Day Hagan Research Update

DAY HAGAN RESEARCH UPDATE

WHILE SENTIMENT REMAINS AN ISSUE, THE TIME CORRECTION CONTINUES ACCOMPANIED BY CYCLICAL STRENGTH

SUMMARY

In what appears to be an increasing inflationary back drop, the S&P 500 continues to experience a 'time correction.'

WRITTEN BY

Art Huprich, CMT

POSTED

January 31, 2017

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KEY LEVELS

  • S&P 500 (SPX/2280.90) – Support (level[s] where buying interest exists): between 2260 and 2254, 2240 and 2233. Initial resistance (level[s] where theoretical selling pressure exists): 2301.
  • Russell 2000 (RUT/1352.33) – Support: 1341, 1308 and 1296. Resistance: Between 1384 and 1393.
  • 10-Year Treasury Note Yield Index (TNX/24.83 [2.43%]) – Support: initial range between 24.30 (50-DMA [will marginally change each day]) and 23. (2.43% to 2.30%). Initial resistance: 25.55 (2.55% - minor) and 26.21 (2.62%). I think the odds favor that two major resistance levels at 30 (3.00%) and 35 (3.50%) get tested over the next 12+ months.

SUMMARY

From a non-trading perspective, the bullish trend of "higher troughs and higher peaks" in the percentage of NYSE stocks above their 200-day moving average remains intact.  Thus, I would view any near-term pullback that develops as normal. One yellow flag is that when the major indices reached new highs, the number of new 52-week highs for the SPX, mid cap and small cap indices did not confirm. I will note this indicator is not very timely in terms of discerning a major top, but is a reflection of selective buying and something to be monitored in conjunction with other internal market indicators.

Near term, the month of February is historically volatile following a new presidential administration, which after the recent topside run, likely will translate into downside probing. What might be a near-term catalyst? 1) Weakness in the ratio between small caps and large caps, meaning small caps have been underperforming for the past few weeks. 2) From J.P. Morgan, "While the market remains myopically focused on earnings and Trump, the Fed is likely to become a bigger focus in the coming days/weeks (this writer's emphasis) with big inflation numbers this week (Q4 Employment Cost Index today, the wage component of the January jobs report Friday), the first FOMC decision of the year Wednesday afternoon (watch inflation language), the US January jobs report Friday, and Trump's Fed picks." Thus, I wouldn't be surprised by intraday and day-to-day volatility


OBSERVATIONS

  • Domestic (U.S.) versus International (relative strength analysis): The U.S. maintains its leadership position but relative price trends continue to imply selective exposure to emerging and international markets, including certain parts of Europe, certain parts of Asia and certain parts of Latin America.
  • Breadth (Advance – Decline Line analysis [A-D Line]): With the exception of the Small Cap A-D Line, the following A-D Lines recently closed at new highs: NYSE (common stock only and traditional), S&P 500, Mid Cap and S&P 1500. Consequently, from an intermediate-term perspective (non-trading), there are no major divergences that would be consistent with the immediate onset of a major bear market.
  • Value versus Growth (relative strength analysis): this ratio continues to favor Value overall, but as pointed out late last year, is still working off a prior extreme short-term reading.
  • Leading S&P Macro Sectors (relative strength analysis): The Technology, Industrial and Financial sectors are still on the list. However, a sector I discussed during the middle part of last year has caught fire, especially since the November 2016 election. Specifically, the Basic Materials sector. The recent strength by the Basic Materials price line and relative strength trend was accompanied by an expansion in new highs and strong advance – decline readings. However, near term, the sector is overbought. I'd expect some sideways to down action but overall, stay involved with underlying stops.
  • Sentiment (contrary and secondary indicator and in my experience, better at identifying bottoms than tops): A headwind for the equity market as various sentiment indicators remain overly bullish.  

Over the past 12 to 15 months, each strong top side move was followed by a consolidation/pull back period.
Following the sharp advance off the November 2016 Election Low, the SPX has been confied to a range of between 2 percent and 3 percent.
The U.S. should remain the dominant portfolio weighting, but global opportunites exist.
I would think this represents a vote of confidence for both the domestic and global economy.

WHAT I AM WATCHING

Consistent with the title of the report and sector comments relative to the Basic Materials sector, by plotting an inflation index (a grouping of companies that generally benefit from rising prices) versus a deflation index (a grouping of deflationary sensitive stocks), we can see if the market is suggesting "inflation" or "deflation." This may aid not just with equity decisions, but fixed income as well!


A declining line suggest deflation: a rising line suggests inflation.

Have a wonderful start to your week and a successful 2017. Please know that Day Hagan Asset Management appreciates your support and hard work!

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

— Written 1.29 and 30.2017. Chart sources: Stockcharts.com and Ned Davis Research Group. 

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