Newton's Notes:
Weekly Technical Perspective


Mark Newton, CMT

January 20, 2020
Mark Newton CMT, Newton Advisors, LLC

S&P 500 Cash Index
Support: 3274-6, 3246, 3210-2, 3161
Resistance: 3332-3, 3344-5, 3361-2


Summary : Equity indices are now up more than 3% for the month(SPX) and up 15% since early October nearly 3.5 months ago. Trends remain bullish but overbought and while many indices are back at new all-time highs, momentum has been diverging on both Daily and monthly charts. While there remain concerns about the longevity of this rally in Technology which is up 50% in the last year, Industrials and Healthcare have come to the rescue lately, while Financials ETF, XLF, has just moved back to new all-time highs, exceeding the former peak 13 years ago. Treasury yields meanwhile have been remarkably subdued, with little to no signs of following this equity rally. Additionally, commodities have stabilized after recent consolidation, while the Dollar has bounced, and continues to make near-term progress higher as a counter-trend rally following its most recent multi-month breakdown. While there are numerous concerns surfacing that historically have been problematic for Equities in the past, for now, none of these has served to shake this rally. Until price starts to turn down, it's proper just to understand the risks, while diversifying and keeping a tight stop on longs.

What a way to start the year, as Equities look to be mimicking 2018 with a sharp rally of nearly 3% in the first 12 days of January. The extent of this move without any signs of pullback is causing uneasiness for both Bulls and Bears alike given how relentless this rally has been, literally ignoring many of the issues that had been thought by many to have been so important for stocks a few months ago. Most of the factors which have been successful in identifying peak and troughs over the last couple years really haven't been successful at all in recent weeks as this rally has taken on blowoff type behavior. While many stocks still look attractive technically, it looks increasingly much riskier to assume new longs on the Benchmark indices and ETF's, yet also risky to attempt any kind of shorting, without any sign of trend damage. The optimal move seems to be just slowly taking profits in longs that act well when they become excessively overbought, and try to avoid chasing stocks up 100% in hopes of another 5%. As long as tight stops are kept on longs, there's no sense in trying to identify the top, and it's practical to simply recognize the risks while trying not to become too complacent given daily stories surfacing about stocks hitting new highs.
 
The List of Concerns is Growing but hasn't mattered yet
I outlined 5 important negatives heading into this week: Momentum being overbought and diverging negatively, Sentiment getting frothy, Demark exhaustion, Cycles turning down mid-month and Financials underperformance
 
We can now add the following to that list:
1) High Yield Corporates have been diverging with Investment grade & Equities in the last week. Credit spreads are not tightening with Equities moving higher
2) Implied volatlity has continued to act firm and trading above July lows
3) Defensive positioning- Utilities have outperformed Tech over last 5 days
4) Yields turning down sharply while Yield curve flattens
5) Equity Put/call ratio hitting lowest level in over 10 years on monthly charts
6) Top 5 stocks in SPX now representing nearly 20% of the index

These don't necessarily guarantee a selloff is imminent, but as the list grows, it's important to keep stops tight and avoid extrapolating this rally too much into the future. Technically, when combining momentum, sentiment, seasonality and cycles, there looks to be an above-average chance of this rally from late last year being given up in 2020.
 
Counter-trend exhaustion was one cautionary sign heading into this week that was deemed important, but many of these signals have now increased in number across many assets across different timeframes. Demark indicators are in better alignment now than at beginning of the week, when a few indices DID in fact show sells, but now both sets of counter-trend exhaustion are present- TD SEQUENTIAL and TD COMBO.

However, some definite positives have surfaced as well that merit discussion. Industrials have broken back out to new high territory above a very lengthy bullish base. Meanwhile healthcare has also shown evidence of relative strength lately after a dismal 2019 and has rebounded to outperform all other major sectors except Technology on a 3-month basis. Those two sectors are certainly important representing nearly 1/4 of the SPX. Additionally, Technology continues to defy gravity, up a staggering 70% since bottoming in December 2018, but with many of the "1 Trillion" club showing negative momentum divergence in very overbought territory.

Bottom line, markets were thought to be on the verge of turning a week ago, and since have grown even more overbought, with none of the indicators that traditionally are important in correlating with turning points really having all that much effect. This doesn't warrant tossing these studies aside and paying up to buy Equity indices at these stretched levels, as it's thought that the recent gains should still be vulnerable to trend reversal in the near future. But it will be necessary to not get too caught up in the notion that markets need to turn down. Rather it's right to make good risk/reward decisions of what to own at this stage of the rally, while keeping very well diversified, with cash at a higher level of one's portfolio and keeping stops on Longs very tight. Once trendlines start to give way, the recent concerns will certainly take on more importance.
 
WHAT TO OWN? WHAT TO AVOID?
In the Daily Technical comment over the last week, I identified Utilities as being a group to want to own, along with the REITS. These have outperformed and still look to strengthen in the upcoming weeks. Healthcare is also a sector which looks ripe for further gains and specifically Pharmaceutical and Medical Device names still look more attractive than many Biotechs. Meanwhile the XHS, the Healthcare Services ETF is closing in on former highs and thought to cause some resistance to this rise. Outside of the main sectors, Gold stocks still look attractive and should rally to test former highs from early January. However, it should be noted that many of the Metals stocks are not acting that well when one includes Steel, Aluminum, and the base metals. These stocks are more difficult to own as a group, and should be underweighted for now. Finally, Treasuries look like a good risk/reward near-term given the increasing signs of yields rolling over, and TLT is thought to work well into February.


Most Important Technical Developments of the past week

SPX, NASDAQ and DJIA failed to reverse course and have extended another 3% since the year got underway and SPX now up nearly 15% since October. Prices are stretched, and risk/reward poor
 
Emerging markets have extended gains with EEM reaching highest levels since mid-2018 with gains in China, Korea, India. Mexico’s EWW has made a bullish breakout which is very constructive
 
Momentum indicators like RSI remain lower than December peak despite the 3% gain in index prices.  Meanwhile, weekly momentum has reached the highest levels since Jan 2018
 
Defensive sectors have begun to outperform, with Utilities showing the best performance of the last five days, outpacing Technology by over 80 bps. Staples outperformed Discretionary last week
 
Treasury yields have failed to show signs of following Equities higher and after five months of sideways trading with no progress, look vulnerable to pulling back to testing last year’s lows.
 
US Dollar index has bounced after its late year breakdown, and now challenging the key downtrend from October 2019.  Additional near-term strength looks likely
 
Commodities have consolidated gains given the Dollar’s recent strength, but still look likely to resolve this to the upside, as recent pullback has proven very mild indeed
 
Sentiment continues to build positively given lack of any equity weakness, and Equity Put/Call ratios are set to make the lowest monthly close in at least five years and very close to 2010 levels, under .50
 
Small caps turned back lower relative to SPX last week and remain under pressure from late last year as part of steep declines from 2018
 
Industrials and Healthcare have both come to the rescue to bail out Technology which is quite extended, while Financials are now exceeding highs from 2007 (XLF)
 

S&P Subsector performance shows Utilities dominating all groups last week
SPX Sub-sector performance over the last week shows Utilities with top performance of nearly 4%. This is followed by Transportation, which had been a laggard and recently has pushed back to multi-month highs in DJ Transportation avg, yet still shy of All-time highs. Meanwhile the Banking sector has been beaten up most of January thus far. Interestingly enough this comes at a time when XLF is attempting to push to the highest level ever, above peaks made in 2007 (More on that below) For now, some interesting signs of Consumer Service and Food and Beverage stocks outperforming and this defensive tilt needs to be watched even more closely this coming week.


 
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
 
Short-term (3-5 days):  Trend Bullish, stretched & still at risk of reversal While trends remain bullish, i'm still willing to take a stand this week, given that Demark exhaustion finally lines up by Wednesday potentially on daily charts. However, it's important that SPX turns down by end of week with Financials, Healthcare and Industrials showing signs of breaking out. The Bearish case rests largely on a combination of Demark, near-term divergences in overbought territory and has LITTLE to do with actual price action which of course is the most important indicator of all. However, the risk/reward simply is not there to press many of these Technology names when momentum has gotten so overbought. (AAPL in particular, is now a "SELL" technically in my opinion from a risk/reward basis, and happy to pass on Analysis to those that have not received) So, "bearish" in terms of positioning this week has more to do with buying implied volatility and expecting a turn at a time when nobody expects given the completion of Demark Sells for the SPX, NDX while buys for the VIX . Any failure to breakdown this week likely would cause the rally to extend into mid-February, which for now, still seems very much like the alternate scenario. For this week, use rallies to sell into while under 3280 would mark the start of our correction.

Intermediate-term (3-5 months)- Bearish- Price trends have not shown sufficient deterioration thus far to think trends are negative by any stretch. However, the risk/reward for Equities entering 2020 is poor given the combination of four key metrics. 1) Momentum, which is now near-term overbought again, while longer-term trends have flattened out from January 2018. 2) Sentiment - We've seen a flip-flop in sentiment in the last three months, from extreme bearish to extreme bullish heading into year-end. 3) Counter-trend Demark based Exhaustion on daily and weekly timeframes of many indices and sectors 4) Cycles - We're entering a year which has the potential to be sub-par based on the combination of Election year tendencies, along with Decennial cycle patterns. Additionally, some near-term cycles show a major turning point around Jan 10-15 which could be a prominent high. Overall, it's thought that the next few months should be negative and correct this recent excess.

10 Charts of Technically significant moves for last week
SPX -Bullish, stretched with Exhaustion indicators setting in. SPX has now moved up 100 points just since early January over the lat 10 trading sessions. Year-to-date returns are nearing 3%, and daily charts show prices stretching up well above the trend from early October. Counter-trend exhaustion has arrived as of last Friday and Setup counts are due Monday/Tuesday, making this week an important juncture time-wise. Momentum as per RSI has not reached levels seen in late December despite the rapid push back to new highs, and this is also something to worry about. Overall, trends will be bullish until/unless 3280 is broken, but expect this week to be pivotal in either allowing this blowoff to become even more parabolic, or to reverse and finish down. Technically it's tough to be involved long here from a risk/reward standpoint, but seeing some evidence of weakness is a must before growing more defensive and attempting to short.

Financials is a sector to watch carefully as we've seen persistent underperformance in this group to kick off the year but now XLF has managed to exceed 2007 highs which constitutes the first test of this level in 13 years time. Following a stellar 2019 for the group where Financials proved to be 3rd best, sector wise, the group has stalled a bit, precisely as XLF pushed higher to test 2007 peaks. The group as a whole has been under pressure on an equal-weighted basis since 2018 and its performance last year was led by many of the larger banks with JPM, C, and BAC up over 35% while the broader group lagged. We'll now have our first real test to see what this group is made of, as XLF either moves up above 31.50 and we begin to see even greater acceleration in this group, or whether prices hold and reverse course as yields and the 2/10 yield curve have been persistently low and seemingly under pressure in the last month.
Industrials is a group which actually has begun to look much better in absolute terms after XLI's breakout of the Reverse Head and Shoulder-like base which has been ongoing since 2018. This group had lagged over the last few years, but could be poised to show better performance given this XLI move in recent weeks. Last week's push higher suggests a possible test of $90, which likely would be led by the Aerospace and Defense group, along the Machinery names like DE and CAT while GE continues to make progress after having escaped the "Single-Digits" While not a big constituent of the SPX at 9%, this group's success for now is important to pay attention to.
Transportation has begun to make some headway after a severe period of lagging in recent months. As discussed, this group is one that still has failed to break back out to new high territory. Yet its move above 10k proved to jumpstart its momentum as this also successfully exceeded a former downtrend in the group. Last week's rise in particular was constructive, given that it surpassed about 10 weeks of prior highs, and sets the stage for a retest of all-time highs. This former peak near 11.750 in the DJ Transportation Avg will prove to be very important indeed. Near-term trends are bullish, but it's right to sell into strength in the next 2-3 weeks if/when prices get near former highs. For now, the Airlines still appear like laggards, and one needs to be selective in this group as to what to favor.
Financials as shown on a ratio basis vs SPX, have been far less robust than what charts of XLF might imply. The group dominated performance back in 2016-8 but has underperformed dramatically once Treasury yields and the Yield curve began to fall outside of the performance of a few select Banks. The recent underperformance in this group to kick off 2020 happened right as yields started to back down fro 1.95% to 1.70% before briefly bouncing. Much should depend on whether XLF can sustain its recent breakout attempt above 2007 highs which should allow for some meaningful outperformance in the group. Conversely, stalling out and slipping back under 30.50 would likely spell trouble for this group at a time when the trend in yields remains very much down.

Metals and Mining ETF (SPDR S&P Metals and Mining (XME)) has begun to show real weakness of late , and should fall further in the weeks ahead given this breakdown and structure. Most of this recent trend damage has been based on the deteriorating conditions in most Aluminum, Steel and Coal stocks, and many within these sub-sectors remain under pressure and appear like an area to underweight for those looking. I had highlighted this group last week, but important to show how negative this break of the trendline and subsequent failed bounce has been to finish the week. Structurally, the recent peak and decline appears like an impulsive five-wave decline from an Elliott-standpoint. While weakness might be contained near $26.50 on this first decline, one should look at selling into rallies, expecting further intermediate-term weakness as a result of this structure.
CBOE Volatility index- The VIX appears to be very close to bottoming as per the daily chart shown above. Implied volatility has proven to be quite firm of late, holding up above last November and July lows, which often can happen ahead of a major reversal. Now Counter-trend tools from Demark show a completed TD Buy Setup to be merely two days away, as part of an official 9-13-9 pattern since last August. Overall, it looks right to buy implied Vol here with a 1-2 month timeframe, expecting that stock indices should stall out and begin to turn down. This in turn should be quite bullish for the VIX, and expect to see a challenge of this downtrend, shown above in the next couple months. While shorting the market technically is always premature without actual evidence of trend damage, buying volatility, on the other hand, is not and looks to be an appealing play at this stage of the market rally.


CBOE Equity Put/Call ratio - Monthly charts of the Put/call show this having reached levels not seen in at least 5 years and close to lows made back in 2010. Readings of .44 indicate pretty severe upside speculation with more than 2 calls being bought for every Put. Overall, this doesn't appear like a time to be complacent, regardless if Trends have not yet broken. The combination of a VIX down near 12 and a very low Put/call are sending loud warnings to be on alert for an upcoming trend change, not an area to press longs for a Move to SPX 4000. One should keep a close eye on Put/call as former market peaks have tended to occur coinciding with very low Put/call data, as most investors tend to make big upside bets using options at precisely the wrong time (as a group)
McClellan's Summation index- Yet again, breadth has trended higher to levels that are now showing a highly probable chance of Advance/Decline turning back lower in the near future. When overlaying Demark signals onto daily charts of the smoothed Advance/Decline, we see that all of the turns in the last year coincided with both exhaustion at both peaks and troughs, the latest being a good buy signal in early December. Now charts show upside exhaustion (Sells) not dissimilar from what occurred back in November, July as well as April 2019. Keeping a close eye to when breadth readings start to turn negative in the week ahead should yield good clues as to when stock indices turn back lower.
The US Dollar Index (Bloomberg) has pushed up to near important near-term resistance, and has resulted in a stalling out in the commodity rally from last Summer. While some minor near-term trend improvement has occurred, much more will be needed to negate the breakdown of the trend going back since early 2018. It's thought that any push above 1195 in the Bloomberg Dollar index would to a sharp push up to 1200, but yet that would represent a time to sell into this bounce. Conversely, if prices break right away and violate 1190, this should represent a green light to own EURUSD, and GBPUSD, expecting further Dollar deterioration.

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