Day Hagan Research Update

DAY HAGAN TECH TALK

FRUSTRATION ABOUNDS

SUMMARY

Frustration abounds as there has been continual rotation within the S&P macro sectors and no serious broad market decline. On any close above resistance, we need to see new 52-week highs expand. Otherwise...

WRITTEN BY

Art Huprich, CMT

POSTED

June 7, 2016

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Day Hagan Tech Talk, June 7, 2016

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KEY LEVELS

  • S&P 500 (SPX/2109.41) – Tactical support: 2085 (very short-term), 2040 (closing level) and 2026 (intraday). Resistance: 2116.48, 2132.82 and 2135.
  • Russell 2000 (RUT/1176.87) – Support: 1095 (closing), 1086 (intraday). Resistance: 1205 and 1225+.
  • 10-Year Treasury Note Yield Index (TNX/17.23 [1.72 percent]) – Support: 17.00(1.70 percent). Resistance: between 19 and 20 (1.90 percent and 2.00 percent), for starters.

TECHNICAL SUMMARY

S&P 500 Price Trends: The S&P 500 has absorbed a lot of negative events recently—bullish. Currently, it is important to gauge how the SPX will react to overhanging levels of selling pressure (resistance).

Relative Strength readings have been dictating—and continue to dictate—a dominant U.S. weighting. However, select international and emerging markets have been exhibiting improving relative strength: New Zealand, Thailand, Denmark, India and Canada. Ned Davis Research Group made the following fundamental statement: “Iran’s long-term macro story and relative sophistication make it an attractive and cheap market.” Big picture relative strength trends favor Large Cap. However, in terms of risk on-risk off, Mid-Cap and Small Cap have been outperforming since February, a near-term positive guidepost. Value is slightly favored over Growth, though it is close. As these relationships adjust and our models dictate, we will allocate accordingly.

Momentum: Internal momentum has diverged over the last seven-plus weeks, i.e. only 76 percent of NYSE stocks are above their 50-day average today versus just over 90 percent in mid-April. This is something to pay attention to!

Breadth: I follow Large Cap (S&P 500), Mid Cap, Small Cap and NYSE (traditional and common stock only) Advance-Decline Lines. The only A-D Line not to move into new high territory recently is the NYSE common stock only, though it is above its April peak and moving in the same direction (up) as the others. In other words, no major breadth divergences exist.

S&P Macro Sector Analysis (relative strength trends versus SPY): Fast internal sector rotation, as opposed to a broad market decline, is frustrating but continues to prevail. I expect this to continue. Health Care, which underperformed for the better part of the past year, is moving up the leadership scale. XLV broke above a downtrend line on both an absolute and relative basis. On a leadership scale Industrials are 50-50, meaning that you should take it on a stock-by-stock basis. Technology, on an equal-weighted basis, acts well. Consumer Discretionary is disappointing. Financials, Materials and Energy grind higher.

Sentiment (secondary indicator that is difficult to use as a timing vehicle, yet helps discern the backdrop): According to the Daily Shot Letter, Merrill Lynch uses sell-side research as a contrarian indicator, which suggests that U.S. equities have room to rally further.” Chart below. Also, William Delwiche, CMT, made reference to the following in a string of tweets: “The Financial Times newspaper recently ran a headline indicating that equity fund outflows have surpassed $100 billion for 2016… a closer look at the data (not just the headlines) suggests this is the case… combined mutual fund and ETF flows have been negative in all but five weeks in 2016.”

Bottom Line: A lack of excitement has surrounded the advance off the January-February Double Bottom lows. Currently, frustration abounds as there has been continual rotation within the S&P macro sectors and no serious broad market decline. Art Cashin of UBS likes to say “Stay vigilant and nimble, very nimble.” Consistent with this, on any close above resistance, we need to see new 52-week highs expand, as they did during previous moves up off the 2009 low. Otherwise, frustration may lead to another attempt to “sell ’em.”


S&P 500 with Short-Term Momentum Divergence (Lower Fram)
Current period of Small Cap outperformance has further room to go!
The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street's consensus equity allocation has been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa.

WHAT WE ARE WATCHING

Natural Gas

Contrary to all of the discussion about Crude Oil by the “Talking Heads,” I haven’t seen nor read much about the recent move in Natural Gas. Maybe that should change.


Once the 200-DMA rolled over, notice the number of times prices fell after having rallied up close to the 200-DMA. However, this pattern has been broken and volume (lower frame) has expanded - bullish.

Fixed Income (10-Year Yield Index – TNX)

An interesting article I read relative to interest rates, written by a firm known for its technical analysis prowess, stated “It’s been a little over two years since ‘100 percent of Economists’ expected rates to move higher.(MarketWatch.com article dated April 22, 2014) Shown below is a chart of the TNX. Since the Fed raised rates last December, the chart of TNX has declined. An objective opinion would be that until resistance is broken, rates likely continue to move lower or at the very least move laterally within the confines of overbought and oversold trading bands. I like Bollinger bands around a 50-day moving average. Currently, TNX is oversold and sitting on support.


10-Year Yield Index (TNX) with Bollinger Bands Around 50-DMA

U.S. Dollar Index

Given the influence the U.S. Dollar has on the direction of corporate growth and earnings, commodities, global equity markets and domestic equity sectors, the U.S. Dollar Index continues to be a main focus for Day Hagan Asset Management, as it has been since late 2015.


Until the downtrend line and/or decling 40-WMA is overcome on a closing basis, the trend is neutral to negative.

Have a great week.

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

— Written 06.03.2016 and 06.06.2016 (after 4:00PM EDT). Charts courtesy of Stockcharts.com and The Daily Shot Letter.

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