S&P 500 Near-Term Outlook (2-3 Days): BEARISH
I am seeing various signs of the Industrials sector selling off (Transports), while a yield curve downturn is putting pressure on the Financials sector. As well, the Nasdaq (INDEXNASDAQ:.IXIC) and technology look to be stalling out. These factors (and several concerns listed below) may lead to a near-term pullback on the S&P 500 (INDEXSP:.INX) and broad indices.
Overall, this leg of the rally looks to have run its course. Hourly momentum has gotten very overbought while counter-trend signals are now in place on various intra-day time frames.
TECHNICAL THOUGHTS
Yesterday saw little change on the S&P 500, as indices closed nearly unchanged for the session. However, several important technical developments are worth noting:
First, we saw a real acceleration higher in Healthcare which had been basing of late, giving some evidence that the breakout acceleration that began in June was showing some life yet again, starting a new leg higher to take the place of Technology. Both Pharmaceuticals and Biotech stocks moved to multi-day highs and seem likely to outperform in the short run.
Second, the US Dollar (CURRENCY:USD) reversed early gains after Draghi’s hawkish Growth comments, which helped the EURUSD spike back to highs while the US Dollar index fell to the lowest level since last August. Commodities are likely to continue to do well if US Dollar decline continues while rates are dropping.
Third, the Yield curve began to pullback a bit more sharply, which was detrimental to Financials, and this group has underperformed all week. While the broader uptrend for Financials since the election remains very much intact, the near-term prognosis is mixed at best for now, until yields can show signs of turning back higher.
Fourth, Wednesday’s breakdown in Industrials continued on Thursday, as Transports extended losses which hurt the XLI. Both XLI and DJ Transportation Avg had broken trendline support on Wednesday which seemed problematic to the Bull case. Near-term, both indices have sold off more, though both are well within intermediate-term bullish uptrends (making this short-term in nature only).
Fifth, Emerging markets along with Technology have gotten stretched and in the case of Technology, lie near prior March highs which should limit the upside near-term. Any snapback rally in the Dollar from very oversold conditions would limit the Emerging market move.
Overall, Tech looks to be stalling.. and over the past week, we’ve seen weakness in Financials and Industrials These three sectors represent over 45% of the S&P 500.
To repeat the concerns from Wednesday’s trading:
Wednesday’s price action carried prices right into what could be an important near-term area of resistance that causes some type of slow-down in this advance. Key to note are as follows:
1). S&P futures are set to trigger counter-trend signs of upside exhaustion within 2-3 days, similar to what’s been registered already on weekly charts in the S&P, along with DJIA and NASDAQ as of mid-June
2). Intra-day charts of S&P have gotten very overbought with counter-trend signs of exhaustion on several intra-day timeframes which could limit this advance.
3). Technology charts now show XLK, QQQ, MSH to have reached and slightly exceeded early June highs, with all three registering Counter-trend sells. At a minimum, this could result in a stalling out after expiration for the final week of July.
4). Transportation has begun to “crack’ of late given the technical deterioration in the Rails and Airlines just in the last few days. Uptrends from May have been breached in the DJ Transportation Avg, as prices have pulled back to undercut the last couple week’s lows. This does have the potential to result in a minor selloff for Transport stocks in my view. Snap-back rallies would be prone to failure if happened right away.
5). In addition to Transports, the broader Industrials Space was also adversely affected, as prices broke down under their own one-month trend after stalling out in recent weeks. Under $69 would be a minor concern for Industrials outperformance and XLI could weaken to $68.30. Note ,the long-term trends remain very much intact
6). Crude oil along with Gold, Silver and other commodities continue to make fractional progress. Crude being back up against $47 is a minor positive, and any DAILY close above early July highs at 447.35 would result in rush for WTI up to $50-$50.50, and should be source of positive price action for Energy. (Note, XLE has begun to dive of late vs OIH, which normally is a bullish sign for Energy stocks. From now into early next week, rallies back over 47.30 would be used to buy WTI along with buying OIH, XOP.
7). Near-term cycles which pinpointed turns for April 10-12 along with June 3-4, now show July 20-21 to have importance. This potentially could represent a short-term peak which allows the 20-week cycle to start to turn down into mid-August. Conversely, potentially just a few days of decline before additional strength up to August 17-21 before a larger top. The next few trading days will be key.
Chart Spotlight: S&P 500 Futures
The S&P 500 on an hourly basis has reached overbought levels while intra-day charts have begun to signal signs of momentum being overdone. Upside should prove limited in this scenario, and while we can’t rule out a move to 2485, it should be difficult to make too much progress given that Tech has stalled out while Industrials are dropping and Financials are underperforming with a flattening yield curve. Healthcare alone likely isn’t strong enough to carry the entire market.
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Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
