Day Hagan Tech Talk

DAY HAGAN TECH TALK

PERFORMANCE ANXIETY IS NOW AT WORK

SUMMARY

A near-term overbought condition could lead to downside probing post-Thanksgiving. However, the increase in volume off the election lows coupled with year-end performance anxiety favors “stair-step” gains into year-end.

WRITTEN BY

Art Huprich, CMT

POSTED

November 22, 2016

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KEY LEVELS

  • S&P 500 (SPX/2198.18) – Support: Between 2180 and 2150 – I realize this is a very wide range, but it consists of “previous lows” along with 50-day moving average and volume support. Resistance: New highs means there are no disappointed holders, making resistance difficult to ascertain. However, separate upper channel lines exist at approximately 2210 and 2225.
  • Russell 2000 (RUT/1322.23) – Support: 1296, 1275 (minor), 1264 to 1260. Resistance: New highs means there are no disappointed holders, making resistance difficult to ascertain. However, an upper channel line exists between approximately 1330 and 1340. 
  • 10-Year Treasury Note Yield Index (TNX/23.39 [2.33%]) – Support: 21.26 (2.12% – gap support), Between 20 and 19 (2.00% to 1.90%), for starters. Resistance: Between 24 and 25 (2.40% – 2.50%). I suggested hedging bond positions starting in October. While rates have moved up quickly and are near resistance, meaning a pullback could occur at any time, I continue to think that bond prices could pull back further in 2017.

SUMMARY

Going into the elections, the onus was on the bulls. Following the elections and now due to year-end performance anxiety, the onus is now on the bears going into year-end.

Many stock indices closed at new highs yesterday (11/21/16), yet they are also overbought near-term. This could lead to some downside probing post-Thanksgiving. However, the increase in volume off the November 4 election lows coupled with year-end performance anxiety favors “stair-step” gains into year-end.  

WHAT TO DO NOW

  • Equities Remain the Strongest Asset Class. Don Hagan recently discussed the recent huge reversal in fund flows, out of bonds and into equities. While this move may have been “too far too fast,” since Wall Street has favored fixed income for years, I ask, “Is it possible that the long awaited reallocation from fixed income to equities has finally begun?” Don also stated we are “watching for follow-through.”
  • U.S. Still the Dominant Weighting. While the relative trend of the U.S. (SPY) versus the rest of the world (VEU) is extended and due for a pullback, it still suggests the U.S. market is exhibiting a leadership quality—strong price action. Energy (XLE) is exhibiting improving relative strength and moving up the leadership scale. 
  • Large Cap versus Small Cap relative trend has flipped again, in favor of Small Caps. I was wrong in my last report by favoring Large Cap. Following the election and subsequent strong rally by the U.S. dollar (multiyear topside breakout), the exports of large multinational companies may be constrained. Also, smaller companies may benefit from potential lower corporate taxes and less regulation.
  • Value now favored over Growth, based on the relative trend of the Russell 3000 Value Index (RAV) versus the Russell 3000 Growth Index (RAG).

ADDITIONAL OBSERVATIONS

  • Breadth (defined by Advance-Decline Lines): Even with the recent surge in equity prices, a traditional “Breadth Thrust” has not occurred according to our work. Interestingly, while the traditional NYSE Advance-Decline Line is still quite a ways from its previous peak (I believe this is due to a large number of components that are closed-end bond funds, preferred stocks, interest rate sensitive non-operating company vehicles, etc.), the Common Stock Only NYSE Advance-Decline Line is close to new high territory. The recent absolute and relative high by the Wilshire 5000 is also supportive into year-end.
  • Divergences between A-D Lines and price indexes are a main technical input I use, in terms of warning of a possible longer-term equity market top—so far, no breadth divergence exists!
  • Sentiment: Pessimism is subsiding and optimism is increasing but isn’t near extreme levels. Until optimism reaches an extreme level, “sentiment” shouldn’t be a hindrance.

Support: 2180 - 2150 (previous lows, volume [bars on left side of chart], moving average [not shown])
While this move is extended short-term, and would benefit by a pull back, it continues to imply that the U.S. market is still exhibiting the best leadership qualities, in terms of absolute and relative price action.
While this relationship has likely moved "too far - too fast" it continues to favor "Small over Large"
While this relationship has moved very far in a short period of time, and would benefit by a pause/pull back period, it still favors Value over Growth going into year end, and beyond.
Winthin 10 ussies of a new high - Sufficient to say "A-D Lines are moving in line with price indices - NO divergence exists, at this time!"

On behalf of the team at Day Hagan Asset Management, I want to wish you a Happy Thanksgiving. We are thankful for your support. Have a wonderful holiday!

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

— Written 11.21.2016. Charts courtesy of the following websites: Stockcharts.

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