S&P 500 Trading Outlook (3-5 Days): Bearish, however movement above 2687 would be constructive to a larger rally.
The 40 point decline off the highs yesterday is a concern as Financials, Small-caps, Industrials showed weakness. If strength in stock index futures wanes once again, this could lead to a 3-5 day decline to retest lows one final time in December before a rally.
As mentioned, a move above 2687 would be a strong indicator that a low is in and a rally has begun. But for now, we await proof of a low…
Demark counts look to require additional 3-5 days of pullback, and sectors like Financials, Industrials remain in tough shape technically with DJ Transports hanging on for dear life right at former lows.
Small-caps continue to underperform and have broken down further vs the S&P 500 in the last couple weeks. To this last point, this isn’t necessarily a bearish omen for stocks, as markets showed similar deterioration from 2015-6 and just coincided with minor equity weakness, though larger bull markets do in fact peak with a slide in Small-caps and Mid-caps to kick things off and that seems to be happening now.
Three interesting things look to be happening which are worth mentioning: Consumer staples are breaking out to the highest relative levels since early 2018 relative to SPX, something which bodes well for further outperformance (Note, the two stocks recommended Monday in the Weekly Technical Perspective from this sector as part of the Attractive Defensives- PG and CHD) Second, the US Dollar index is shaping up for a final push higher into late December, something which could coincide with a minor reversal in the recent Gold and silver rally, and put near-term pressure on commodities right ahead of the 2 year anniversary of the US Dollar peak post US Election. Third, the 2/10 yield curve looks to be collapsing, something which is coinciding with severe Financials underperformance. This could continue also in to FOMC and keep US indices under pressure for 3-5 days until markets stabilize post FOMC.
The Bottom Line: During this volatile period, Defensives look attractive and are far more stable than trying to pick lows in Technology, Financials and Industrials, no matter how compelling these stocks look. It’s imperative for these latter groups to start to shape up a bit. Near-term, trying to play the swings in Equity index futures isn’t for the timid.
Right now, the markets still look to be under pressure. And no need to try to catch the lows, though that’s what we’ll try to do here. But some sense of trend improvement is truly necessary before weighing in too positively.
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Twitter: @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.
