Day Hagan Tech Talk

DAY HAGAN TECH TALK

NEAR-TERM OVERBOUGHT AND WANING MOMENTUM VERSUS POSITIVE SEASONALS AND PERFORMANCE ANXIETY

SUMMARY

Waning momentum equates to a potential near-term mean reversion pullback or consolidation period. However, given a positive seasonal backdrop and performance anxiety, the onus remains on the bears going into year-end.

WRITTEN BY

Art Huprich, CMT

POSTED

December 6, 2016

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KEY LEVELS

  • S&P 500 (SPX/2204.71) – Support (level[s] where theoretical buying interest exists): 2190 (short-term), between 2180 and 2150. Resistance (level[s] where theoretical selling pressure exists): 2214 and approximately 2225 (upper channel line). However, recent new closing highs mean there are few disappointed holders,making resistance difficult to ascertain. 2400+ (longer-term price target based on the depth of the base that was completed mid-July).
  • Russell 2000 (RUT/1337.79) – Support: 1308 (minor), 1296, 1275 (minor), and 1264 to 1260. Resistance: 1347. However, recent new closing highs mean there are few disappointed holders,making resistance difficult to ascertain.
  • 10-Year Treasury Note Yield Index (TNX/23.87 [2.38%]) – Support: 23 (2.30% - minor), 22 (2.20% - minor), 21.26 (2.12% – gap support), for starters. Resistance: 25 (2.50%), for starters. While rates have moved up quickly and are near resistance, meaning a pullback could occur at any time, I think the 10-year yield could hit 3%, and possibly 3.50%, going forward.

SUMMARY

Within the context of a long-term bull market, a near-term overbought condition coupled with waning momentum equates to a potential near-term mean reversion pullback or consolidation period (SPX support: 2190, between 2180 and 2150). However, given a positive seasonal backdrop (the first half of December can be sloppy but historically improves during the back half) and performance anxiety, overall the onus remains on the bears going into year-end.


OBSERVATIONS

  • Long-term Price Trend (S&P 500): Don’t confuse the forest (long-term secular bull market continues) for the trees (near-term overbought condition) – chart below.
  • Short-term Price Trend (S&P 500): In light of an overbought condition, the potential exists for a near-term mean reversion pullback (rising 20-DMA and 50-DMA currently at 2183 and 2157 respectively), or a consolidation period – chart below.
  • In terms of warning of a potential longer-term equity market top, divergences between Advance-Decline Lines and price indexes are a main technical input I use. No major divergences currently exist. However,the Traditional NYSE Advance-Decline Line must be monitored closely, given the large number of its poorly acting, interest rate sensitive components!
  • Corporate Spreads: Despite higher interest rates, corporate spreads have not widened—a positive sign.
  • 10-Year Yield: While the short-term move higher “feels” extreme, yields appear destined to ultimately trade higher – chart below. 
  • Sector Rotation: In early October the S&P Technology Information Sector Index ($SPT/789.15) ran into resistance on an absolute and relative basis. Thus, I discussed a “cooling off” period for the Technology complex (Tech Talk, 10/11/16). Since early November, that looks to have been the case. Consequently, the index is now oversold short-term, using a deviation from mean analysis. I think the index should be watched closely to see if this condition generates an underlying bid—in other words, use the technology index as a group and equity market guidepost. On a similar note, the Industrial complex, defined by the Industrial Select Sector SPDR (XLI/$62.76), has been an area of “leadership”—strong relative strength. Currently however, like the Technology complex in early October, the XLI has run into resistance. Consequently, while I believe this sector will remain in an intermediate-term leadership role, I wouldn’t be surprised by a “downtick” in absolute and/or relative price action.
  • As Bespoke Investment Group recently stated “the rotation into pro-Trump/GOP sectors has continued unabated.” Consistent with this, if the economy is indeed transitioning from a low interest rate environment (deflation) to a rising interest rate environment (inflation) as a result of improving economic growth and infrastructure spending, the post-election rotation may have further to go. This may be a reason to have some exposure in sectors that will benefit from this scenario—charts below.
  • Sentiment: Many sentiment indicators have reached “Optimistic” or “Extreme Optimism” levels. Within this context and in terms of accurately using sentiment indicators, our colleague Neil Leeson recently stated, “the reversal from extremes is more important than the extreme level itself.”






Have a wonderful day,

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

— Written 12.05.2016 (before and after 4:00pm EST). Charts courtesy of the following websites: Stockcharts.

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