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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.

 

Dips should be used to buy ahead of BREXIT vote

June 20, 2016

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

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

 

 

 

Key Takeaways

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

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

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

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

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

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

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



S&P 500

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


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


Technical review and What to expect

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

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

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

 


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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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



 

Disclaimer:

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

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

 

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

June 6, 2016

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

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

Key Takeaways

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

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

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

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

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




S&P 500

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


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


Technical review and What to expect

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

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

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

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

Charts and comments below.

 


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

 

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

 

 

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

 

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

Disclaimer:

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

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

Trend bullish, but SPX faces resistance entering June

May 31, 2016

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

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

 

Key Takeaways:

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

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

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

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

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

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

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


S&P 500

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


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


Technical review and What to expect

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

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

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

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

 


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

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


 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Disclaimer:

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

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

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.

 

Consumer Staples (XLP)  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, and TAP.

Disclaimer:

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