Day Hagan Research Update

DAY HAGAN RESEARCH UPDATE

WHILE A TIME CORRECTION VERSUS A PRICE CORRECTION CONTINUES, SENTIMENT STILL REMAINS A NEAR-TERM ISSUE

SUMMARY

Equity markets can work off an overbought price condition in two ways: a price correction or a time correction. The S&P 500 has moved laterally since early December and, in essence, worked down an overbought condition.

WRITTEN BY

Art Huprich, CMT

POSTED

January 17, 2017

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KEY LEVELS

  • S&P 500 (SPX/2274.64) – Support (level where buying interest exists): 2254, 2233 and approximately 2225. Initial resistance (level where theoretical selling pressure exists): Between 2277 and 2282.
  • Russell 2000 (RUT/1372.05) – Support: 1354, 1308 and 1296. Resistance: Between 1380 and 1393.
  • 10-Year Treasury Note Yield Index (TNX/23.80 [2.38%]) – Support: 23.46 to 23 (2.34% to 2.30%) and 22 (2.20%). Initial resistance: 25.97 to 27 (2.59% to 2.70%). I think the odds favor that major resistance at 30 (3.00%) and 35 (3.50% – long-term downtrend line) gets tested over the next 12+ months. While I am not a fundamental analyst, I would have to believe that a slow and steady move to 3%-3.50% would benefit Banks and, in turn, their performance relative to the SPX.

SUMMARY

From a weekly perspective, despite a plethora of news events that will continue to create an ongoing period of volatility, the probabilities currently suggest that "price trend" and "momentum" remain supportive of equities.

Near-term overbought condition has been worked off as a result of the consolidation that the SPX has experienced since early December—a time correction. While the S&P 500 remains range-bound, the NASDAQ continues to record new highs and is exhibiting renewed relative strength versus the SPX, usually a supportive sign for higher levels.


OBSERVATIONS

  • Price Trend (S&P 500): Weekly price trend and momentum is supportive of equities.
  • Short-term Price Trend:Equity market indices and S&P macro sector ETFs continue to mean revert to their 50-DMA – the 50-DMA is rising for all except Consumer Staples. Meaning, what once was an overbought condition is no longer so. In light of the equity market being bookended by the MLK holiday and Inauguration Day (most federal government offices will be closed on Friday), and a pickup in corporate earnings reports this week, I wouldn't be surprised by intraday and day-to-day volatility.  
  • 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 international markets, including certain parts of Europe (Germany, to name one) and certain parts of Asia—improvement in certain Asian markets may also be reflected in the still bullish chart configuration of Copper.
  • Leadership (relative strength analysis): Pockets within the Transportation and Financial groups remain favorable, though bullish sentiment extremes in the financial complex may hinder/mute near-term price action. Much to my chagrin, after mentioning that there was some near-term relative improvement by Consumer Staples in my last report, I was wrong as the sector recently hit a new relative low. 
  • Sentiment (contrary and secondary indicator best used to support or refute primary indicators [price and volume] and in my experience, better at identifying bottoms than tops): A headwind for the equity market as various sentiment indicators remain overly bullish. Neil Leeson also addressed issues surrounding sentiment in his 1/13/17 update.

The weekly chart of the S&P 500 suggests the probabilities support the bulls in terms of price trend and momentum. This is despite what will once again be a year (2017) subject to volatility spikes in both directions!


S&P 500 Large Cap Index Chart

I think the chart below is a good representation of why the domestic equity markets moved laterally for all of 2015 and a good portion of 2016. However, since "equity flows" have started to reverse, I also believe this chart highlights a potential source of "huge" (thank you DJT) demand (buying interest).


2016 was the largest and most prolonged period in equity outflows. Post election, weekly flows have turned positive as hope replaces the "Wall of Worry" in investors' minds.

As mentioned before, some intraday and day-to-day volatility is possible since the week has featured the MLK holiday and will end with Inauguration Day, accompanied by a pickup in corporate earnings reports this week. Support: 2254, 2233 (both shown in chart) and approximately 2225 (not shown).


During two previous fast and hard top side moves, the SPX consolidated over a multi-month time period...in light of sentiment extremes (to much bullishness), I wouldn't be surprised if the 5+ week conolidation period continues.

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 1.16.2017. Chart sources: Stockcharts.com, Lipper and UBS.

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