and should lead higher up to $80 or above with intermediate-term technical targets near $90.   Overall a good candidate to consider "chasing" this SPX move back to new highs as this underwent severe consolidation for nearly a year before the recent breakout and now should face far fewer limitations technically in terms of immediate upside resistance.
 

 

United Parcel Services (UPS- $109.52) UPS' ability to have surpassed former highs from early 2016 and late 2015 just in the last week should give this some upward acceleration that helps UPS move higher to test its former all-time highs from late 2014 at $114.40 with additional near-term support at $117.50.  The stock has been basing since late 2014 after a stellar rally from 2009 lows, and looks to be embarking on the final push of this giant long-term uptrend in its latest push higher.  Near-term weakness after the last six of eight UP days should find ample support near $106-7 and allow for an outsized advance that gets this up to $114.40 without too much trouble.  Similar to other stocks listed here, momentum is not all that overbought given the recent consolidation, so the new-found surge in momentum is likely to offer a good opportunity to buy this here and expect further gains, technically speaking.

 

 

Lam Research (LRCX- $84.88) LRCX is right on the verge of a large breakout of a consolidation pattern that's been intact since late 2014, which makes it an attractive risk/reward technically speaking to own now and add to gains since this clears $87.19 which was hit on an intra-week basis two weeks ago.   The pattern in the last 18 months resembles a larger Reverse Head and Shoulders pattern with an increasing slope of higher lows since last year, while highs have been made in the low $80's.  Given the recent advance in Semiconductor stocks vs other parts of Technology, it's likely this can also make a sharp move and begin a more steady period of outperformance.  Technically this looks quite good to buy here and add on any weakness with upside targets initially near $90 and then $100.

 

 

Lowe's Co's (LOW- $82.34)- LOW has just exceeded the highs of a 17-month consolidation that's been intact since February of 2015.  This stock has been a laggard vs Home Depot for some time, but began to play catchup around 2012 and at present, remains preferred to own technically speaking.  Its push back to new highs should allow for further strength up to near $90, and suggests that any near-term weakness likely holds in the high $70's before pushing back to highs.    Momentum is positively sloped while not overbought on weekly charts given the 12+month consolidation in the name.  Thus, a breakout in the market that coincides with LOW also making the same move makes this stock interesting in thinking this can likely push ever higher.  Overall, a technically attractive stock which had based after a lengthy uptrend and now looks to be pushing up into another uptrend for the first time since early last year.

 

 

Casey's General Stores (CASY- $134.19) CASY has just managed to exceed late 2015 highs after a very tight V-shaped consolidation pattern as part of this uptrend, and this breakout should lead the stock up to at least $141-$142 before much of a slowdown.  The longer-term pattern shows various consolidation breakouts which have happened over the years, each leading CASY higher without much pullback, and would expect this also follows suit similar to past occasions.   Any near-term weakness should find support near $129-$132 and offer good opportunity to buy dips for a continued rise.  Momentum, as might be expected, is positively sloped and just nearing overbought levels on weekly charts, as the last six months of consolidation helped to alleviate this overbought condition.

 

 

Bristol Myers (BMY- $75.28) BMY is just in the process of breaking out to new all-time highs which was achieved on a closing basis last week, though the stock fell just shy of exceeding intra-week all-time highs made back in 1999, nearly 17 years ago.  This giant rounding formation should give way to continued strength once officially exceeded, which arguably is happening now, and upside targets near-term lie at 77.50 then 80 with intermediate-term targets at $90.  Pullbacks to the low $70's would offer an even better risk/reward to buy and only if this gets down under $70 would it postpone the push higher.  For now, one of the better acting stocks within Healthcare that's just in the process of breaking out.

 

 

Intuitive Surgical (ISRG-$678.84) While already extended by 7-8% above its breakout point, ISRG remains attractive to move higher technically and continues to show outperformance within Healthcare as one of the top performing names.  Given that Healthcare has just shown evidence of trying to work higher, this stock should continue to demonstrate good leadership given very little overall deterioration in price.   Pullbacks down to $625-$650 would offer an ideal risk/reward buy for ISRG, but even at current levels, its likely to reach $725 without too much trouble technically, with intermediate-term targets near $800. 

 

 

Verisk Analytics (VRSK- $83.40) VRSK's ability to exceed both early 2016 as well as 2015 highs makes this pattern resemble a Cup and Handle breakout which should allow for VRSK to trend up to near $90 before any real peak.   The stocks near-term overbought condition on daily charts is not as important as a negative when considering these two former highs which have been surpassed, and should help any minor overbought condition which pulls back to prove short-lived.  Upside looks about 10% higher in the near-term while $76 should be a level for trading stops which would postpone this rally.  For now, this continues to look quite attractive on a near-term and intermediate-term basis.

 

 

Universal Display (OLED- $70.69) This stock's push back to new all-time highs exceeds 2011 highs which have not been tested in over five years' time.  Prior to this large base, OLED had achieved a near six-fold move in price and its current monthly chart resembles a large rounding bottom formation.   Upside technical targets lie at $80 while any pullback to $67-68 should be an excellent chance to buy dips.  While momentum has neared overbought levels of late, the stairstepping price action in this stock since mid-2015 should lead this to move back above early June highs in the next 1-2 weeks and push higher to $80.  Overall , OLED looks quite attractive on a 1-2 month basis for further upside, technically speaking.

 

 

Synopsys (SNPS- $54.25) June's push back to new all-time highs for SNPS keeps this stock in very good technical position, and additional upside looks likely to near $58 in the near-term before even minor resistance crops up.  The long-term base in SNPS was exceeded back in late 2013 which gave way to a near 50% move in shares up to the mid-$50's, and the stock still has shown very little signs of any real technical weakness.  While weekly momentum is just getting to near overbought levels, most Demark signals remain at least 4-5 weeks away at a minimum, suggesting that any near-term pullback should be bought for higher prices in the months ahead.


 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Any early week pullbacks should be used to buy- Newton's Notes Weekly Technical Perspective 070516

July 5, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2084-6, 2073, 2057-8, 2043      Support
2104-5, 2119-21, 2131-3                Resistance

 

V-shaped recoveries are notoriously difficult to profit from, as investors take down risk during declines only to miss the subsequent rally, which in this case has completely recouped the decline

 

Key Takeaways

Near-term pullback likely, but should be used to buy for move back to new highs.  S&P's complete recovery has been nothing short of astounding as the post BREXIT rally managed to recoup all of the losses seen in those two days (6%) causing a V-shaped pattern that typically is very difficult to profit from.  The four-day (5%) rally has left prices at the highest weekly closing levels since last July while putting prices yet again within striking distance of all-time high territory in the US.  While near-term overbought conditions are present on intra-day charts of SPX,  Advance/Decline on NYSE "All-Stocks" has moved back to new all-time highs, creating a difficult decision for those wishing to consider selling into this move to take anything more than short-term profits.   Bottom line, the near-term view (3-5 days) suggests selling into this rally and allowing for consolidation, while the intermediate-term view (2-3 months) suggests holding longs for a move back to new all-time highs. 

The bond market has largely ignored the equity move and plummeting rates in the US have followed Japan, Germany, Switzerland and others to new multi-month lows while the Economic situation hasn't changed too dramatically for the US.  The 10-Year and German Bund yield both look to be close to bottoming, which could happen as early as this week given counter-trend signals based on Demark indicators.  Moreover, any uptick in yields likely serves as a further positive force for equities given the tailwind for the Financial sector.  For now, the near-term Treasury and Bund trends remain positive, but downside for yields here looks limited.

Gold and Silver broke back out to new weekly closing highs last week, while Sentiment in Silver has reached climactic levels of bullishness per Daily Sentiment index (DSI) that could allow for some backing and filing in this move in the metals starting mid-week.   Technicals have turned more bullish on the Precious metals of late following the failed breakdown from 6/16-24 that immediately reversed back to highs.  Yet CFTC data shows Speculative longs reaching levels that have coincided with peaks in price in the past.  Near-term, the advance is extended, but might not peak out until end of week.  Moreover, given the positive technical improvements, we'll need more evidence of technical damage before turning too bearish on an intermediate-term basis.

Utilities and Telecom showed better performance than all other sectors this week despite a sharp 3%+ rally, and given the ongoing Yield decline, still look to be able to make progress in moving higher this week.  Once we have greater evidence of yields starting to turn up along with US Stock indices breaking back out to new high territory, it will be right to fade both of these groups.




Short-term Thoughts (3-5 days) :  Upside should prove limited after S&P's 5%+ push in the last four days, with strong overhead resistance at 2119-20 in Futures and Cash index which remains an important area.  However, the improvement in Healthcare and Industrials in the last week could help markets start to trend better, as NYSE "All stocks" advance/decline has moved back to new high territory.


Intermediate-term Thoughts (2-3 months): Bullish- (No change) -A move back to new high territory is expected before indices turn down to begin any larger correction.  The BREXIT decision caused meaningful declines in most of the world, yet US indices failed to show much, if any structural deterioration, and the pickup in Bearish sentiment as seen by VIX move, Equity put/call spike to pessimistic levels while TRIN spiked over 2% and indices remain within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily for months.  Now the BREXIT decision and plummeting interest rates have all but guaranteed that the FED will be on hold, despite any meaningful downshift in US Economic growth.  The Advance/decline recently moved to new all-time highs and breadth and momentum remain on solid footing, all which suggest any decline in the near-term should be used to buy selectively, and with the start of positive sector rotation towards Technology Healthcare with any sign in yields holding and turning up being a real positive for Financials.

 

Last week's push back above 2100 helped the SPX close at the highest level since June of last year, and just barely a stone's throw from all-time high territory.  For now, more reasons are bullish than bearish as to why stocks should move back to new all-time high territory, and pullbacks this coming week should be used to buy for movement to new highs into August.

 

 

US 10-Year Yields have now pulled back to test areas last hit back in mid-2012, which should be strong support to buy for a snapback rally in the weeks ahead.  3 reasons stand out as being important for why yields should bottom out, the first being this former area of key lows from four years ago.  Second, signs of positive divergence are now present on daily charts, with the recent pullback to new lows in yield not being followed by a similar move in momentum.  Third, sentiment is once again approaching Bullish levels, per DSI (Daily Sentiment index) as most investors have accepted as common fact that US Treasuries should be a common safehaven to own as global yields move rapidly towards negative territory.   While intermediate-term trends remain firmly negative for yields, the near-term pattern suggests a greater than average trading bounce should be "right around the corner"

 

 

Junk bonds certainly haven't reflected any of this fear seen by most of the globe and very little sign of anything other than just a flattening out in JNK in the last few months.  Given that prior selloffs in the past year were led down by High Yield, this resilience could lead up to near $36 before any peak arises.

 

 

Europe remains much worse than US Equity markets as viewed by the continued failure of SXXP to be able to mount any kind of rally that helps SXXP regain the trend which was broken while most European equity indices are trading 17+% off all-time highs vs just 1% for the US.  For now, no meaningful signs of any kind of mean reversion that would suggest US should begin to trend lower, and the divergence seems to be widening of late. 

 

 

Utilities have gotten stretched, but we still have insufficient reasons to sell into this trend, outside  this trend, outside of 2-3 day overbought conditions that could lead to minor weakening in price.  For now, prices are halfway home to the target near $54 which was talked about last month in the Weekly Technical Perspective, and it's likely that higher prices can happen , with pullbacks proving temporary this week.

 

WTI Crude oil's peak in early June led to some flattening out in the bull trend from early May, but really hasn't done much in terms of altering the bullish trend since January of this year and if anything this consolidation is beginning to look very choppy and overlapping in nature.  Any move back over $50 should lead to new monthly highs, and allow for this uptrend in Crude to likely continue higher into mid-September before any real peak.  Bottom line, it's tough fighting this uptrend in Crude and its increasingly looking like a challenge of this year's highs could be in store in the weeks ahead.

 

Gold, when viewed in multi-currency form, has broken out of the flag consolidation form that's been in place since February of this year.  While prices are stretched near-term while sentiment is growing increasingly more bullish, the move in Gold and precious metals in general has been a real positive of late after a shakeout decline into mid-June failed to gain much traction.  Gains to 1400 could occur, but would be used to sell and buy pullbacks over the next month.

 

 

Brazil's ETF, the Ishares MSCI Brazil Capped ETF, has broken out back to the highest levels since mid-2015.  While prices are stretched after hitting new highs, any pullback in the days ahead should be buyable for continued strength given these technical improvements.

 

 

NYSE "All-Stocks" Advance/Decline, has moved back up to new all-time high territory on a weekly closing basis after testing initially into mid-June.  This has bullish implications for Stocks given historical precedent, and breadth and momentum remain strong right now.

 

The Net number of New highs vs New lows has moved back to the highest levels since mid-2014 over two years ago as of last Friday's close.  Given the ongoing uncertainty coupled with bullish breadth and momentum, it's likely that stocks move higher into August back to new all-time highs before any real pullback.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Dips should be used to buy ahead of BREXIT vote

June 20, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2050-1, 2040-1, 2022-4                              Support
2071-2, 2083-5, 2100, 2112-3, 2130-2       Resistance

 

 

 

Key Takeaways

1) Mild stabilization doesn't equate to LOWS in equities-S&P trend has begun to try to stabilize a bit, though remains down from 6/8 and insufficient proof of a low is in just yet to justify a bullish stance.  Above 2085 would suggest the lows for this move are likely in place and give confidence for a move back up to new highs.  For now, given that indices closed down on the week and Treasury yields still look to have additional downside, it's important to wait for more proof before trying to buy SPX at 2071.  The near-term trend suggests one final pullback under last week's lows could materialize early in the week ahead of the BREXIT vote, and this might be better to buy, before assuming prices can simply lift up to highs in absence of any news/vote.

2)  Bond surge still looks to have more to go- Friday's bounce in yields should prove short-lived, and give way to additional pullbacks over the next few weeks into early July before a meaningful low in Bond yields is in place.   The move has gotten stretched ahead of the BREXIT vote, and appears to be solely on the basis of Global yields selling off, more so than any judgement as to lack of US economic growth.

3) Seasonality suggests next week could prove negative, based on historical trends.   Stock Trader's Almanac data states that the period after the Triple(Quad) Witching expiration in June has been "DOWN" the last 22 of 25 years. Also, since 1991, of 31 down Triple Witching Weeks, 22 following weeks were also down.  Last week in the S&P was lower by 1.2%, so given the negative momentum and lack of sufficient bullish price action thus far, this week could very well also be lower.  Getting past the BREXIT vote should eliminate some uncertainty, and allow for stocks to rise.

4) Volatility has begun to rise in a strange manner with a flattening of the VIX term structure very early on in this recent decline from early June.  The Total Put/call ratio hit the highest levels since January last week, while the 5-day moving average was up over 1, near early May highs.  Credit Suisse's Fear Barometer hit the highest levels ever last week, which is based on Out of the Money options, and 5 different volatility ETN's which are based on the CBOE VIX traded high enough volume to make up over 4% of total volume.   Much of this could represent hedging given little underlying selling in the indices, but for now, an interesting phenomenon, and something to keep watch of.

5) Currencies will be front and center this week with both the Pound Sterling and EUR/USD lying near key levels ahead of the BREXIT vote.  Any breakdown in either Sterling or Euro vs USD that causes a move in the US Dollar index back over 96 is thought to be quite bearish for Commodities, and could accelerate the Earnings shortfall in future quarters.  1.11 is a key level for EUR/USD and a breakdown of this would suggest a move down to Par vs the US Dollar.

6)  Sector-wise, Telecom and Utilities managed to beat out all other eight sectors, as the yield decline caused a rush towards high yielding stocks while Financials lagged, as might be expected.  Furthermore, the three worst sectors last week (Healthcare, Technology, and Financials) were also the three weakest for the year as a whole after the first five months of the year.  In one interesting shift, Consumer Discretionary managed to outperform Consumer Staples despite a "down" week for the market. 

7) Divergences remain abundant with the SPX trading well above where EuroSTOXX 50 and most of Asia has trended in the last month, and SPX also has held up better than what the traditional relationship of how stocks and bond yields, USDJPY have shown.  For now, this doesn't suggest that SPX needs to necessarily pullback and join the others, but it is a concern given how tight the correlation has been with SPX to others, and important for SPX to remain above May lows.



S&P 500

Short-term Thoughts (3-5 days) : Bearish for a move back down to new weekly lows- Above 2085 would turn the trend bullish.   If a surge back above 2085 happens at this point, given of the recent bearishness, it would be right to trust this move and think that a move to new highs is possible.  For now, Most of the structure, while indicating some minor consolidation in place, can still allow for a bit more weakness before any bigger low in place, and very difficult to see a real rally given the amount of seriousness that the market and financial media have made this upcoming BREXIT vote.  Given that the market still largely expects a "STAY" vote, according to polls and UK betting sites, where real money is placed on the outcome, getting past next week should be a real positive, helping to clear up some uncertainty.  A "Leave' vote, would likely result in a huge decline in GBP and Euro vs the USD which would have bearish implications for Gold.  With regards to equities, dips should be used to buy


Intermediate-term Thoughts (2-3 months): Bullish-  (No change) - A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

Combination of the poor seasonal cycle in place for 2Q post expiration with ongoing negative short-term momentum and insufficient proof of a low in place, the odds still favor that a bit more weakness is possible this week ahead of the BREXIT vote.  Given that this year as a whole has proven very choppy, with constant outflows out of Equities over a majority of the last 25 weeks, it's difficult to see how markets would suddenly gain conviction with the urge to position ahead of this week's upcoming vote.  Better to stay selective on what to buy, and await some evidence that stocks have begun to trend back higher, (which would take a move back over 2085 (2078 for Sept S&P Futures)  Dips back down in S&P Futures to 2030-40 though should be good to buy into this week, and expect some push back higher.

Bond yields remain the source of much anxiety with yields plummeting around the globe, and it's thought that some evidence of stabilization is required to have some confidence that stocks can begin to turn back towards highs, as it's been difficult in the past for stocks and bonds to trend sharply in unison over the last few years, and both tend to trade opposite in low yield environments.  When scanning Demark indicators for confluence as to signals across German Bund yields, UK Gilts, JGB's and US TY yields along with TLT, TBT signals, it looks premature on a weekly chart to make the case that yields have bottomed just yet, despite last Friday's sharp yield bounce.  Most argue for another 2-3 weeks of yield decline which might mean stocks might fail to accelerate as sharply higher until yields can truly stabilize.

The US Dollar will also be quite important to watch this week, as a sharp rise or pullback post BREXIT vote would have huge implications for Growth vs Value, Emerging Markets, commodities, and whether the Energy, Materials and Industrials sectors can continue some of the recent gains.  Some charts of the major indices along with commodities, currencies and Fixed income charts are below.
 

 


Charts & Writeups- SPX, TNX, DXY, NKY, Ratio charts, & overlays, with a few key sector stocks
 

 

SPX- 120 min chart-  Insufficient proof of a low in just yet, but should be close within the next couple weeks, with BREXIT this coming week potentially serving as a catalyst.  Look to buy dips in the week ahead on any retest of lows, with the area at 2030-40 being important as support, while movement back over 2082 should be bullish. Technically it's likely that this entire consolidation should give way to a move back to new high territory into July, so it's wise not to get too cute in trying to time the exact low, but its likely we could "back and fill" a bit early in the week before a late week rally.  Looking back. this three-month chart of SPX shows the brief move above April highs that ended up failing right away, giving way to a 60% pullback of the progress since mid-May.  In the last few days, we've seen a few attempts at bouncing which thus far have failed, but we've now seen two of the last three days close well up off the lows.  Overall, the choppiness of this pattern suggests buying dips for a move back to highs, as the degree of pessimism of late and extreme volatility surge should limit damage under May lows.

 

 

10-Year Treasury yields, Daily-  Bottom line-  Friday's bounce in yields was encouraging, but there remains few signs that this is anything more than a bounce at this point, and yields still look vulnerable to a possible move down under 1.40 before any real low is in place.  Yield charts of German Bund yields and JGB's look similar, along with UK Gilts after a global bond surge that's brought about an understandable amount of concern.  Looking at this daily chart, the breakdown in Yields got almost down to February lows before bouncing, but given a two-month consolidation that broke down, it's probably unlikely given no meaningful economic reports due right away that Bonds show any type of serious selloff which would take yields right up over 1.70.  However, this is what to look for in the weeks ahead.  For now, another 2-3 weeks of Yield weakness look possible.

 

 

OVERLAY with SPX, TNX, USDJPY-  SPX when shown on a chart with US 10yr Bond yields and USDJPY, shows the extent of the divergence that's been present since Equities took off in mid-February, while bond yields showed no similar move off the lows.  While the 12-month chart had shown a fairly tight correlation in the past, it's diverged of late, and only in the last week have equities begun to selloff once Bond yields showed a more meaningful breakdown.  There's no saying that Equities have to be the asset class that follows yields all the way down, and if anything in the next week, some stabilization in the US Dollar vs Yen and in Bond yields should give way to a bounce in these latter two in July which would be conducive to Equities bouncing back to highs.

 

 

SPX, and STOXX 600 index, and Bloomberg World index-  Just as SPX has diverged from Treasury yields of late, the real divergence has occurred with SPX vs global stock markets as a whole, as both Europe and Asia have been far weaker, and this remains something to pay close attention to in the months ahead.  Until we see evidence of mean reversion, there's no saying that US Equities should join the weakness in the other indices, but May lows will represent a key area of support that has to hold.  This can't be undercut without expecting a bigger pullback for SPX, which for now, seems unlikely.

 

 

US Dollar index-  This daily chart of the US Dollar index shows the attempted rally holding right where it needed to at 96 before failing and then retesting just in the last two weeks. Unless May lows are violated, there's no saying that the US Dollar has to move lower, and if anything, this recent stabilization and improvement in momentum since April has to be watched carefully in the weeks ahead. Movement back over 96 should cause a meltdown in commodities, with Gold falling back down under 1200.  For now, the BREXIT meeting this coming week should likely answer some hard questions about this recent churning.

 

 

NKY-  NIKKEI 225 index-  This breakdown of four-month trendline support for Japanese stocks this past week coincided with a meltdown in the US Dollar vs Yen, which got down to near 103.70 before rallying briefly.  For now, this pattern remains bearish, and suggestive of further technical selling, as rally attempts into early 2016 failed right near former lows from late 2015 and now have given way again to the downside.  Movement down to 14544, or even 13000  looks definitely possible before any meaningful rally, and Japanese stocks right now are weaker than either European, or US stocks, with prices well off all-time highs which were made in 2015.

 

 

EUR/USD-  Ahead of this week's BREXIT vote, the Euro has sold off down to key make-or-break support vs the US Dollar, which will have important implications in the weeks ahead.  Violations of 1.11 in EUR/USD would likely coincide with a sharp intermediate-term decline in EUR/USD which could end up testing last November's lows and lower.  Sharp pullbacks in the Euro likely also would coincide with commodity weakness as the US Dollar index as a whole would exceed 96 and begin a sharp move back up towards former highs.  While many are concentrating solely on Pound Sterling and its relationship to the US Dollar, the Euro seems to be equally important to watch for evidence of breakdowns or snapback rallies in the weeks ahead.

 

 

Gold, when looked at utilizing the BEWI index, to strip out the effects of the US Dollar, looks a bit more bullish than when scrutinizing the Daily chart of Gold in USD terms.  This base over the last few months is having its highs tested, and the upcoming BREXIT vote likely will have serious implications for either helping gold breakout, or fade and pullback to the lows and lower in the months ahead.  For now this pattern is more bullish than bearish, but prices will need to get up above recent highs to have a shot at real upside acceleration.

 

 

Consumer Discretionary vs Consumer Staples (as shown on this ratio chart of the S&P 500 Consumer Discretrionary index, vs S&P 500 Consumer Staples index)  remains bearish after this long-term uptrend broke early this year.  The rally attempt looks to have failed while Discretionary pulled back hard relatively speaking in the last month.  Overall, this pattern since 2013 has shown evidence of peaking out, but the top last year definitely gives some larger hints about the broader deterioration that's been seen in US stocks, as well as addressing the defensiveness of the market as a whole.

 

 

Financials have neared an area where they could stabilize after a sharp drawdown from recent highs.  However, this four-year weekly chart still shows a very weak picture for the sector.   The early year weakness violated a multi-year base in Financials vs SPX and now the recent bounce failed to get back above where it needed to, thus far.  Until Treasury yields can stabilize and start to rally off recent lows, it's unlikely this group will be able to make much progress, as recent relative strength has definitely been positively correlated with rates moving higher.  For now, it's a work in progress, but looks to be closer to trading lows after its sharp decline.

 

 

UTILITIES vs SPX- Weekly- Utilities have improved, relatively speaking after the breakout early this year caused this group to outperform all other nine sectors in the month of January.  That could have been a forewarning of what to come, as the year thus far has still seen the Utes outperform all other sectors, which has occurred both for defensive reasons, and given the yield decline.  For now, this seven-year downtrend was exceeded and relatively speaking, the group is headed back rapidly towards prior highs early in the year.  While this might not be broken just yet (as doing so would suggest a much larger Equity decline most likely) the group remains quite bullish, and relatively has just begun to show meaningful strength relative to the SPX after nearly seven years of underperformance.   Technical targets for XLU, as suggested a few weeks ago in the Weekly Technical Perspective, lie near $54.



 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report:  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Utilities breakout to new highs should carry group higher near-term

June 6, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2080-3, 2075-6, 2039-40, 2022-4        Support
2105-6, 2111-2, 2123-5, 2135              Resistance

Key Takeaways

1) S&P trend has consolidated a bit over the last six days, but holding within striking distance of all-time high territory is certainly more positive than negative.  An upcoming move back to new high territory seems likely into early July.  For now, 2105 is important in S&P Futures, 2111 in SPX cash and getting above these would allow the S&P to mirror what happened in the NASDAQ Composite and Russell 2000 last week. 

2) US Dollar index gave up 50% of its entire snapback rally in May with just one day's decline last week, but is unlikely to move all the way back down to May highs, and this pullback should likely stabilize in the next week before turning back higher. 

3) Treasury yields turned down sharply from resistance last week, which had looked to be setting up for a move to the upside, but now have reached the bottom of this recent multi-month channel for 10-year yields.  German bund yields and Treasury yields likely need to stabilize and start to turn higher before Equities can embark on any sort of breakout, given historical tendencies

4)  Sector-wise, last week mirrored what had been seen on a Year-to-Date basis with strength in Utilities, Telecom and Staples while Technology, and Financials both weakened.  Healthcare was a bright spot and continues to look like an attractive sector technically which could experience mean reversion in the next couple months. (Higher after underperforming in the first five months of trading)

5) Lots of breakouts in the last week with the Russell 2000, Healthcare, and Utilities all moving back to at least new monthly highs, with Utilities hitting new all-time highs again.  The Advance/Decline for NYSE "All-stocks" exceeded April highs, putting this within reach of all-time high territory.




S&P 500

Short-term Thoughts (3-5 days) : Trend bullish but this recent consolidation over the last six days will need to exceed 2105 SPM6, 2111-SPX to begin to join the recent strength seen in NASDAQ Composite, Russell 2k, and for now, prices have been near-term range-bound while breadth expands.  One worry is the extent to which Treasuries have rallied hard in the last week along with the Yen vs the US Dollar, and both have been bearish in the past for US Stocks, so it's important this week that we see stabilization and rallies in both before thinking that Equities and Treasuries can diverge too much more.   This week, it should be wise to use any minor drawdowns to buy, expecting an upcoming move back to new high territory.


Intermediate-term Thoughts (2-3 months): Bullish-  (No change) - A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

US Equities continue to dodge every punch that's being thrown these days.  Last week equities weathered nearly the worst economic data miss possible as Payrolls came in at the lowest levels since 2010.  While bond yields and the US Dollar plummeted, US Equities shrugged and churned back higher to finish the holiday shortened week at a mildly positive +0.43%.  By end of week, despite some early attempts at pulling back, trends overall still show very little evidence of any Technical damage.  Looking back, we've now experienced yet another dismal earnings season, while economic data remains poor enough that the Fed has seemingly boxed itself into a corner with regards to trying to hike based on market resiliency vs strength in the economy.  Most market participants drew down risk into January and February along with into early May and have subsequently missed most of the recovery and have lagged the market badly this year.  All of this together paints a rather grim picture for sentiment, which in turn, has fueled a wall of worry for stocks yet again with prices within striking distance of highs.

Overall, it's rare to see stocks and bonds move in unison, at least over the last couple years.  As bond yields plummet, like what happened last week, sectors like Financials experience understandable underperformance, which should present a huge headwind for stocks given their composition of SPX at 16.32%, or the second largest sector.  This year's +2.7% returns for S&P thus far have been experienced through a huge period of Defensive positioning for Equities, as Staples, Telecom and Utilities are in the top five (out of 10) sectors for outperformance this year.  While a push back up to new high territory should cause the laggards to begin showing better performance, (and we've seen some evidence of that in the last couple weeks of technology and Healthcare showing good relative strength) it still remains difficult to find fault with and Sell the Defensive sectors

One of those groups, the best performing sector of the year, the Utilities, is the key group of focus this week for this week's Weekly Technical Perspective.  Utilities remain this year's best performing sector, outperforming all other nine S&P major sectors and are leading the Second best sector YTD-Telecom by more than 300 bps with a nearly 500 basis point lead over Energy.   Their January outperformance was a notable "tell" that normally tends to highlight sectors which can show further leadership throughout the year and this year has been no exception.  In performance through 6/3/16, Utilities have risen by 14.95% have consistently been in the upper quartile over the last 1 and 3 month period, while showing the best performance last week, higher by 2.73% while the S&P managed to just barely get to positive territory.  

This outperformance in Utilities should continue, at least over the next 2-3 months given the technical breakout of XLU back above former highs.  Momentum has not yet gotten overbought, and both weekly and monthly counter-trend signals are premature to suggest some kind of reversal.  Weekly patterns show the formation since January 2015 as being a giant Cup and Handle formation, with last Friday's rise above March 2016 highs likely leading to a sharp acceleration which could carry XLU up to $54 before any meaningful weakness.  Finally, the group remains one which most people would rather avoid at this stage, citing valuation concerns, and/or thoughts of future underperformance given the beginning of interest rate normalization along with the start of a potential secular bear market in long-term Treasuries.  For now, the technical pickup in momentum this week on the breakout above March highs makes Utilities worth overweighting, where 5-10% gains are possible in the next couple months, and fading here looks premature. 

Charts and comments below.

 


Charts & Writeups- Utilities Sector- Absolute, Relative charts of Utilities & best ones to own on after this breakout
 

 

Utilities SPDR ETF-  XLU-   Bullish, and this past week's move back over March highs represents what's though to be a breakout of a Cup and Handle pattern in the XLU which should help to fuel this sector in the short run, after the consolidation throughout most of last year and from February-May of this year.  XLU should move back higher to $54 as no counter-trend sells are present using Demark indicators on a weekly, nor monthly basis and XLU remains structurally attractive.

 

 

Utilities, XLU, Monthly- this longer-term channel shows prices likely to test the upper end before any trend failure, as momentum remains positive and counter-trend signs of exhaustion remain premature.  Rallies up to $54-54.45 look likely

 

 

Utilities vs SPX- Weekly Ratio chart since 2007-  This breakout of the long-term trend lower from 2007 was fairly pronounced in January and has since consolidated a bit, but has not really given up this breakout, and should still be thought to be positive for Utilities in driving this sector higher for outperformance in the months ahead.  While markets might need to show more evidence of trend damage before Utilities can offer true trending behavior, last week's gains in Utilities back to new highs should let this sector trend higher still on both an absolute and a relative basis.
 

 

European Utilities are certainly not performing as well as US and should be avoided near-term.  This ratio of European Utes vs the XLU has plummeted to new yearly lows after the early year breakdown, and still looks as if one final push back down to new lows can happen.   Ratio above highlights the SX6P or STOXX600 Utilitiesindex vs. the XLU.

 

 

CMS Energy- (CMS-$42.82) The stock of this largely Michigan-based Utility has just broken back out to new highs following the move last Friday in XLU and should be favored for further outperformance.  Upside targets lie near $45 and only a move back down under $40 would postpone this advance.  Within the XLU, CMS Energy has been an outperformer for the last month along with on YTD terms, and technically still looks like one of the better to own to take advantage of this recent Utility strength.

 

 

WEC Energy Corp- (WEC- $61.52) Another mid-west Utility, WEC, has moved back up above former Spring highs along with former highs from early 2015, making this a stronger technical name, and should be able to push up to the mid-to-high $60's on the strength of this recent advance. Its parabolic typeadvance from last year has caused weekly momentum to push up to near overbought levels and the stock remains over 20% above its long-term uptrend line from 09 lows, it's premature to sell or avoid WEC here.  Additional gains are likely to near $65 which would be the first real area to consider resistance on this move, and for now, its right to own WEC and use any dips to buy, technically.

 

 

NiSource (NI-$24.46) NI has been a consistent outperformer within the Utilities space on nearly every timeframe in the last 12 months and its breakout back to new all-time highs should help this trend continue a bit longer.  The act of forming a base from April and now exceeding the highs late last week is a real positive technically, and should allow this stock to rise up to near $26 with a max of near 27.50 before any stalling out.  Until there is some evidence of price showing more signs of stalling out, and weakening relatively speaking, NI will continue to be one of the top Utilities in the space.

 

 

NRG Energy (NRG- 17.39)  NRG has the dubious distinction of being the worst performing stock of the major Utilities over the last 12 months, while the best performing stock over the last week, month and three-month timeframes.  Its performance in the last rolling 30 days alone showed a Positive 23.95%. Technically, this is one example of some of the poor performers over the last 12 months attempting to regain their former momentum, and in this case, NRG has just exceeded prior lows that were violated from back in 2012 and 2008-9.  While the stock has gotten near-term overbought, the act of closing back over $17.75 would drive this to the low $20's without much trouble. For now, given the move back to new highs in XLU, it's doubtful that NRG's outperformance comes to a dead halt right near $17.40, so this should be favored for a move into the low $20's before any real stalling.

 

 

P G & E (PCG- $61.55) PCG is being revisited given its move back to new all-time high territory, and the cup-like nature of its pattern makes this likely to continue showing above-average performance in the near-term, with technical targets up near $65.  The act of forming a small base like PCG did from March after having peaked out in the past makes this a Cup and Handle candidate which has just exceeded the right-hand side of this base

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report:  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Trend bullish, but SPX faces resistance entering June

May 31, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2039-40, 2029-30, 2022-4, 2007-9        Support
2105-6, 2112-4, 2025-6                             Resistance

 

Key Takeaways:

1) S&P trend changed to bullish on last week's move above trendline resistance at 2065 which carried prices quickly up to test mid-April highs. However, upside now looks limited given overbought conditions combined with short-term cycles and former highs being technically important.

2) US Dollar index poised for its biggest monthly rise since September 2014 with returns through 5/30/16 of 3.6%.  Precious metals have been hard hit in the last two weeks given this rally.

3) Emerging markets, conversely, have been hard hit in May, with MSCI Emerging mkts index falling nearly 4%, the most since January, while Brazil's Bovespa dropped nearly 9% on the month. 

4) Treasury yields seem to be readying for an upside breakout, which could allow the long end to join the recent gains in 2 year yields.  Given the Fed's determination at readying the market for a rate increase, the bond market seems to be paying attention on the front end, while 10 and 30-year yields, similar to stocks are up near key short-term resistance.

5)  Technology, Financials and Healthcare dominated performance for May, with the SPX's 1.4% gains for the month with one day remaining being led by the three sectors that account for 50% of capitalization

6) Sentiment has begun to show some evidence of following the most recent rally, as Equity put/call data dove from readings shown earlier in the week.  By end of week, the Equity Put/call had fallen to levels not seen since last August.

7) Breadth continues to be supportive of a move back to new high territory, while climbing back to April highs might allowfor a bit of resistance to take hold as the indices enter June.  However, the beginning of the month tends to be far better seasonally speaking than back end-end of quarter, which often shows end-of-quarter positioning.


S&P 500

Short-term Thoughts (3-5 days) : Trend bullish but has reached former April highs which looks to be a logical place to pick a spot to fight this trend, for those who intend to do so.   A stalling out is possible between 6/1-6/4 based on the combination of short-term cycles, former highs acting as resistance, along with overbought conditions in the near-term.   However, this rally looks to move back to new high territory in the weeks ahead, so its smart not to get too aggressive in hedging, or trying to short into this move, as the pullback could prove minor before moving back to new high territory. 


Intermediate-term Thoughts (2-3 months): Bullish-    A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

The last week brought forth some fairly significant technical developments, as the S&P managed to breakout of the minor downtrend from mid-April and accelerate all the way up to test these levels by end of week.  As of 5/30, the electronic session in Monday's holiday session saw S&P futures close within a point of all-time high territory, 2101 vs last May 21-2103, while still under the intra-day 2105 which was recorded both last May and this past April.(and still 1.4% below SPX cash peak closing prices just above 2130) While near-term momentum has gotten stretched on this recent 3% spike in prices in the last 10 days, the weekly structure suggests this was quite the bullish move, not only canceling out the thoughts of a possible Head and Shoulders pattern at play, but also improvingthe technical structure on an immediate move back up to levels that were hit around the middle part of April.  The trend is bullish short-term, and closing in quickly on key overhead levels, which should be a source of resistance entering the month of June.  However, if all-time highs are exceeded in the SPX, NASDAQ and DJIA, this should provide the impetus for a quick move to SPX 2250 into the summer, allowing price to join the recent breadth improvement and move back to all-time highs seen by the Advance/Decline for all securities.

For now, bonds haven't really shown signs of selling off too substantially on the long end just yet, which would be thought to be the case if the FOMC suspects the US economy is strong enough to hike in June or July.  2 Year yield attempted to breakout, while 10 and 30 remain more subdued, but do lie near key areas where breakouts might happen in the next couple weeks and have to be watched carefully here in this regard.  Meanwhile the US Dollar index should be closing in on its first major area of resistance near 96, which might cause a temporary stalling out in the US Dollar and allow for short-term bounces in both the Euro and Gold.  

Overall I suspect this week could provide a short-term stalling out in stocks, but am skeptical that equities show any sort of meaningful selloff other than a 2-3% drawdown at a maximum before moving back to new high territory.  And despite any near-term slowdown, it remains right to be long in selective stocks within Technology, Financials and Healthcare, as these sectors provide about 50% of the total SPX composition and should outperform in the next couple months.

This week's Weekly Technical Perspective covers 10 stocks within the major 10 sectors that are all poised for potential further gains in the weeks ahead.  Each of these has bullish technical structure and has recently moved to new 52-week highs, or is on the verge. Charts and comments below.

 


Charts & Writeups- 10 Bullish stocks to consider technically among 10 different S&P Sectors
 

Technology-  Intuit (INTU-$107.89)-   INTU looks technically attractive, and its ability to have rebounded back to test the highs of its ascending triangle formation from last May should result in an upcoming breakout to new high territory.   Given the stock has moved in a linear uptrend since the latter part of 2008, this triangle formation since 2015 represents a change in structure.  However, ascending triangle patterns of this sort tend to be bullish continuation patterns, and should lead to an upcoming breakout given historical precedent in how these patterns are typically resolved.  Movement back up above $109 should lead straight to $120 and any pullback in the days and weeks ahead to near $105-$106.50 should constitute a technical buying opportunity.


 

Financials- PrivateBancorp (PVTB- $44.54) PVTB's strength in climbing back above $44 puts this stock in a strong technical position as it's setting up for an upcoming test of last year's highs near $45.79, made in November.  However, the larger pattern remains quite constructive, and little resistance lies between current levels and the area near $50 which has hit initially back in 2008.

 

Energy - Concho Resources inc (CXO- $122.19) CXO's rally back above $110 serves as a breakout of the two-year downtrend in place for this stock, and allowed for acceleration up to over $120 in a short period of time.  Given that Crude's rally is ongoing and to this point has shown little signs of peaking out, the Energy sector remains one to favor technically.  CXO's outperformance this year speaks for itself after having risen 31+% this year through 5/27/16, but given this move back over the descending trendline, it looks to have further to go, technically speaking.  Initial targets lie near last May's highs at $134, with movement over allowing for a move back up over $140.

 

Industrials -  Acuity Brands (AYI- $256.21)  AYI is bullish technically and the breakout into mid-April looks to have consolidated sufficiently and now could give way to a move back to new high territory in the weeks ahead. While the selloff into February of this year caused some minor trend damage, this was recuperated nearly right away and the larger trend for AYI remains in parabolic mode since early 2009 with an accelerating trend of higher highs and higher lows at an increasing rate.  Key for short-term traders will be a move back over $259 which should drive this up to $280 which is an attractive area to sell for trading purposes.  For intermediate-term investors, a move back down under $239 is necessary to think this rally might be postponed.

 

Healthcare -  WebMD Health (WBMD- $65.32)  The recent breakout of the enormous nine-year double bottom pattern has meaningful bullish intermediate-term implications for WBMD and should help the pattern continue to stretch higher, despite a near 75% gain in prices just since last September alone.  Monthly RSI has hit 75, which might seem troublesome for the months ahead, but the move over two prior highs from 2011 and 2007 should help WBMD hit $70 before any stalling with a good likelihood of $80 potentially being reached as an intermediate-term technical target.  In the short run, any pullback to the low $60s all the way down to $58 would be an excellent area to consider buying dips.  But the intermediate-term progress in exceeding two prior highs made more than five years ago is considered a reason for optimism overall with WBMD.

 

Materials- Vulcan Materials (VMC-$118.12)-  VMC remains in acceleration mode as it completes the right side of its giant "Rounding Bottom" pattern with upside targets at $128, or nearly 8% above.  Given that this level held the initial time back in 2007, it should serve as a magnet for prices but also likely cause a real stalling out in the shares on the first retest.  Overall, pullbacks to $110-$115 would likely constitute an attractive opportunity to buy dips with upside targets near these former highs in 2007.  For now, VMC remains one of the more attractive within the space, and has shown very little signs of any weakness, with even its February 2016 pullback proving minimal and leading to move back to monthly highs within the next few weeks.

 

Telecom -  Verizon (VZ- $50.62)  VZ's pattern improved substantially given the rally back to test 2013 highs early this year.  The subsequent pullback failed to do much technical damage and has now provided an opportunity to buy dips with key upside resistance near $55.  Overall, this pattern in VZ between 1999 and 2013 resembles a giant base for this stock with subsequent three years representing a higher base which should give way to an eventual rally back to test 1999 highs.   Verizon also has taken some positive steps of late relative to AT&T, and could be in the process of bottoming out in relative terms and starting to relatively outperform.  Overall, given the amount of strength early this year followed by the recent consolidation, VZ remains attractive to own, with movement back over $55 leading to the real acceleration that will allow this to eventually retest $63.

 

Consumer Staples - Molson Coors Brewing (TAP-$100.20)  TAP's move back to new monthly highs in exceeding former levels set back last November/December when equities peaked last year should set the stage for additional strength up to near $110 before any meaningful peak.   The initial advance late last year managed to exceed nearly six months of sideways consolidation and TAP has continued to show very good signs of technical structure, with an ongoing pattern of higher highs and higher lows which makes this stock one of the better within its peer group to own. 

 

Consumer Discretionary - Hasbro (HAS-$87.28)  HAS looks attractive technically given the stock's ability to rise back over highs set this past Fall and now the recent stalling out is showing signs of being resolved by movement back to highs given last Friday's advance.   Upside targets lie near $90 and then $100, which should be meaningful to HAS given its prior rise.  Momentum-wise, the stock's pullback last Fall helped to alleviate some overbought conditions, and its recent move back to new highs looks to have been consolidated in good fashion which should allow for rallies back above $90.  Overall, HAS is attractive, and long positions are warranted at current levels, looking to buy dips.

 

Utilities -  P G $ E (PCG- $59.12) PCG is attractive within the Utilities space given that the stock has not yet moved back to new highs, and rests near former highs from last Spring, which provided resistance on the initial test earller this year.  Getting back above $60 looks likely in the weeks ahead and should provide a springboard for PCG to rise to at least $70 on an intermediate-term basis.  Giventhat stock completely retraced the weakness into last Fall, a move back up above $60 on a weekly basis should result in real upside acceleration.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report:  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Technology Progress could lead the way- Sector rotation important

May 23, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2039-40, 2029-30, 2022-4, 2007-9        Support
2064-6, 2070-1, 2080-2, 2105-6            Resistance

 

 

Key Takeaways:

1) S&P trend still bearish from mid-April- Insufficient progress to declare selloff complete- HOWEVER, high bearish sentiment readings, time cycles suggest lows should be in place within 1-2 weeks- >2065 Key
2) Defensive groups like Utilities, Staples, Telecomm all beginning to underperform in the near-term, which looks like a key "TELL" that equity rally is right around the corner
3) Technology has shown some of the best performance in the last week while the worst laggard over the last month- Its sharp gains this week likely signal a turn back to Tech outperformance
4) Sentiment continues to be slanted more toward bearish than given the AAII survey along with the Put/call data which recently moved to the highest levels since September
5) USD rally still showing no signs of turning lower, despite sharp 3 week rally within 4month downtrend
6) Commodities showing evidence of short-term peaks at hand given Dollar rally
7) Treasury selloff looks to have reached key YIELD resistance, and yields should back off this week, favoring TLT, TYD, TMF,while German Bunds could rally as yields test 10bps or slightly lower before any real bottom in yields
8)  Emerging mkts still look to have one final pullback this week before bottoming- Close to support, but selloff thus far incomplete.



S&P 500

Short-term Thoughts (3-5 days) : Mildly Bearish- The technical structure remains negative from mid-April, but should be within 1-2 weeks max of bottoming out and turning back higher to challenge all-time highs.  The late week rally appearing very much like the prior rally attempts that happened within this downtrend from early May, from 5/6-5/10 and then 5/13-5/17.  Key downtrend resistance lies near 2065 for ESM6, (S&P June Mini's contract) and still very tough to make anything of this move over the last few weeks other than a choppy downtrend, which still lies within striking distance of all-time high territory.  As of last Friday, 5/20, prices were within 2 ticks of closing prices from March 29, nearly two month ago, showing the degree to which prices largely have gone nowhere.  After one full year, SPX is only down 3.68% from last May's all-time high close.

Over the next two weeks, pullbacks should prove limited, and rallies should be right around the corner.  The combination of bearish sentiment with High TRIN readings, ongoing bullish weekly momentum and breadth with Ichimoku cloud support just below argues that recent weakness "shouldn't" be the start of a bigger pullback, and should provide a floor to indices just as prices pass the 1-year anniversary of all-time highs.  Look to use any further weakness to buy dips and consider covering shorts or hedges with a move back above 2065 on a close likely signaling that this one month mild selloff is complete.

Intermediate-term Thoughts (2-3 months): Bullish-    A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 

This week's report focuses on Technology outperformance after sharp gains in the month of May and in the last week but following a huge 30-day period of underperformance.  To put this in perspective, given that only seven more days remain in the month of May, the S&P Information Technology index had to have experienced a very weak final week of April given that the group went from worst to first so quickly. (Worst on 30-day basis, -4.12% for the S&P Information technology index through 5/20/16, but best in May, the ONLY group showing positive performance out of the 10 major S&P GICS Level 1 sectors re: Bloomberg)
 
NVDA, EA, AMAT and FIS have been the best performing stocks in May, with gains spanning from 10-24% with NVDA far and away leading the pack.  Meanwhile, on a 30-day rolling period, we see that FSLR, STX, XRX, SWKS, and AAPL were all lower by greater than 10%.  Quite the dispersion, making selectivity in this group a must. 

Technically speaking, Semiconductor stocks remain the best part of Technology, and charts of Semis vs Hardware (shown below) and Semis vs Software have both begun to turn higher sharply(Semis vs Hardware managed to hit new multi-year highs, breaking out of a giant basing pattern formed in the beginning of the prior Decade. 

Additionally as charts show below, the NASDAQ has bottomed out vs the S&P right near an area of former relative lows, while the Tech sector has risen above a key downtrend vs the entire market, which supports the notion of further Tech outperformance in the months ahead.  While prices on many stocks which caused some of this relative strength have gotten stretched of late, (NVDA as a prime example) the group seems primed to rebound from its miserable stretch of losses in the prior 30-days.  Given that Technology constitutes nearly 20% of the SPX, its largest sector by percentage, gains in Tech should be important in causing a tailwind for gains in equities in the months ahead.
 

 


Charts & Writeups- Technology charts of interest- NDX, SOX, MSH v SPX, SOX v Hardware, & AAPL,GOOGL, AMAT, & NVDA technicals
 

NASDAQ 100 index-  Technically speaking, both the NASDAQ composite and 100 index have held up fairly well in the month of May, with the NASDAQ comp down only -0.12% for the month, far better than the DJIA's -1.53% through 5/20, along with measurably better than Europe, with the EuroSTOXX50 -2.18% thus far, with seven trading days remaining.   Daily charts show this downtrend from mid-April after the break of the uptrend line now giving way to a range-bound pattern in the NDX,with lows occurring right near 4280 and highs happening at 4407.   The borders of this one-month range will be key as to the future path of prices and its best to follow price in whatever direction it goes.  Technically, the breakout in Technology suggests more of a bullish lean for the next 2-3 months, in expectingan upcoming breakout.  For now, this range is worth watching carefully.

 

NASDAQ vs SPX- The bottoming in the last few weeks of NASDAQ vs SPX is meaningful, given that this trended down from mid-April as part of a larger pullback from late last year.  Additional gains and outperformance look likely from the NASDAQ vs SPX, which could be important given that this bottomed along with the stock market last back in mid-February.

 

The Philadelphia Semiconductor index, or the SOX, has rebounded to an area of importance, following its breakdown in the end of April.  Prices as of last Friday, 5/20, have reclaimed former lows from March/April and are arguably moving back into this former range which had trended sideways for a full month before giving way.  Semis had already broken out in relative terms vs other parts of Technology, but would be apt to show gains in absolute terms if the SOX can reclaim the area at late April highs, just above 680.

 

 

Morgan Stanley Technology index vs SPX-  MSH/SPX-   Don't look now, but TECH has broken out of a downtrend from last year.  The ratio of MSH/SPX has rebounded sufficiently to exceed its relative downtrend from November highs in just the last couple weeks.  This is a bullish development technically and should result in technology showing better relative strength in the months ahead given how quickly this has snapped back.

 

Semiconductor stocks, relatively speaking, (SOX vs S5TECH) have begun to sharply turn higher vs Hardware, as seen in this 5 year weekly chart of the SOX vs S&P Tech Hardware index.  Given that this relative chart moved up over prior highs to multi-year highs in relative terms, this suggests a meaningful breakout in relative outperformance in the Semi sector vs Hardware, making Semiconductor stocks "THE GROUP" to own within Technology for weeks and months to come. 

 

Apple (AAPL- $95.22)  AAPL's recent ability to rebound follows a severe period of underperformance that's not unlike what the stock went through from highs back in 2012, when it peaked out and fell more than 45% from its peaks, though managed to maintain its intermediate-term uptrend.  A similar fate has occurred since last May in AAPL when the stock become quite overbought vs its long-term trend and gave back over 30% from peak to trough before the rally over the last week.  A few things are worth mentioning.  First, AAPL's selloff this time around hasn't done any more technical damage than what happened the last go-around, after the stock became extremely stretched vs its intermediate-term trendline.  The weakness in the last 12 months has strong support in the mid $80's given this long-term trend and is considered a much better risk/reward given its selloff down to important long-term support.  If this is broken, it would be correct to have more bearish intermediate-term prospects, but at present, the stock remains in a short-term downtrend which looks to be trying to stabilize near former lows as part of an ongoing uptrend.

 

Google (GOOGL- $721.71) GOOGL's technical picture remains bullish but stretched on a weekly basis after the sharp breakout from last July, which carried the stock higher by over 30% in the month of July alone.   The entire last year has been spent in consolidation mode after this breakout, with the stock treading water between 810 on the upside and 680 on the downside just in the last seven months alone.   The stock is down nearly 9% over the last month, but given the steep ascent of this chart since last Summer, it could afford to pullback to the mid-$600s and still be attractive to buy, from a purely technical perspective.   For now the near-term picture is range-bound, and tough to rule out a test of 680-690.  Meanwhile moving back over 743 would help to lift this up to 800 and improve the picture dramatically.  Technically, GOOGL is a short-term hold as part of a long-term bullish pattern.

 

Google vs Apple-   The ratio between GOOGL and AAPL has gradually been bottoming out in the past couple years, favoring Google on a long-term basis, technically.  However, GOOGL's outperformance of late seems to have reached key upside resistance which should cause some stalling out in this ratio, just as its neared 2014 highs.   So from a short-term basis, there lies reasons to consider AAPL more technically attractive after its recent woes, as it tries to bounce, while GOOGL remains range-bound.   In the bigger picture, the ability of GOOGL to get back over 2014 highs relative to AAPL would result in GOOGL being the favorite, and suggest a serious amount of outperformance.

 

NVIDIA- (NVDA- $44.33)  Short-term NVDA is extremely Stretched and has reached technical targets which should result in a stalling out and pullback for trading purposes.  However, the stock is long-term attractive given the rounding bottom structure and move over 2007 highs, so any pullback back down to 40, or the high $30's should represent a great buying opportunity.  NVDA is the Technology sector's top performing stock of the year,(from within the S&P 500 Information Technology index)  up 34.50%. However, 21% of this return happened in the last month, making this very overbought and susceptible to some huge backing and filling in the weeks ahead.  Weekly RSI has not reached former levels hit in 2015 while the stock presently is near 30% higher.  Overall, a good intermediate-term stock to own given the bullish momentum and ability to rise back to new all-time high territory.  However, near-term, its doubtful this will be able to extend gains over $46 and it looks right to take near-term profits with the idea of buying dips.

 

Applied Materials (AMAT- $22.66) The ability to quickly recapture the damage that was done in 2015 keeps this stock in a base-building effort that began back in the early part of the last decade   The gap last week has made AMAT a bit short-term overbought.  after the runup from late 2015.  However the longer-term pattern shows fairly constructive technical structure, and it wouldn't take much to suggest AMAT could experience a large advance which should be very likely if AMAT gets back over $25.  Overall, pullbacks should be contained near $20 with upside to near $26-$27 and then the high $20's.

 

Citrix Systems (CTXS- $83.21)-  Near-term structure has turned choppy after a strong rally back up to challenge former highs from 2011-2012.  The larger pattern has been quite constructive in forming an initial high turning 2011, but CTXS needs to show evidence of getting back above these former highs which would improve the intermediate-term gains.  For now, this is one of the few in Technology that exhibits a 5-year base on top of its longer-term uptrend and any movement back up above $90 would likely elicit a giant rally back to test and exceed former highs.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: GLD, IAU, SLV.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Aerospace/Defense breaking out among Industrials

May 9, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2037-8, 2026-28, 2007-9              Support
2068-70, 2089-90, 2105-6            Resistance

 

In This Issue

S&P gains last Friday still haven't done enough to think immediate gains happen

Industrials under review, and specifically, Aerospace & Defense

 

Summary: Short-term weakness still looks to be at hand, despite last Friday's bounce attempt, as downtrends from mid-April remain intact and insufficient strength has been seen to call a bottom of any sort. 

Europe did successfully attempt to stabilize late last week, but the price action in both the SPX along with the World index is certainly inconclusive of any low.  In the bigger picture, there is a good likelihood that weakness proves minimal in the weeks ahead, however, given that pullbacks have taken prices right above several different kinds of technical support while bearish sentiment is on the rise.  For now, selectivity remains key in stocks and important areas to look for support lie near 2026-8 initially in S&P futures followed by 2007-8 which looks to be much stronger.  Overall, with technical support less than 1% away, one should take a look at using any pullback to cover shorts, while considering the Metals stocks, technology, buying into Consumer Discretionary and Healthcare after recent weakness.  The Aerospace & Defense sector has some allure within the Industrials space (which will be showcased below) as its move back to new highs makes this one of the stronger areas within Industrials.

In the short run, the near-term technical picture remains pointed lower, with bearish daily momentum pointing down,with breadth averages not having rebounded sufficiently to have conviction.  For those that utilize counter-trend indicators for buying into downtrends, those also remain inconclusive at this time and not complete, which eyeing NASDAQ, SPX, or Treasury yields (which have trended very closely to stocks in recent months.   However, with Ichimoku cloud support directly below, and positive intermediate-term momentum, the bigger picture still looks fine for Equities.  As reiterated above, Minor drawdowns should be used to buy in the next 1-2 weeks with S&P futures likely finding support near 2026-30 as maximum area of downside before a move back to test and exceed November 2015 highs on the way to new high territory.

Overall this part of the year typically isn't for the faint of heart now that stocks have entered May.  We've entered that part of the year where indices have traditionally been seasonally weak, particularly in Election years.  According to Stock traders Almanac, Presidential election year Mays rank poorly #11 of 12 for the DJIA and S&P and #9 for the NASDAQ.   The "worst six-month period" has indeed begun, and as history has shown, a $10,000 investment held only from May-October would have lost money since 1950, VERSUS the six "BEST" months of the year- November - April having grown to $838,486 in the period from 1950-2014.  Astounding indeed.  Given that technical indicators such as MACD turned down on daily charts, this period is upon us yet again.  Sector-wise, Banking Materials stocks and Gold and Silver traditionally decline during May.  The Financials certainly have followed suit there but Materials stocks have largely shrugged off this seasonally weak period thus far as Gold and Silver's rise have shown little signs of reversing course. 

Industrials has interest at this stage of the rally given that it's had some impressive outperformance in recent months, but yet has stalled out recently given signs of XLI nearing former peaks along with many stock in this sector. While Capital goods and Aerospace and Defense remain on solid ground, other sectors like Machinery have largely rallied on Dollar weakness but could be prone to give up that outperformance if the Dollar turns back higher, which looks likely.  The Aerospace & Defense part of the group still has a lot of allure within the space, with many stocks having recently broken out to new 52-week high territory.




Top 7 Ways to Play Industrials, Techically speaking
1) BUY XLI, which still looks to make headway vs SPX after recent weakness
2) Buy Aerospace & Defense- Breaking out to new high territory- Favor RTN, GD, LLL, & LMT.
3) Buy XLI vs Europe's SXOP 600, the Construction and Materials index
4) Buy Rail stocks vs the Airlines
5) Sell(Short) Machinery stocks
6) Sell (Short ) Transport stocks more than 2-3 months in duration
7) Buy XLI vs China-  Favor XLI over FXI

 


Charts & Writeups-  Industrials Sector, Absolute, relative, XLI v SXOP, Rail vs Air, XLI vs FXI, Aerospace & Defense, others
 

SPX index- Weekly- Following a sharp nearly 200 point rally in S&P from mid-February into mid-March, SPX has traded largely range-bound over the last seven weeks, at an area right near former highs from November.  Sentiment has turned bearish in the last couple weeks given the stallout, as seasonality concerns combined with lackluster earnings and ongoing concern of China and/or the course for US Fed policy have kept people largely on the sidelines in the last couple months.  As of last Friday, the AAII sentiment showed 30% Bears vs 22% Bulls, with SPX just 3.3% off all-time high territory from this time last year.  So we've experienced nearly a full year of dramatic selloff and recovery with prices nearly at prior levels from last May.  Overall, the near-term pattern remains negative over the last couple weeks, but selloffs should prove minimal before rising prices carry SPX back to new highs into June/July based on the current structure.  In this scenario, SPX has no business being under 2000 and any additional pullback this week should be used to buy down at 2030 area down to 2010 for upcoming gains back to new highs.
 

Industrials- XLI shows the sharp outperformance in February in relative terms (See graph below price of XLI vs market) followed by a period of Catchup for the other sectors, as Industrials slowed.  The act of getting back above former highs from last November/December is definitely a positive technically, yet the area at former Spring highs remains a strong area of resistance.  Technically speaking the recent pullback into the 50-day moving average could provide good support for the group, given that it also lines up with former highs from November 2015 along with having provided good support and resistance for XLI going back since mid-2015.

 

Industrials in relative terms to SPX when looking on an Equal-weight basis (to strip out the effects of GE) stalled out in recent weeks right near highs made back in 2014.  Recent churning hasn't done much to suggest much of a top at work, but just a slowing in performance given the presence of former highs.  Arrows shown point to counter-trend sells and buys in relative terms right near highs and lows respectively.  For now, additional churning can happen, but movement up to new highs looks to be in the cards which will allow for a bit more outperformance out of this sector into the summer months before any real top.

 

Industrials in equal-weighted terms, broke down relative to the market much earlier than most indices did in January of this year, having made its decline in late 2015.   While the sector peaked out right when Small-caps did in mid-2014, it was the breakdown below prior lows from 2015 that caused the real downside acceleration.  At present, Industrials seems to still be in the midst of a bounce from oversold levels, but its equal-weight chart is far more negative than what might be seen from looking at XLI charts with price within a whisker of all-time highs. The equal-weight picture has seen far more deterioration..

 

US Industrials vs STOXX 600 Construction & Materials index-   XLI is bullish vs European construction and materials stocks, as prices have just risen to the highest levels since early last year.  This technical rise back above March-April highs suggests further upward acceleration, and should continue to favor US Industrials vs European stocks of similar nature.

 

RAIL vs AIR- While the intermediate-term trend remains negative, this chart of Rail stocks vs the Airlines has shown real progress in recent weeks that makes additional gains likely in relative terms, favoring the Rail sector-  XAL has dropped down from highs near $97 to under $86 in the span of just a couple weeks which has helped this relative chart break out of a mild downtrend created from early 2015.  In the weeks ahead, additional strength still looks likely in the Rails, and if getting above the longer-term trend from 2012, this would offer a larger move for the group, suggesting overweights in Rails vs shorting/underweights in the Airlines.

 

Machinery vs Industrials-  Machinery stocks look to be at key resistance from longer-term trends from 2014, and recent stalling out suggests a possible move back down to lows.  The group has experienced strength right at a time of the falling US Dollar, which plays into the theme of multi-nationals like Caterpillar (CAT) bouncing.  Now that the Dollar has been widely shorted and shown some evidence of turning back higher, (which might take a few more weeks), the Machinery stocks could very well begin to underperform again, as seen by this ongoing downtrend remaining very much in place.

 

S&P Aerospace and Defense index has just moved back to new high territory after exceeding highs which were important in late 2015 along with winter 2015 highs.  This breakout which happened initially in late April and was consolidated, looks positive for continued outperformance in Aerospace and Defense in the short run.

 

Aerospace & Defense vs SPX has just made new relative highs in the last week, besting prior levels seen back in early 2015 along with 2014.  This should allow for a period of outperformance that's likely worth chasing technically with those with timeframes of 3-5 weeks or longer given that relative charts have just advanced to new all-time highs.  While stretched on monthly charts, it's worth still favoring this sector for outperformance until some evidence of trend deterioration occurs.

 

Transports vs XLI-  New relative lows look possible for the Transports vs the Industrials sector give this group undercutting April lows which puts it within striking distance of levels seen back early this year.  Overall, Transports showed evidence of peaking back in 2014, back when Small-caps topped out, yet most broader indices continued higher.  This retest of former lows is due to trigger counter-trend buy signals in the next few weeks, but for now, additional move back to new lows should occur.

 

Ratios of XLI to FXI suggest Industrials should outperform China in the short run, as seen by XLI moving back to new highs vs the Ishares China Large-Cap ETF.   Overall, a very steep advance since mid-2015 and one which looks likely to continue given this move back to new high territory.


 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report:  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Semi Drop should offer buying opportunity within Technology

May 2, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2058-60, 2048-9, 2026-30              Support
2071-4, 2089-90, 2105-6, 2123-5   Resistance

 

In This Issue

S&P trend turns negative for Short-term, but selling should prove short-lived 1-2% losses

Sector Focus on Technology & Semiconductors given last week's pullback

US Dollar nearing August 2015 lows should provide some stabilization

Summary: Near-term weakness looks possible this week given signs of the S&P breaking down under minor trendline support and joining the NASDAQ, which has already dropped more than 5% from mid-April highs.  Factors such as minor negative divergence, Technology underperformance, global equity market unease, Election year seasonality, and short-term trend deterioration all argue that a 1-2% pullback can happen into early May.  However, the intermediate-term rally still looks very much intact, and factors like bullish weekly momentum and breadth (Advance/Decline having recently moved back to new high territory) lackluster sentiment, and Treasury yields holding up are all positive factors which should be given more precedence at this time.  Minor drawdowns should be used to buy in the next 1-2 weeks with S&P futures likely finding support near 2026-30 as maximum area of downside before a move back to test and exceed November 2015 highs on the way to new high territory.

Looking back, the month of April was remarkable in that equities had rallied nearly 14% up to near prior late 2015 peaks without as much as any real weakness, or given the outflows, any real participation from the investing public.  Last week showed the first evidence of S&P moving below a prior week's lows while the US Dollar continued its downward descent, nearing the lowest levels since last August.  Commodities, meanwhile, turned in their best month since 2010 as Metals and Energy showed above-average strength.  Sector-wise, Energy and Materials both benefited from this move in the month of April, turning in the top performance for major S&P sectors, with Energy being sufficient to knock Utilities out of its 1st place ranking for the year.  Financials and Healthcare also made comebacks to the tune of 3.67% and 2.57% respectively.

Now we enter the challenging month of May, which ranks poorly in Election years, #11 of 12 for both DJIA and S&P and 9th out of 12 for the NASDAQ.  This month does bring about the start of the "Worst six month of the year" period according to Stock Traders Almanac, and studies from Bespoke show that May-October tends to be particularly worse if the first four months of the year have been relatively flat (Plus or minus 2%) which has happened 16 times since 1928 and averages -0.21%.  While if the market is higher by more than 2% over the first four months, the subsequent six month stretch is +2.99%, while if worst then 2% down over the first four months, the average gain was 1.11%.  So seasonally speaking, definitely reasons to heed the phrase "Sell in May and go Away"  However, the sentiment already seems remarkably bearish, with AAII polls this past week showing a greater level of percentage "Bears" than "Bulls"

This week we concentrate on the Semiconductor sub-sector within Technology, April's worst performing sector, but with some interesting progress having been made from the Semis relatively speaking to Hardware given Apple's woes.  Additionally, Semis are showing signs of bottoming out vs the Software group.   The NASDAQ meanwhile has dropped down under February lows vs the S&P, which suggests its important to be selective here following NDX having given up 5% from mid-April.  Overall, last Friday's drop was bearish for the SOX, but pullbacks should prove limited and provide some attractive buying opportunities in May for the Semi space, which looks likely to outperform vs both Hardware and Software (Based on the S&P groups S5TECH index, and S5SFTW index)
 

 
Charts & Writeups-  SOX index, Semis vs Hardware, Semis vs Software, NASDAQ vs SPX,  AVGO, NVDA, NXPI, IDCC, & TXN
 

Philadelphia Semiconductor Index (SOX-$645.33) SOX's break of former lows going back since mid-March looks more bearish than bullish technically, a clear break of a level that had held numerous times in the last two months before giving way last Friday.  While additional near-term weakness looks likely to areas near 632-4 or 618, any drawdown should be used to buy dips given the improving relative picture(Seen in charts below).  Momentum at present is not yet oversold, and levels that bulls should concentrate on for any rebound are 665, and then 685.  A break of the former would put the SOX back up into its former range, while getting back over 685 would result in upside acceleration given that March/April highs were a test of November/December 2015 levels.
 

Semis vs Hardware-  When looking at the relative relationship between the SOX index and Technology's Tech Hardware index, or S5TECH, we see a clear breakout of a pattern that had been steadily improving since last Summer.  The move to new monthly highs managed to eclipse the early February peak, and while overbought at current levels, any pullback in the days or week(s) ahead would be a buying opportunity to favor the Semi space over Hardware.  Apple's representation within Hardware certainly was a factor in the month of April, but other stocks weakness such as Seagate Technology, Western Digital, or NetApp, were equally as damning for Hardware.  These last three all underperformed Apple during the month of April, showing that it was a widespread issue for Hardware weakness, not necessarily limited to Apple's woes.

 

Semis vs Hardware-  Weekly-  The weekly chart going back since 2007 presents a far more bullish picture for Semis in relative terms to Hardware, with the breakout of a base that extends back over nearly a 10-year span.   The pattern might be termed a reverse Head and shoulders formation by some, whereas by others it merely resembles a long-term bullish base breakout.  Regardless of the terminology, the act of having bottomed out in 2012 and moved sideways in symmetrical fashion before rising to new yearly highs last week is certainly a bullish factor to consider sticking with the Semi space within Technology, despite the absolute weakness last Friday.
 

Semis vs. Software- Semis also look promising when viewing the group vs the Software space, which dramatically outperformed Semiconductor stocks over the last year, with a sharp rally and outperformance (shown here as Semi underperformance)  However, this group (SOX) recently triggered counter-trend TD Sequential buys right near 2012 lows vs the Software space, based on S5SFTW index, and the one-year underperformance in Semis makes this area look attractive to the likes of ORCL, YHOO, WU, EA, MSFT and others.
 

MSH vs SPX-  When viewing Technology as a whole, this group's underperformance largely began at the beginning of the year , but remains a long-term outperformer vs SPX, and recent weakness should translate into a buying opportunity given the long-term uptrend from 2002.  Near-term woes in Semiconductor stocks shouldn't be given as much merit given how they've outperformed hardware, and in general this space remains one to consider owning and buying on dips. 

NASDAQ vs SPX- One thing to keep aware of, that will make owning the right stock increasingly important, is the degree that the NASDAQ has been breaking down relatively to SPX.  Technology woes certainly contributed to this last month, but as the chart shows, NASDAQ has violated a three-year uptrend vs SPX and now the bounce looks to have failed in attempts to regain this uptrend line.  Movement back down under February lows suggests a bit more weakness before this can bottom out unless we were to see a sudden large snapback over the next few trading days.  Counter-trend TD Buy setups per Demark indicators are now in place in the NDX after its recent drawdown, but this deterioration in the relative line remains a negative when viewing NDX/SPX.

 

Broadcom (AVGO- $145.75) AVGO remains one of the better stocks to own within the Semi space and pullbacks down under $140 should be considered a good technical risk/reward to buy dips with thoughts of continued strength in the months to come.  Last week's pullback makes buying dips here still look a bit premature, as the breakout attempt is now falling back into the prior base given the selling from last Thursday and Friday.  However, anywhere from $130-$135 should be an excellent area to consider buying dips given the ongoing positive structure and momentum in this name.

 

NVIDIA (NVDA- $35.53) NVDA looks to be peaking in the short-run, and could allow for movement back down to the low $30's which would create a great risk/reward opportunity to buy this stock, technically speaking.  The broader trend remains quite bullish with the stock having advanced in parabolic fashion in the last year, to levels right below prior peaks from 2007.  While overbought and showing some evidence of minor negative divergence, NVDA remains the best performing stock in the Philadelphia Semiconductor index by a long shot, with gains of over 60% in the rolling 12-month period.  This huge upward surge in momentum will be difficult to completely erase, so near-term weakness should still create excellent opportunities to buy dips with thoughts of NVDA getting back to near $40 in the months ahead.

 

NXP Semiconductors (NXPI- $85.28) NXPI's stalling out over the last couple weeks doesn't take away from its overall bullishness in getting back over the one-year trendline extending down from last Summer highs.  Nearterm weakness down under $80 is a possibility, yet the degree to which NXPI has outperformed over the last 3, 6 month periods should make this one to continue owning, technically speaking.  Movement back higher to $100 looks to be a possibility, with any dips in this group in the week ahead providing a good opportunity to buy dips.

 

Interdigital (IDCC- $56.98) IDCC is bullish on an intermediate-term basis, and movement back over $60 would help this stock to accelerate in climbing back to retest former highs from 2011.  IDCC has outperformed all other Semi stocks within the SOX on a three-month basis, with returns of 26.51% through 4/29/16, and the bullish pattern on weekly chart should allow for continued dominance in the space, with positive momentum and a series of higher lows since 2012.  Near-term, the stock has gotten stretched just shy of $60, but pullbacks to the low $50's would represent a good area to buy dips.

 

Texas Intruments (TXN- 57.04) TXN's slowdown over the last year can't be ruled the start of a larger decline given the extent to which prices remain near last year's highs.  The churning near these tops is considered quite bullish technically, and should allow for an upcoming push back above $60 which would allow TXN to begin to outperform once again.  In the short run, an engulfing pattern last Friday makes this temporarily vulnerable to pullbacks to the low-to-mid-$50's, but its technical structure argues for buying dips, given how resilient the stock has traded over the years.   Weakness should prove minor and a chance for adding to existing technical longs for a chance of accelerating back over $60 in the weeks ahead.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report:  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Seventh Inning Stretch- Energy looks to have more upside into May/June

April 25, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2075-7, 2058-60, 2048-9       Support
2105-6, 2123-5, 2130-3   Resistance

In This Issue

S&P trend positive, but beginning to churn near highs, & short-term top possible

Sector Focus on Energy- Breaking out to new highs relative to SPX, this looks quite positive into mid-May

Sentiment remains subdued and should ultimately fuel the SPX higher given lack of optimism

Summary: Trends remain positive for Equities but showing increasing signs of stalling out in the short run, which could produce a short-term top in US Equity indices as early as this week.  Momentum and breadth have begun to fade while prices are up against prominent highs formed last November for SPX while a number of sectors are facing the same issues, with XLI, XLY, XLV nearing important prior highs, while XLF is also up against resistance in the short run after a nice bump in recent weeks.  Treasuries have shown evidence of turning lower, as 10yr yields now approach 1.90% while the US Dollar has stabilized and pushed back higher in a manner that's allowed the commodity space to stall out a bit in recent days.  Overall, the trend remains bullish, and given that sentiment remains somewhat subdued while breadth has been quite strong in the past few months, technically it's right to think that any pullback should prove short-lived and give way to a rise back to new highs in the indices in the upcoming 1-2 months. For now, most benchmark indices have their work cut out for them at this juncture, which looks important and could provide some difficulty for those expecting immediate acceleration without any real catalyst.

Equities have now risen over 14.3% in the last 10 weeks from the mid-Feb lows.  Yet outflows continue to outpace inflows substantially in US Equities which have now occurred during 13 out of the last 16 weeks.  This past week saw $4.5b outflow from equity funds through 4/21.  Bullish sentiment certainly hasn't risen as dramatically as would be expected, when looking at Equity Put/call ratios, High short interest, and Subdued levels of Bulls over Bear per sentiment polls such as Investors intelligence and AAII.  The recent Barron's Big Money poll showed that American's Money managers thought that equities couldn't rise 10% in the next 12months by more than a 2/1ratio (68 vs 32%)  The same group expected stocks to fall by more than 10% during the next year by nearly the equivalent ratio, on the bearish side- 66% vs 34%.   Additionally, the latest reading from AAII shows Bulls with less than a 10% point lead over Bears, with 33.41 vs 23.92, certainly not too enthusiastic.  Whether poor earnings or Fed indecision or the rush towards Global NIRP is to blame, the result is the same:  Many have not nearly participated in this rally as would have been expected these last few weeks (discounting the first few off the lows, which are always difficult to time properly) .  Now investors are faced with the task of hoping that indices stall out and pullback again, which would afford some a good buying opportunity, yet very few seem to use pullbacks to buy, but rather, become defensive.  If stocks experience any type of weakness, and investors had thought a correction was coming, that simply serves to fuel bearishness even more.   It takes a combination of good earnings, Monetary clarity, and an uninterrupted uptrend to embolden the investing public to the extent where this finally shows up in the polls. For now, sentiment still doesn't really reflect the 14%+ rally we've experienced.

Bottom line, technically, the Positives seem to be as follows:  1) Positive weekly momentum based on an upward sloping and diverging MACD 2) Solid uninterrupted Uptrend from mid-February, 3) a bounce that has carried far too high and long to be considered a Bear market rally, 4) Widespread participation, with sectors like Financials, Industrials, Healthcare leading, while the Defensives have begun to underperform meaningfully, 5) Less than optimistic Sentiment 6) Lack of selling in the High Yield JNK etf, which typically tends to show weakness ahead of declines in Equities 7) Rallies in Treasury yields and WTI Crude, both which look to move higher and have correlated quite well with US Stocks 8) Demark "Sells" still premature in indices like the NASDAQ, which would be thought to trigger TD Sequential and/or TD Combo "13 Sells" first, and turn down9) Very bullish intermediate-term momentum, where the percentage of stocks trading above their 50, 200 day MA have rallied back substantially, while the Cumulative Advance/Decline has moved back to new All-time highs.  Trying to fade this gauge when it hits new highs is typically an exercise in futility.   However, the Bear arguments are also compelling, and are as follows:  1) Waning short-term momentum after overbought conditions arose where the recent push back to new highs was not followed by momentum 2) Poor seasonality during mid-April to June for most Election years, the worst time seasonally speaking to be invested given history going back since 1950 3) Prices now sit within striking distance of former November 2015 highs while a plethora of Sector indices are showing the same signal:  XLI, XLY, XLV, XLF all at or near former highs 4) Sectors like Technology have been underperforming substantially, with many growth names falling out of favor.  5) Monthly momentum as shown by MACD remains negative and even on a push to new highs, this would fail to move to new highs.  6) Indices are approaching a time where a number of short-term key cycles project a "turn".  based on time ratios from former highs and lows over the last 12 months, in particular, being 90 days from our recent prominent low in mid-January seems important.  Overall, most of the negatives are near-term in nature, while the positives are intermediate-term in nature.  Thus, selloffs likely prove short-lived before a move back to new high territory.

This week we concentrate on Energy, which remarkably has snapped back to become this year's Top performing S&P sector in YTD terms with 11.49% through 4/22/16 vs 2.33% for SPX.  Given that oil was plummeting throughout the month of January, its sudden reversal, and 65% climb in less than three months' time has helped this sector substantially.  While seasonality tends to show Crude often peaking in mid-May during months when it bottoms in January/February timeframe, (like what happened in 3 of the last 5 years, and 26 out of the last 32 years, for an 81% Win rate) the Doha meeting in June could prove to be an additional factor this year which could cause some volatility into and post the Late Spring period before Summer.  

Technically speaking, crude remains structurally bullish at current levels given its ability to have broken out of downtrend line resistance from 2014 while not yet overbought on a weekly basis.  COT data shows a long bias for Net Speculators, though sentiment wise, most view the ongoing supply issue as being a serious threat, rightly so, for an intermediate-term rally to continue and sentiment seems more bearish than bullish.  Relatively speaking, OIH has just broken out vs SPX in the last week while Exploration and Production has been far and away the best performing part of Energy, while the Refiners have lagged.  In the weeks ahead, leading up to a possible May/June peak, it still looks right to favor the E&P along with Service & Equipment parts of Energy.  While potentially late in the game, many Energy stocks still look to have the potential to return 5-10% in the next 4-6 weeks, making this a sector to stick with, given that many others are already stretched up near prior highs.  Long ideas and targets, along with six writeups, are found below.
 

Energy- Top technical longs to consider

WMB- $19.54- Tgt- $25.50
SWN- 12.27   Tgt- 16.50-17
DO-   23.90- Tgt- 28.15, 31
ESV- 11.90    Tgt- 16.50-17.50
CXO- 114.26Tgt- 130
HP-    64.08- Tgt- 69.50-70
MRO- 14.34- Tgt- 19-20
CHK- 6.55Tgt- 8.75-9.00
COP- 47.62Tgt- 52-53
CVX- 102.01-  Tgt- 109-110
SLB- 79.93- Tgt 84
PXD- 153.15- Tgt 173-175
PSX- 87.98-  Tgt- 93.45-94

Charts & Writeups-  WTI Crude, OIH vs SPX, XLE vs XLU, Crude vs Gold, XOP vs OIH, Drillers vs Exploration & Production, Refining Rel. to Energy, SWN, WMB, DO, CHK, ESV, and SLB

 

WTI Crude- Jun '16 contract-  Crude remains bullish following its breakout over March highs to the highest level since last December.  Its move to exceed a two-year area of trendline resistance has helped momentum to push higher, while prices remain resilient even in the wake of ongoing huge supply issues and a lack of production Freeze announcement during the recent Doha meeting.  Technically, momentum is not yet overbought and prices could push up to 48, then 50-52 ahead of June before a peak in price for 2016.  For now, WTI remains constructive to own long and it looks likely to continue higher in the days and weeks ahead into mid-May and potentially mid-June.
 

OIH vs SPX-  When looking at relative charts of the Market Vectors Oil Service ETF vs the SPX, one of the key reasons for still wanting to own Energy after the move its had has to do with the ability to break out above prior highs from March, something that structurally should lead Energy higher relatively speaking into mid-May. For now, this would have to reverse violently to prove this to be a false breakout, but given the positive yet not overbought momentum, along with ongoing skepticism regarding Oil's rise, this sector still looks to have a ways to go before any sort of stallout.

Energy vs Utilities-  XLE vs XLU (Relative basis)  Given oil's precipitous decline into late January, along with a low interest rate environment, it's understandable that the Utilities sector has outperformed Energy, which is shown on this chart as a long downtrend in XLE vs XLU which got underway in mid-2014.  However, this could be changing given the start of yields to turn higher, while most of the Defensive sectors are beginning to give way recently, lagging performance of the broader market.  As energy attempts to push even higher, this relationship is now challenging this downtrend for the third time since 2014 and needs to be watched carefully for signs of breaking out.  Such a development would make it right to overweight Energy vs the Utilities for the first time in over two years.  Stay tuned.

 

Crude oil vs Gold-  When trying to decide on whether to own Crude vs Gold, we've seen some recent evidence of this ratio bottoming out over a month ago, arguing for Crude longs within the commodity complex over Gold.  While just a minor bounce has occurred thus far, this looks likely to continue and a further rally into May looks probable.  Thus, Crude at present, is the one to own for the next 4-6 weeks vs Gold, technically speaking.

 

XOP vs OIH-  (Relative relationship between the SPDR S&P Oil and Gas Exploration and Production ETF, vs the Market Vectors Oil Service ETF) As might be expected during a time of steep gains in Oil, the high beta E&P's have been outperforming the Equipment and Services sector which looks to continue for at least another 3-4 weeks according to this weekly chart.  Technicals show the breakout of the ratio of XOP to OIH and subsequent follow-through that has recently picked up steam into late April.  While this ratio does have overhead resistance directly above, it still looks like XOP is the one to own within Energy vs OIH for outperformance into May. 

Drillers vs E&P-  When plotting the Oil and Gas Drilling sector vs the Oil and Gas Exploration and Production sector, as per their respective S&P groups-  (S5OILD, vs S5OILP- Bloomberg) we see that this ratio has faced a steep decline through the month of March, which only recently has shown some evidence of bottoming out.  For now, it looks like the Drillers are beginning to bottom out as a group and within the next 2-3 weeks should be favored for an oversold bounce vs the E&Ps

Refiners vs Energy-  When looking at the S&P Refining sector vs the broader Energy space, there looks to be definite evidence of a topping pattern in place for the first time since the breakout happened in mid-2014.  Relative charts show the possible presence of a Head and Shoulders pattern which is just attempting to break down given a test of the "Neckline" of this formation.  Momentum has steadily lost strength in the last year, as might be expected, and now only after a mild bounce into early this year, this ratio is turning down again in attempts to break the lows.  Overall, Refiners have lost sufficient strength to make this group unattractive technically as a group.  Movement in this ratio down further would allow this sub-sector to continue to underperform in the next couple months and should be watched carefully.

Southwestern Energy- ($12.60) This stock has recently broken out to the highest level since late 2015 which could partly be blamed on Short-covering (23.14% Short as a percentage of float) with over 89 million short shares.  Technically the stock has just reached overbought territory after a lengthy decline and bottoming out over the last six months, but the path of least resistance remains to the upside.  Given the sharp move in momentum along with short covering at a time when the energy complex is making a breakout to the SPX, this could help to further fuel the shares in the near-term and upside targets lie near 16.50-$17 in this stock before any sort of stalling outFor now, any pullback in the upcoming week would be used to buy, technically speaking, thinking that additional upside is likely.

Williams Cos, Inc. (WMB- $19.54) Following an over 80% loss in value since mid-2015, WMB has finally begun to stabilize and show evidence of turning higher.  While the stock is likely to face considerable overhead supply on its rise, additional strength looks likely to the mid-$20's technically with targets at 25.50 before any peak.  Its structure in the near-term shows the formation of a reverse Head and Shoulders pattern with this rising right to the top near $20.  Momentum continues to lift and technically its right to expect a move over $20, which should fuel the stock higher after a substantial decline in the last year.  While intermediate-term factors remain a concern for this stock, in the near-term additional gains look probable.

Diamond Offshore Inc. (DO- $23.90) DO is another example of an energy stock with substantial short interest that could experience significant short-covering as its shares begin to improve technically.   DO currently has over 1/4 of its entire float Short, or 25.70%, more than 16 million shares while the stock has begun to look much more attractive for nearly the first time in over three years.  DO has broken out of its downtrend form 2013 and now beginning to make higher lows, something this stock has failed to do for some time.  Strength looks likely up to $28.15 with the potential for a move to $31 in extreme cases.  Most of the gains should occur between now and June, and on any rally, it would likely be wise to take profits on any type of move exceeding 10% in the weeks ahead heading into mid-to-late May.

Chesapeake Energy (CHK- $6.55) Given a bankruptcy not happening until May 2017 at the earliest, the near-term risks of CHK very well might be overstated and its stock has begun to show real technical strength that could allow for further gains in the next 1-2 months, which might offer aggressive traders a chance to participate.  Technically the move above $5.80 from March allowed CHK to breakout of the entire downtrend from 2014, while sporting a very high Short interest % of float of 24.81%, or more than 148 million shares.  While it's difficult to weigh in on the long-term prospects for CHK, in the near-term this looks attractive and given the recent breakout in Energy, could show further signs of short-covering gains up to 9.50-10 before stalling out.  For now, CHK is attractive to own and buy dips given the recent stabilization and now gains in this stock, which look to continue technically over the next 4-6 weeks.

Ensco PLC- Cl A (ESV- $11.90) ESV has just completed a very attractive short-term technical base since March which now looks to be giving way to upside gains and could allow this stock to advance up to $14 and then $16.50-$17.50 before stalling out. Similar to other stocks shown above, the stock has recently broken out of an intermediate-term trend which was formed last May near $28.40 and has begun to show some strengthening in momentum which looks to continue. The stock lost more than 70% of its value into February of this year but has since rebounded sufficiently to breakout above recent April peaks in a manner which should let its recent strength continue.  Near-term upside targets lie near $14, and then likely a max near $16.50-$17, right near last November peaks before this stalls.  For now, this looks attractive to buy at current levels, with only a pullback down under $9.45 cancelling out the benefits of this recent momentum.