Day Hagan Tech Talk June 21, 2016

DAY HAGAN TECH TALK

SAME STORY (INTERNAL ROTATION), DIFFERENT VERSE

SUMMARY

Due to currency movement, shifts in sentiment, a supportive technical backdrop and fund flows, expect sector rotation to continue through the summer months, versus a large market decline.

WRITTEN BY

Art Huprich, CMT

POSTED

June 21, 2016

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KEY LEVELS

  • S&P 500 (SPX/2083.25) – Tactical support: 2050 (short-term), 2040 (closing level) and 2026 (intraday) Resistance (selling pressure): 2100 (short-term), 2121 and 2133 to 2135. 
  • Russell 2000 (RUT/1157.70) – Support: 1133 (short-term), 1120, 1095 (closing level) and 1086. Resistance (selling pressure): 1190 and 1205.
  • 10-Year Treasury Note Yield Index (TNX/16.70 [1.67%]) – Support: 15.18(1.51 percent). Resistance: 17.50 (1.75 percent) and between 19 and 20 (1.90 percent and 2.00 percent). 

TECHNICAL SUMMARY

S&P 500 Price Trends: Within the context of a secular bull market, while the S&P 500 remains confined to a multi-quarter neutral trading range, a bullish short-term pattern of “higher troughs and higher peaks” exists. The last two points suggest a keen focus on the changing technical relationships within various asset classes, style and cap size and sector rotation, along with a risk management discipline. Currently, it will be important to gauge how the SPX and appropriate internal indicators react to overhanging levels of resistance.

Relative strength trends continue to dictate the following: 1) a dominant U.S. weighting. However, the Philippines and New Zealand have been exhibiting improving relative strength. 2) Big picture favors large cap, but mid and small cap have been outperforming since February, a positive guidepost. When will the “Street” recognize this? Chart below. 3) Value (large cap) relative trend is marginally favored over Growth. 4) Flows continue to make their way into non-equity correlated global assets. Chart below.

As these relationships adjust and our models dictate, we will allocate accordingly.

Momentum: “Neutral” since an equal number of daily indicators are pointing down as have curled up. Weekly momentum, as defined by Moving Average Convergence Divergence (MACD), remains positive.

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 had moved above its April peak and is moving in the same direction (up) as the others. In other words, no major breadth divergences exist.

S&P Macro Sector Analysis (listed in no particular order): Basic Materials (XLB) continue to exhibit positive price trend and breadth (advance-decline) readings, while relative trends versus SPY are breaking out. Industrials (XLI) continue to exhibit positive price trend and breadth readings, while the relative trend is improving. Utilities (XLU), while overvalued, exhibit positive price, breadth and relative trends. Outside of its breadth trend, Financials (XLF) price and relative trends are uninspiring. Besides its price trend, Consumer Discretionary (XLY) breadth and relative trends remain uninspiring. On an equal weight basis, Technology (RYT) looks good. On a cap-weighted basis, Technology’s (XLK) relative trend looks uninspiring. While Energy’s (XLE) breadth trend suggests a very selective approach, both its price and relative trends continue to grind higher. Consumer Staples (XLP) breadth and price trend are strong, yet its relative trend is neutral. Health Care (XLV) is neutral on a price trend and relative basis, and its breadth line is weakening/breaking down. Real Estate (VNQ) and Telecommunication (IYZ) look good on a price trend and relative basis—I can’t get breadth readings for either.

Due to currency movement, shifts in sentiment, a supportive technical backdrop and fund flows, expect sector rotation to continue through the summer months, versus a large market decline.

Sentiment (secondary indicator that is difficult to use as a timing vehicle, yet helps discern the backdrop): I think it is prudent to quote Ned Davis Research Group (NDR): “The market faces uncertainty from Brexit and the U.S. presidential election. When the uncertainty is removed should drive the timing of any yearend rally.” I’d also mention that concerns surrounding the Olympics, Central Bank policy and economic and corporate earnings acceleration are weighing on investor sentiment.

Calendar (secondary indicator that is difficult to use as a timing vehicle, yet helps discern the backdrop): Regardless of how many times the Fed raises rates in 2016, according to the chart shown below from NDR, “the current campaign is on pace to be classified as a slow cycle, which should help the market grind higher.”

Bottom Line: For the most part, a lack of excitement has accompanied the advance off the early 2016 lows. Consistent with this, on any close above resistance I need to see an expansion in new 52-week highs, while new 52-week lows remain simultaneously subdued. Otherwise, technical divergences may lead to another pullback/consolidation period.

S&P 500: New 52 Week Highs

Based on my conversations and  readings, and in addition to the rally in many commodities, if I had to pick a relationship that is below Wall Street’s radar, it would be the outperformance by small cap (and mid-cap) stocks since February. This particular relationship suggests that the current “trading range” may eventually be resolved to the upside. 

Relative Strength of Small Cap (IJR) versus Large Cap ($SPX)

As Neil Leeson has written and relative to the chart below, “We consider flows a form of sentiment, and therefore you should go with the flow until you start to see a reversal.”

Flows into Global Commodities (weekly)

The black line in the chart below depicts the market’s historical reaction to a “slow tightening interest rate cycle.” The Fed raised interest rates last December, approximately six months ago. It looks like the SPX’s year-to-date gain of +1.92% (through 6/20/16) is consistent with the black line on the chart below. 

S&P 500 Around First Fed Rate Hikes vs. Speek of Hikes

Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

WHAT WE ARE WATCHING

International Interest Rates: Does anyone really understand the long-term ramifications of what we are experiencing?

Nominal Yields on Government Bonds as of April 30, 2016
Global Yields (10-Year)

Have a great week.

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

–Written 06.20.2016 (after 4:00PM EDT). Charts courtesy of the following: Stockcharts.com, Ned David Research Group and The Daily Shot letter.   

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