DAY HAGAN RESEARCH UPDATE
WHILE SMALL CAPS CONTINUE TO LANGUISH, NEAR-TERM MARKET ROTATION PICKS UP
While one week doesn't make a trend, money is rotating towards defensive areas of the market. As the DJIA moves towards resistance, if this continues, it usually precedes some type of consolidation period or a pullback.
Art Huprich, CMT
February 28, 2017
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- S&P 500 (SPX/2369.75) – Initial Support (level[s] where buying interest exists): 2352 (very small), 2340 (very small), between 2300 and 2285 (rising 50-DMA @ 2290 but will marginally change each day) and between 2267 and 2254. New highs mean there are no disappointed holders, making resistance difficult to ascertain. A price target based on the depth of the base that was completed last July is in the area of 2400+.
- Russell 2000 (RUT/1407.92) – Support: Between 1382 and 1373 (50-DMA), 1349 and 1341. Given the underperformance of small caps and proximity to the next support level of 1309, 1341 is important tactical support. Resistance: Approximately 1410.
- 10-Year Treasury Note Yield Index (TNX/23.69 [2.36%]) – Support: 23. (2.30%). This is an important support level because the next significant support level is between 20 and 19.27 (2.00% to 1.927% - rising 200-DMA). A close below 23 would imply higher bond prices! Resistance: Between 25 and 25.55 (2.50% to 2.55%) and 26.21 (2.62%).
From a non-trading perspective, a pattern of "higher price troughs and higher price peaks" by the Dow Jones Industrial Average implies the "senior indices" intermediate-term path of least resistance is still likely higher.
From a near-term perspective, while the "price trend" remains bullish, "money" is rotating inside the equity market versus exiting it, and now reflecting a slightly more defensive characteristic. Besides the comments below relative to the Small Cap universe, this is evident by recent multi-week relative strength highs by the following S&P macro sectors: Health Care, Consumer Staples and Utilities. In addition to following this rotation, another near-term guidepost is if any intraday or day-to-day selling picks up steam—follows through. So far, this hasn't happened, as all intraday selling has been contained since the beginning of 2017.
WHAT I AM SEEING
- While equities remain the dominant asset class, based on relative strength analysis, U.S. equities continue to play a leadership role, and, according to our models, should carry a dominant portfolio weighting.
- The price action of Small Caps relative to Large Caps and the lagging action by the Small Cap Advance-Decline Line continue to make me anxious! Unless the action in the Small Cap universe improves (confirms), this is meaningful because Small Caps usually start underperforming first, as equity markets top, followed by Mid-Caps and ultimately Large Caps. Please take note and stay tuned.
- Momentum, defined by percentage of stocks above their 50-day moving average, is also lagging. However, this type of action can occur a long time before the final peak, in my experience. I interpret this as meaning the current equity backdrop is being much more specific as to what should be culled from portfolios: poor acting small cap positions.
The following chart has been updated from our last Tech Talk report, dated 2/14/17:
Have a wonderful start to your week. Please know that Day Hagan Asset Management appreciates your support and hard work!
Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management
— Written 2.27.2017. Chart sources: Stockcharts.com. Thanks to Bob Dickey for pointing out the DJIA's resistance line!
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