Day Hagan Research Update

DAY HAGAN TECH TALK

WITH NEW LOWS INCREASING ODDS FAVOR ANOTHER NEAR-TERM CONSOLIDATION PERIOD OR PULLBACK

SUMMARY

With buying pressure slowing and new 52-week lows moving grudgingly higher, the odds favor another near-term consolidation period (i.e. December 2016-January 2017) or a pullback.

WRITTEN BY

Art Huprich, CMT

POSTED

March 14, 2017

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KEY LEVELS

  • S&P 500 (SPX/2373.47) – Support (level[s] where buying interest exists): Between 2355 and 2352, 2312 (rising 50-DMA–will marginally change each day), and between 2300 and 2267. Resistance (level[s] where selling pressure exists): 2401.  
  • Russell 2000 (RUT/1370.28) – Support: Between 1349 and 1341, and 1309. Resistance: 1380, 1400 and 1415.
  • 10-Year U.S. Treasury Yield Index (TNX/26.08 [2.60%]) – Support: Between 23.14 (2.31%) and 23 (2.30%). Resistance: 26.21 (2.62%). Despite being close to resistance and even if there is a near-term pullback tomorrow following the FOMC news, TNX remains in an overall uptrend—chart below.

SUMMARY

From a non-trading primary uptrend perspective, as of March 1 the percentage of large cap S&P 500 stocks above their 200-day average was at its highest reading in over two years and continues to form a bullish pattern of "higher troughs and higher peaks." I interpret this to mean that the intermediate-term path of least resistance for Large Caps is still likely higher. To this point, an important technical development in 2016 was how the market low was made in February of that year. Recall that while the S&P 500 declined approximately 15% between mid-2015 and February 2016, the average stock in the Russell 3000 was down over 30% and there were a number of small cap stocks down in excess of 40%. My interpretation of that development is that even after the base breakout in July 2016, the huge rally since the 2016 Presidential Election and the current "extended short-term condition" of the equity market, the current intermediate-term uptrend isn't as "long in tooth" as many prognosticators make it out to be. 

One thing I am watching from a non-trading perspective is the negative non-confirmation that occurred between the NYSE Common-Stock-Only Advance-Decline Line and the S&P 500/DJIA, when each recorded a new closing high on March 1.

From a near-term perspective, I currently prefer Don Hagan's succinct opinion about the short-term outlook for equities: "Elevated risks." To which I'll add, "leading to another consolidation period similar to mid-December 2016-late January 2017, or a pullback." Sectors exhibiting leadership qualities based on relative strength analysis include: Technology, Financial and Health Care. Staples are also inching up the leadership scale as their relative strength trend versus the SPX continues to improve.




An interest rate hike and comments from the FOMC are expected tomorrow, 3/15/17. Consistent with this, my interpretation of the chart below remains that the 10-Year Yield Index will "staircase" its way towards long-term resistance "in and around 30 (3.00%), and possibly even in the area of 34.5 (3.45%)." Within this context, the Financials benefit on the direction of the 10-year yield and move higher relative to REITs and Utilities (bond proxies.)



Given the recent breakdown on a relative and actual basis by the Transportation complex, Wall Street needs to be mindful that there are times when the "Transports" can be a "leading guidepost," as it was on the upside, prior to the November 2016 elections.



The Energy sector continues to be the main area of pain for equities, and a topic that I have been very wrong about—I have been far too bullish.



WORTHY OF MENTION

While on the subject of interest rates and fixed income, if you need to have fixed income exposure (please recall that when interest rates go up, fixed income prices have historically fallen—I think interest rates are going higher, as discussed in previous Tech Talk reports and shown above), have some fixed income exposure that may act as a hedge against future inflation.

When the line shown below is rising, the iShares TIPS Bond ETF (TIP—seeks to track the investment results of an index composed of inflation-protected U.S. Treasury bonds) is outperforming the iShares 20+ Year Treasury Bond ETF (TLT—seeks to track the investment results of an index composed of U.S. Treasury bonds), and vice-versa.



Have a wonderful start to your week,

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 3.13.2017. Chart sources: Stockcharts.com.

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