April 25, 2016
S&P JUNE FUTURES (SPM6)
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.
Schlumberger (SLB- $79.93) SLB broke out of nearly a two-year downtrend during the early part of April, which caused it to gain nearly 10% in a very short period of time. At current levels, the stock is still not really overbought on any timeframe other than a daily basis and should push higher up to the low $80's before finding any resistance. Given that this stock is one of the key constituents of the OIH, a breakout in relative terms vs SPX should help SLB also gain ground in the weeks ahead. Counter-trend indications of upside exhaustion have not yet been triggered, and would require another push back to new highs, which looks to occur in the upcoming weeks. Only a move back down under $72 would cancel out the positive effects of SLB's recent strength, and for now, this remains one of the more attractive stocks to buy given its two-year breakout while still more than 30% off its all-time highs.
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