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XLE

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.

 

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.

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. 

 

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.

Major Sector Review- 04/19/16

April 19, 2016

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

2058-60, 2026-7, 2000-1, 1982-3       Support
2083-4, 2100-2105, 2130-3   Resistance

In This Issue

Sector view: Healthcare, Materials breaking out, following recent Financials move

Shift out of Defensive sectors adds credibility to the rally

SPX resilient at a time when most expected to fall

Technical Sector Summary: 4-6 Week timeframe is basis for grouping-  Calls are made based on thoughts of the groups going forward between now and the end of 2Q, vs how much the sectors have trended up in the past.

Bullish

Healthcare- Short-term bullish- Intermediate-term bullish- Healthcare is just starting to emerge again after breaking out 4/18 from its downtrend from last summer (XLV) and showing evidence that its relative chart has also broken out vs the broader market and now turning back to the upside- XLV should rally up to challenge 72.90 from its current 70.67-  Most attractive Trend Following: UNH, JNJ, BCR, BDX, SYK, WAT.  Most attractive risk/rewards: MDT, BSX, GILD, CELG, ALXN, REGN, XRAY--Consider XLV, VHT, IYH, IHI, IHF, XBI, DRG

Financials- Short-term bullish, Intermediate-term Neutral- The recent breakout in XLF vs SPX has helped this sector to rebound at the right time and provide the market with some much needed participation, with above-average gains in banks, broker dealer stocks, insurance and the REITS.  Short-term momentum has turned positive on XLF, while relative charts of XLF vs SPX have broken out above former lows and mild downtrends that make this sector one to overweight for the weeks ahead.  Unfortunately, given the long-term Neutral pattern present in this group, only near-term strength can be recommended at this time.  If and when this sector begins to show signs of a larger breakout, this would add to the bullishness of this group on a long-term timeframe.  Most attractive trend following names:  Most attractive Technical risk/rewards : GS, SLM, BLK, V, MA, JPM, ETFC, AMTD, NDAQ, ICE

Materials- Short-term bullish Interestingly enough, one of this year's best performing sectors Year to Date is also one of the laggards on a six-month basis which incorporates the last two months of 2015.  This sector has been steadily improving given the weakness in the US Dollar which has helped the Mining sector along with Chemicals.  XLB has just broken out above highs seen back in March, along with last November/December, which puts this at the highest levels since last July.  Given the ongoing pullback in USD, further strength looks likely for Materials in Q2.  Most attractive risk/reward names: WM, FAST, DOW, AA, NEM, IFF, IP, VMC.

Energy- Short-term bullish, Intermediate-term bearish, and additional progress is necessary before thinking this sector can simply continue higher without facing real challenges.  For now, a bullish call is based on the period between now and late May, where Energy still looks to outperform.  However, technically, gains into the next month would call for profit-taking in most stocks and extreme selectivity given the run that this sector has enjoyed over the last couple months.- Gains likely up to challenge last year's 70.78 highs from its current 64.59.  Given that Crude has survived the Doha scare with no real technical damage given complete inaction on the part of OPEC but thoughts turning to June, this sector could show real outperformance inn the next couple months before any peakout, seasonally speaking.  XLE has just exceeded trendline resistance from last year, and has just surpassed its 200-day moving average for the first time in the last three attempts since last Spring.  Momentum indicatorslike MACD are positively sloped and trending higher-  Most attractive Trend following:  HES, APA, NFX, XOM, CVX

TechnologyShort-term, intermediate-term Bullish-  Minor slowing of late near former highs should present good opportunity to buy for 1-2 months of outperformance before any Summer slowdown begins.  XLK has been consolidating right near former highs but slightly above, while relative charts vs SPX haven't declined substantially enough to expect a meaningful slowdown.  This minor relative weakness in the last few weeks appears to be down near key trendlines which should result in this sector beginning to lift back higher.  Most attractive risk/reward names: ADBE, AVGO, TXN, SGMS, NXPI, NVDA, GOOGL, MSFT, A, TXN


Neutral

Consumer DiscretionaryShort-term bullish on absolute basis, while relative charts vs SPX are more neutral.  Given Monday's breakout above late March highs, XLY likely finds strong resistance near 81.23, former highs, which lie just above current levels, while relative charts have been flat and range-bound for the last few months.   While it's tough to argue the strength in this sector since mid-February, the risk/reward doesn't look as appealing in the short run, particularly given the relative churning in the relative line given that price lies $1 from former highs while momentum has waned a bit in the last month.  Most attractive risk/reward names : NKE, SBUX, ORLY, UA, DG, MCD, HD

Industrials- Upside might prove limited near-term given price being right under former highs- Similar to Discretionary, noone can argue the near-term strength or outperformance, but XLI lies right near former highs within .75c and relative charts have flattened a bit given the churning in the last month.  The ability to breakout back to new all-time highs would encourage following this sector and overweighting yet again, but given the move its had, it's important to be a bit more selective given that prices remain within striking distance of highs from early last year.  Most attractive risk/reward names: RTN, COL, ROK, MMM,  TEX, BLL, LMT, MMM, DOV, MLM, FISV, ADP, TDG


Bearish

Utilities-  Stretched and additional mean reversion, pullbacks likely for Utilities after move to new alltime highsOutsized outperformance this year now starting to wane as indices near highs and Yields beginning to stabilize- Expect underperformance between now and June as indices breakout to new high territory and yields move North.  Most attractive for a risk/reward basis: NI, WEC, PPL, PNM

Consumer Staples- Near-term underperformance likely-  This sector has gotten stretched, while the relative strength has slowly begun to turn down over the last month as evidence of Sector rotation took hold and flows out of Defensive sectors started to occur.  Most attractive for a risk/reward basis include: CPB, RAI, CAG, CLX, KO, PM, WMT, DG, and TAP.

 



Sector Thoughts- Charts and additional analysis of the major SPDR Sector ETFs

 

Healthcare- (XLV)- Healthcare is just starting to emerge again after breaking out 4/18 from its downtrend from last summer (XLV) and showing evidence that its relative chart has also broken out vs the broader market and now turning back to the upside- XLV should rally up to challenge 72.90 from its current 70.67.  Overall, this sector appears to be just turning back higher after a lengthy six month period of consolidation, and appears like a much better risk/reward than most stocks within Industrials, Cons. Discretionary, or the Financial sector, mostly based on its short-term correction within the larger bullish base.

 

Energy-(XLE)-Energy looks to be just starting to make more meaningful progress that could allow for additional gains ahead of the next big meeting in Doha in June.  For now, a bullish call is short-term in nature only, where gains into the next month would call for profit-taking in most stocks and extreme selectivity given the run that this sector has enjoyed over the last couple months.- Gains likely up to challenge last year's 70.78 highs from its current 64.59.  Given that Crude has survived the Doha scare with no real technical damage given complete inaction on the part of OPEC but thoughts turning to June, this sector could show real outperformance inn the next couple months before any peakout, seasonally speaking.  XLE has just exceeded trendline resistance from last year, and has just surpassed its 200-day moving average for the first time in the last three attempts since last Spring.  Momentum indicatorslike MACD are positively sloped and trending higher Yet the larger pattern continues to suggest caution on an intermediate-term timeframe, so for now, near-term strength is likely and we'll see the extent of the outperformance and be on the lookout for signs of stalling out in May/June.
 

Financials -(XLF)- The recent breakout in XLF vs SPX has helped this sector to rebound at the right time and provide the market with some much needed participation, with above-average gains in banks, broker dealer stocks, insurance and the REITS.  Short-term momentum has turned positive on XLF, while relative charts of XLF vs SPX have broken out above former lows and mild downtrends that make this sector one to overweight for the weeks ahead.  Unfortunately, given the long-term Neutral pattern present in this group, only near-term strength can be recommended at this time.  If and when this sector begins to show signs of a larger breakout, this would add to the bullishness of this group on a long-term timeframe
 

Materials- (XLB)- Interestingly enough, one of this year's best performing sectors Year to Date is also one of the laggards on a six-month basis which incorporates the last two months of 2015.  This sector has been steadily improving given the weakness in the US Dollar which has helped the Mining sector along with Chemicals.  XLB has just broken out above highs seen back in March, along with last November/December, which puts this at the highest levels since last July.  Given the ongoing pullback in USD, further strength looks likely for Materials in Q2.
 

Technology (XLK)- Minor slowing of late near former highs should present good opportunity to buy for 1-2 months of outperformance before any Summer slowdown begins.  XLK has been consolidating right near former highs but slightly above, while relative charts vs SPX haven't declined substantially enough to expect a meaningful slowdown.  This minor relative weakness in the last few weeks appears to be down near key trendlines which should result in this sector beginning to lift back higher.  Most attractive

Industrials (XLI)- Upside might prove limited near-term given price being right under former highs- Similar to Discretionary, noone can argue the near-term strength or outperformance, but XLI lies right near former highs within .75c and relative charts have flattened a bit given the churning in the last month.  The ability to breakout back to new all-time highs would encourage following this sector and overweighting yet again, but given the move its had, it's important to be a bit more selective given that prices remain within striking distance of highs from early last year.

Consumer Discretionary (XLY)- Short-term bullish on absolute basis, while relative charts vs SPX are more neutral.  Given Monday's breakout above late March highs, XLY likely finds strong resistance near 81.23, former highs, which lie just above current levels, while relative charts have been flat and range-bound for the last few months.   While it's tough to argue the strength in this sector since mid-February, the risk/reward doesn't look as appealing in the short run, particularly given the relative churning in the relative line given that price lies $1 from former highs while momentum has waned a bit in the last month.

Utilities (XLU)- Stretched and additional mean reversion, pullbacks likely for Utilities in the short-run. Intermediate-term bullishOutsized outperformance this year now starting to wane as indices near highs and Yields beginning to stabilize- Expect underperformance between now and June as indices breakout to new high territory and yields move North.  While the broader technical pattern on Utilities remains in very good shape, momentum has gotten stretched and we've seen some evidence of near-term underperformance which could very well last another 1-2 months in this group as Treasury yields attempt to rally a bit more into June.  For now, this group is near-term unattractive, but intermediate-term bullish given the structural progress.