New market thoughts from Raymond James’ Jeff Saut: “Breakouts Everywhere” 05/10/18

“Who ya gonna believe, me or your own eyes?”
. . . Groucho Marx, the movie Duck Soup (1933)
You’ve probably seen the cartoon where a woman comes home and finds her husband in with another woman? The man looks up and says “No, I’m not cheating!” and follows that up with his favorite Groucho Marx line, “Who are you going to believe? Me or your own eyes? (Groucho).” We could say the same thing about investors over the past two weeks, “Who are you going to believe? Me or your own eyes?” because there are upside breakouts everywhere in the stock charts. We have been talking/writing about this for a few weeks and our pal Bob Pisani did a particularly good job of showing some breakouts right before our appearance on CNBC. Shortly thereafter Bob wrote this:
It’s finally happening. The broad market and key leadership sectors are breaking out of a downtrend. Bulls are starting to regain control of the narrative. The big-cap S&P 500 and the small-cap Russell 2000 are both breaking out of a three-month downtrend that saw a series of lower lows. That is now reversing. Today, when the S&P moved into the 2,680 range–the key breakout from that downtrend–the market lifted. The S&P has risen nearly 100 points, the Dow more than 1,000 points, since Thursday’s lows. February, March and April were tough for bulls, as a series of weaker economic data, inflation concerns, and debates about “peak earnings” had bears on the ascendency. But in the past week, the bull narrative has been given support.
Indeed, breakouts are everywhere. Take a look at the Technology Select Sector SPDR Fund (XLK/$69.08), which has broken above a downtrend line (chart 1). The Financial Select Sector SPDR Fund (XLF/$28.05) is doing the same thing (chart 2). Moving on to some indexes, the iShares PHLX Semiconductor ETF (SOXX/$181.25) has broken out (chart 3) and the small-cap Russell 2000 is doing the same (chart 4). The small-cap space is very interesting given the chart breakout to the upside in the U.S. Dollar Index (DXY/$93.10) because dollar strength tends to favor small capitalization companies. Also of note is that the RUT is a mere ~1.0% from its all-time high, while the SPX is ~5% from its all-time high, and that has typically been a good sign for the overall stock market.
And if you really want to get bullish, take a gander at the Value Line Geometric Index (VALUG/559.20), which has broken out to the upside from a 19-year Brobdingnagian base, as can be seen in chart 5 (a tip of the hat to Leon Tuey).
As for the current stock market, we were adamant during all of January that February was the first real window of downside vulnerability for the equity markets. We were equally adamant that the bottoming sequence was classic with the S&P 500 falling into a “selling climax” on February 6 followed by the anticipated failed “throwback rally.” Then the SPX fell back to record an “undercut low” (a low below the selling climax low) on February 9 and that was it; and, we said so in these reports, in the media, and other venues, and I committed capital accordingly. Verily, we have been treating that February 9 low as THE low until proven wrong. Moreover, last Thursday morning, with the Dow off some 350 points, we told CNBC’s Patti Domm the market was a “buy,” suggesting the Dow Diamonds (DIA/$245.40) were likely a decent way to play the upcoming rally, QED.
So, we have now traded above the 2683 on the SPX, which in yesterday’s Tack we said needed to occur if this rally was going to “stick.” Our models have been, and remain, in gear on the upside as they have been since February 9 and the “internal energy” model has nearly a full charge of energy with the intermediate- and short-term models bullishly configured. Recall, the long-term proprietary model turned positive in October 2008 and had NEVER flipped negative since then. Be optimistic my friends, be optimistic. This morning the preopening futures are marginally higher as we write at 5:11 a.m. with rockets being fired at Israel and Israel responding in kind. We think traders will try and push the SPX above 2700, but there is a wall of overhead resistance at 2720 and stocks in the very short-term are pretty over-bought. Still, the path of least resistance remains on the upside.
P.S.: I will be on a plane to Virginia tomorrow at 6:00 a.m. so there will be no Morning Tack on Friday since Andrew Adams remains in Italy.

Download the full document here

Leave a Reply


captcha *