S&P 500 Trading Outlook (2-3 Days):  Sell into strength
Overall upside is limited on the S&P 500 (INDEXSP:.INX) through next week.
While the trend has certainly been quite positive over the last few days, with the Industrials (NYSEARCA:XLI) and Transports breaking out to new highs and the Financials Sector (NYSEARCA:XLF) reaching its highest point since 2008, prices are stretched.
The combination of DeMark sells with the Nasdaq’s (INDEXNASDAQ:.IXIC) deterioration is enough to adapt a defensive tone on the stock market. For a bearish stance, one needs to see evidence of 2600 being broken at a minimum to expect selloffs down to 2550. That may have to wait until next week.
S&P 500 Futures Chart
Technical Thoughts
Action plan summary:  Buy Healthcare.  Sell Technology.  Take short-term profits in Industrials and Financials, with eye on buying back on pullbacks.
Upside should prove limited into next week given the extent of the rally in the last three days. Financials and Industrials in particular are likely to stall out early next week and given the recent Technology weakness (which was not really recouped), a short-term consolidation between these three groups represents nearly 50% of the market. Technically speaking, I suspect that US equities are nearing a short-term peak, which should result in some consolidation into the second week of December before a potential push into year end as part of a Santa Claus Rally.
The latest stock market rally has its own share of problems. Here’s a few things to consider.
1)Â The breadth of yesterday’s advance was just barely 3/2 positive.. not the 4/1 or 5/1 that might be expected during normal 1% index gains.
2) The Technology decline earlier this week remains a technical negative.. this has not been recouped, and gains into Friday/early next week should prove to be selling opportunities for Technology, and specifically the Semiconductors group
3)Â Equity Put/call ratios finished yet again at a low rate of 0.52.
4) DeMark signals will show completed TD Sell Setups on Friday for SPX, DJIA from a very extended state
5) From a non-technical perspective, the fact remains that the Senate tax deal is still very uncertain and will involve real debate before this is passed. So if stocks are rallying hard on thinking the tax bill is a “shoo-in”, the odds seem very close to 50/50, with any failure likely coinciding with stocks giving up recent gains.
The key concern is that industrials and Financials slow down after 6-7% moves in short order, while Technology could weaken further in early December. The combination of those would result in at least some consolidation. The market move is happening without any real fundamental or macro catalyst and largely still rotation but coupled with uncertainty on the horizon and doesn’t present the best risk/reward heading into December for new longs, despite the seasonal strength- The one sector which looks appealing is Healthcare, having shown some signs of lifting in recent days and XBI along with DRG both show the potential to extend. so this should be the key area of concentration, as opposed to favoring XLI, XLF, or XLK.
Thanks for reading.
Twitter: Â @MarkNewtonCMT
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.
