To a large degree, the price action of the Large Cap S&P 500 (SPX) during 2018 reminds me of the 1993 movie Groundhog Day. Specifically, Bill Murray played a TV weatherman who, during an assignment covering the annual Groundhog Day event, is caught in a time loop, repeating the same day repeatedly. Consistent with this and since the index’s sharp decline in February, which stopped right at its rising 200-DMA support line, I have been of the opinion that the index would be confined to a trading range for a period of months, and possibly quarters. So far so good, as the SPX’s tape action since then can be described as “sloppy” and “choppy.” 

Market Messages

  • Upside participation has gotten more selective, especially when it comes to international and emerging markets. But I disagree with Wall Street labeling the current domestic equity market backdrop as “narrow.”
  • “Defensive” sectors are showing improving Advance-Decline Lines (A/D Lines) the past two to six weeks, including Health Care, Consumer Staples and Utilities. Consequently, please follow an unemotional and objective risk management strategy.
  • Given an almost “straight up” move by the relative strength trend of the Russell 2000 versus the S&P 500, and in turn a move up to a resistance point, the odds favor a pullback in the current period of outperformance by the Russell 2000.   
  • Within the context of a supportive, intermediate-term domestic equity market backdrop, until the rhetoric surrounding foreign tariffs/trade clears up, I think the odds favor a continuation of the “sloppy and choppy” short-term tape action by the large cap universe, as defined by the SPX and the “globally weighted” Dow Jones Industrial Average (DJIA).

Support and Resistance Levels

  • S&P 500 – Support (S): Between 2700 and 2676, and rising 200-DMA currently at 2664. Resistance (R): 2775, 2792 and between 2800 and 2822.
  • Dow Jones Industrial Average – S: Between 23,750 and 23,344. R: 25,000, 25,322 and 25,403.  
  • Russell 2000 (RUT) – S: 1640 and between 1620 and 1600. R: 1706.99 (closing high), 1708.10 (intraday high).
  • NASDAQ (COMPQ) – S: Between 7458 and 7320 and 7200. R: 7700 and 7807.
  • Ten-Year U.S. Treasury Yield Index (TNX) – S: 27.59 (2.75%) and 27.17 (2.71%). R: 30.09 (3.00%) and 31.15 (3.11%).
  • Ten-Year German Treasury Yield (0.32% – can find on line) – S: 0.26%; R: 0.50%.

The year-to-date price action of the domestic equity market, when viewed through the window of the Russell 2000 ETF (+10.33% year to date—red bar), Russell 2000 Equal Weight ETF (+8.55% year to date—blue bar), S&P 500 (+3.04% year to date—green bar) and S&P 500 Equal Weight Index (+2.33% year to date—pink bar), depicts a backdrop that is not being totally driven by a handful of Large Cap stocks.

Russell 2000 ETF, Russell 2000 Equal Weight ETF, S&P 500, S&P 500 Equal Weight Index chart. 

It is yet to be determined if the recent improvement in the A/D Lines of “defensive” sectors is a function of rotation, wider participation or an increase in a more “rick off” (protect profits, lower portfolio beta) mindset. Stay tuned!

Health Care Select Sector SPDR Advance-Decline Percent (EOD) Index. Moving in the right direction.
Consumer Staples Select Sector SPDR Advance-Decline Percent (EOD) Index. The group overall, defined by XLP, has a yield close to 3 percent. 
Utilities Select Sector SPDR Advance-Decline Percent (EOD) Index. The group overall, defined by XLU, has a yield just over 3.40 percent. 
Small Cap (RUT) vs. Large Cap (SPX). The current period of small cap out performance is due to cool down. Rising line: small caps outperforms. Falling line: large caps outperform. 
S&P 500 Large Cap Index. The trading range continues and until trade worries clear up, I believe the odds favor this pattern continues. Support and resistance levels, as shown on page one, one highlighted in red (resistance) and green (support). 

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know if we can do any additional work for you.      

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 06.23.2018, and intraday 06.25.2018. Chart sources: Reference to the movie titled “Groundhog Day” was initially made by Stan Weinstein.   

PDF Copy of Article: Day Hagan Tech Talk June 25, 2018 (pdf)

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