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Stocks Decline as Political Uncertainty Roils Markets

Dan Russo, CMT | Chief Market Strategist

May 30, 2018

Key Points

● Fall on Political Fears From Italy and Spain ● 10-Year Falls Below 2.8% as Seek Safety ● Sentiment Metrics Remain More Fearful Than Greedy ● Energy is in a -Term Relative Downtrend ● Futures Point to a Higher Open Key Chart - Energy Relative to S&P 500 - Long-Term Downtrend

We can see in this five-year, weekly, chart that despite the strong move in energy stocks which began in March, the relative trend remains lower. The ratio is below the falling 200-period and resistance is just overhead near the - 48 level. Additionally, the RSI has not registered an overbought reading since 2014. If the ratio was truly going to exhibit a bullish change of trend, we would expect to confirm during rallies which has not been the case.

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Today’s Chaikin Signals - S&P 500 ● Oversold Buy: ALXN ● Relative Strength Breakout: KMX ● Overbought Sell: D, KO ● Reversal Sell: AON, PX, SBUX ● Money Flow Sell: AON, PPL ● Relative Strength Sell: ACN, ALLE, AMP, BEN, BWA, COF, GD, GM, GPC, HBAN, LUV, MDLZ, MET, NCHL, PBCT, RCL, STT, WFC ● Relative Strength Breakdown: BAC, BWA, COF, ETN, HBAN, HON, JPM, KEY, PNC of the Day - Cabot Oil & Gas (COG) - Very Bearish PGR Cabot Oil & Gas (COG, $21.95) has a Very Bearish Chaikin Power Gauge Rating and has been underperforming the SPY since the beginning of the year. The stock is currently in the middle of the range based on our Overbought / Oversold Indicator and the Chaikin Money Flow Indicator has been bearish for most of 2018. COG is trading below a falling long-term trend line and resistance at the $24 level. Below that price, COG is likely to continue to decline.

Pre-Market Movers

Bullish: MOV (9%), UEPS (6%), SIRI (5%), CRM (4%), OKTA (4%)

Bearish: CODX (11%), DSW (5%), KORS (5%), ERA (5%), ZTO (2%)

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Mid-Week Market Update

Earnings Season Update & Thoughts According to FactSet, 97% of the companies in the S&P 500 have reported earnings for the first quarter. Of these companies, 78% have reported actual EPS above the mean EPS estimate, which is the highest percentage since FactSet began tracking this data in Q3 2008. In aggregate, earnings have exceeded expectations by 7.5%, which is the highest surprise percentage since Q4 2010. The earnings growth rate for the S&P 500 has improved to 24.6% today from 17.1% on March 31. Despite the solidly positive earnings results for the first quarter, the S&P 500 remains in the consolidation that has marked trading since the high was made in January and below resistance at 2,741. The RSI is still in neutral ranges as well.

This Week’s Power Gauge for the SPY sees a large deterioration in bullish or very bullish stocks as many names have shifted to neutral.

Last Week’s Power Gauge

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The Long-Term Relative Trend in Energy is Bearish Here is the S&P 500 Energy sector relative to the S&P 500. We can see in this five-year, weekly, chart that despite the strong move in energy stocks which began in March, the relative trend remains lower. The ratio is below the falling 200-period moving average and resistance is just overhead near the - 48 level. Additionally, the RSI has not registered an overbought reading since 2014. If the ratio was truly going to exhibit a bullish change of trend, we would expect momentum to confirm during rallies which has not been the case.

Today’s Stock of the Day is COG. Using the Discovery Tool in Chaikin Analytics to find others like it uncovered:

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Sentiment Update The sentiment indicators which we track are not registering extreme readings and are still closer to levels that mark nervousness rather than complacency.

The 13-day moving average of the CBOE Put/Call Ratio is currently at 0.926. Readings in this range are generally associated with positive forward returns for the S&P 500 over the ensuing six months. In fact, going back to 2005, when the 13-day moving average of the P/C ratio is greater than 0.90, the S&P 500 is higher six months later 69% of the time for a median return of 5.70%. A reading above 1.1 is a sign of capitulation.

The VIX saw a sharp spike higher yesterday as the market sold off. The current level of 17.00 is elevated compared to last year but, as we have noted, this is closer to what we expect to see as 2017 was an outlier to the down side. We looked at data back to 1990, when the VIX closes above 17, the S&P 500 is higher, six months later, 65% of the time with a median return of 5.34%.

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Finally, we can see that the CNN Fear / Greed Index moved to 34 from 59 last week and is back in a “fear” .

Investors can use sentiment indicators to take a contrarian view on the market by buying when other investors are fearful and selling when other investors are greedy.

Market Commentary/Looking Ahead

US equities were lower in Tuesday trading after political uncertainty in Europe weighed on global markets. The Dow and S&P 500 both finished down for the third consecutive day, though well off session lows. The Russell 2000 outperformed, closing with a smaller

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loss than the majors. Financials were the worst performer while defensive sectors held up better. Treasuries made a big bullish move across the curve, as the 10-year yield fell 15 bps to the lowest level since 11-Apr (Eurozone peripheral bonds were hit again with Italian bonds suffering their worst day in 25 years). The dollar was weaker against the risk-sensitive yen, but stronger against the other major currencies, notably the euro. Gold finished down 40 bps and WTI Crude settled off 1.7%. Breadth on the NYSE was negative 1.4:1; breadth on the Nasdaq was negative 1.7:1

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S&P futures up 40 bps after US equities came under pressure on Tuesday.. Asian markets were weak overnight but European markets are bouncing this morning. Treasuries are under pressure across the curve following yesterday’s flight-to-quality and the 10-year yield is back over 2.8%. The dollar is lagging on the euro cross, but not doing much elsewhere. Gold is lower by 20 bps and WTI Crude is up 20 bps after losing nearly 2% in the prior session.

Key Levels To Watch ● Support is in the 2,658 - 2,675 zone (Prior highs, lows and closes) and 2,635 (200-day Moving Average).

● Resistance comes into play at 2,710 (prior support) 2,741 (March 19th & 21st Highs) and 2,800 (March highs).

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S&P 500 Power Gauge Alerts & Earnings Reports

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