May 23, 2016
S&P JUNE FUTURES (SPM6)
2039-40, 2029-30, 2022-4, 2007-9 Support
2064-6, 2070-1, 2080-2, 2105-6 Resistance
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.
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.
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