REVIEW
8/11/2018 Total market view: "Bottom line - Risk trends are up. Events like Turkey tend to be one day bear wonders. Anyone remember the great Cypress sell-off of 2013? Didn't think so - and yet this was a real headline at the time. Last week SPX had a simple pullback to YR1 & WP support, as well as rising 10 & 20 D MAs. Usually a bounce is the next move. That said, if VIX is above its YP then I'm less sure SPX will test its 2018 high. Given seasonality, there might be more weeks of range-bound congestion before another move higher. If this happens then DJI DIA likely to lead down given DXY strength. Also, as noted above, both biotechs and semi-conductors (XBI and SMH) are a bit weaker, which makes it less likely that NDX QQQ will power up above its YR2."
Result - Instead of a 1 day bear wonder Turkey was 2 days with indexes lower on Monday. China was the larger reason for the decline on Wednesday, when DJI did in fact lead down and then held monthly pivot support. RUT IWM also held its MP, and along with VXX MP rejection, these three led to an index gain into Friday. Tech was notably missing from the party as semi-conductors (SMH) and also biotechs (XBI) have been weaker, both under one or more pivots. Essentially range bound congestion continues, but in the context of larger uptrend for USA main indexes.
SUM
Last week 3 of 5 USA main indexes tested support and held nicely. DJI and RUT held AugPs (MPs), and NYA tested HP along with D200MA. In addition, VXX tested and rejected its MP. The dip was the first oversold reading on 2 hour charts since the start of the 2nd half and it was quickly bought. SPX had a mild break of its YR1 level and immediately came back the next day.
Typically when multiple USA mains test and hold support along with VIX / VXX confirmation, the next move is up. I still think this is quite likely.
But it is the second half of August, total volume is understandably low, and there may not be enough juice for a broader advance. More consolidation could easily happen as 2018 leaders NDX and RUT have been paused under resistance for the last several weeks (especially the case on RUT, under its YR2 since June).
That said, my expectations for USA mains (if not this week then in the next few weeks) are:
SPX to test HR1 2883 at minimum, very likely if YR1 2830 holds.
NDX consolidation may continue, likely HR1 YR2 area test (will be very important to watch).
DJI looking good to play catch up.
RUT expect move above YR2 1701 if not immediately then soon enough.
NYA also playing catch up.
A few items of concern are:
VIX again testing YP 12.29 area - indexes much more likely to power up if VIX breaks that level.
TLT testing long term resistance HP and D200MA - safety trade strength would increase chances of a fail at major resistance (such as SPX HR1 NDX YR2).
VTV / VUG (Vanguard value / growth) ratio perking up - although it has done this many times in the context of a brutal downtrend for most of the decade.
International indexes have of course been weaker - all 8 of the emerging indexes I track were under Q2Ps to begin that quarter, and after subsequent declines 7 of these traded under YP support. Currently only ACWI (broader index like NYA) INDA are above YPs. But weekly charts look to me like a trading low is getting close or already in - and if this idea plays out, USA tech will perk up and indexes will be broadly higher along with a safe haven fade. If KWEB recovers its YP I might be a buyer, but INDA (rec from early July) has been the best emerging international play.
In sum the second half has been bullish for SPX and DJI, a bit less so but still up for NDX and RUT. Despite making some noise, safe havens VIX, VXX, TLT, and metals have been weaker. The larger move is still risk on.
Oh yes, a note on the metals that I wish I picked up earlier - there were what appeared to be several moves below all pivots on GDX and SLV that went nowhere or squeezed shorts - but when GLD finally joined them below all pivots in July the plunge was on. The idea of coordinated moves works not just on the USA indexes which I devotedly track every day, but also other asset classes. For those thinking buy, it would be helpful to have a coordinated hold of YS1 YS2 levels, although typically it is better to put capital to work on strength not weakness.
Speaking of coordinated moves, XBI has been under its MP since 7/27, although still holding HP and QP. SMH is below MP, QP, HP and D200MA. KWEB has been crushed with a -25% drop since mid June! Yet NDX QQQ holds firm, still above all medium and long term pivots. Will tech stabilize propelling NDX higher or will sector weakness spread? Not sure but YR2 area in a crowded trade will be something to watch carefully should NDX get there.
Bottom line - trends are up, but the sideways period in NDX and RUT could easily continue. The current configurations point to higher before a top of significance. Sentiment per put call is fairly bearish, valuation hanging around mid 16s per SPX forward P/E, and even a return to 17X implies a test of SPX 2018 highs at minimum. For this week watching VIX YP, TLT HP and of course weekly pivots for short term moves. Of all the sectors that look ready to propel higher I think IWM and other various small cap growth will make the move. I'm referring to ETFs like VIOG, VIOO, VBK, VTWG here (though time may prevent detailed tracking). These are on the 2018 YTD leaderboard and I think greater potential to continue higher than the more crowded tech.
Do you see a theme below? Tech and growth leading benchmark SPX by far. Keep in mind NDX quarterly RSI is 90+ and that is why I think small cap growth more potential and less risk from here.
PIVOTS
USA main indexes - Last week DJI and RUT held MPs. SPX had mild break of YR1 and quickly recovered. Uptrends testing and holding typically lead to more up, especially when confirmed by VIX/VXX.
Sectors of note - Oddly SMH and XBI below MPs, and SMH even under HP and QP. XBI looks ready to bounce.
Developed - DAX below all pivots, Nikkei below D200MA but will more easily recover.
Emerging - China taking it on the chin this summer. SHComp down -23% from highs and other tech cos like the ones in KWEB plunging more than that in just a few weeks. India Sensex and Nifty look magnificent and reflected in INDA rally, although currency differential making these charts look quite different.
Safe havens - VIX back to YP. A big bounce from here along with TLT rally above HP will make me more cautious on the market. On the bonds I track - TLT AGG LQD HYG (using total return technicals!) all except high yield are on the verge of giving a long term buy which would be an interesting warning to stocks. I may add TIP to this watchlist as it is already in much better shape than equivalent duration IEF. Metals could bounce, sure. GDX is -21% on the year, with a -17% drop since 7/9. This is more likely if GDX holds YS2, GLD recovers YS1 and SLV recovers HS2 (ie, a coordinated move). However, why put capital to work here when small cap growth is pushing higher in the midst of consolidation in RUT and NDX and range bound SPX and DJI?
Currencies - Bullish DXY was the right idea, as it rallied to QR1 before pulling back. Given the amount of times YP tested from underneath I'm expecting this level to hold at least on first test.
Commodities - USO broke under HP support along with DXY thrust. CL1 contract has given many good signals in the past and low bang on D200MA so far, so USO could recover soon. Over the weekend I read a PIMCO piece on rotating to more commodities and TIPSs for late cycle investing. I'm intrigued by this although USO has crushed other candidates or broader commodity funds like DBC, DBA (ags), UNG, COMT or COM. Right now all of these are under at least 1 of 3 long term support levels. I'd rather wait for the market to really turn and show leadership - until then riding USA indexes and especially small cap growth as noted above.
Crypto - BTCUSD has tried to rally fro 5-6K area 3 times, not counting the move last week. Each bounce is going lower. 3-4K target although high 4s might do on its Q3S1. A second recovery of BTCUSD QP 7370 would be more constructive.
OTHER TECHNICALS
New lows have crept higher, but new highs stayed mostly firm. New lows dropping back down would likely coincide to a push to highs in indexes.
VALUATION
Dip buyers active in second half so far - maybe SPX in the 16s P/E forward earnings is the reason? A return to 18X tag means 3000+, but also watching 17X currently near 2885. In chart below, red = 20, yellow = 19, orange = 18, green = 17 and light blue = 16. Thick blue is SPX weekly close.
SENTIMENT
Put-call above the median for 2018, which is understandably much higher than 2017. Not so bullish despite SPX and RUT just a bit under 2018 highs.
August dates (posted 7/22 Total market view)
8/2 - Stock pullback low
8/6-8 strong - "Seems like setting up for high"
8/17-20
8/17-20 setting up for stock high or non event.
Another dedicated post on timing coming soon.