September 6, 2016
S&P SEPT FUTURES (SPU6)
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.
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.
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