Some Brief Thoughts on the Markets' Technical Condition Ahead of Month-End

The renewed sell-off in equities is the most important market development. The S&P 500 was sold in eight of the past ten sessions for a two-week drop of more than 7%.  The threat of a trade war did not spark the decline, but it appeared to provide extra fuel.  

The S&P 500 shed 2% before the weekend, while the NASDAQ dropped 2.4%.  This will likely spur losses in Asia and Europe to start the new week, with gap risk likely.  The proximity of the end of the month, quarter, and for some, the fiscal year, may keep some who might otherwise be inclined to see the drop as a buying opportunity sidelined.  The 2532-2554 area is the next important technical area.  It corresponds to the February spike low and the 50-week moving average, and below there is 2478, the 50% retracement of the gains since November 2016 election.   The 61.8% retracement is found near 2385.  

The S&P 500 finished the week just above the 200-day moving average (~2585), which had been frayed in last month's downdraft.  The benchmark has not closed below this average since June 2016 when it was trading around 2000.  

Growth stocks lagged on the way up, but they are leading on the way down.  The Russell 1000 Value Index fell 5.4% last week following a 5% the previous week. It is off 5.7% year-to-date.  The Russell 1000 Growth Index fell 2.1% last week and 4.7% over the past two weeks.  It is off just shy of 0.5% so far this year.

The sell-off in equities is weighing on yields.  The US 10-year yield poked above 2.93% briefly in the middle of the week before the equity market drag took it back to the lower end of the recent range, a little below 2.80%.  The generic 10-year yield has not closed below 2.80% since the early February stock drop.   The week began with many investors looking for some signal from the Fed that it intended on delivering four rate hikes this year.  The week finished with the January 2019 Fed funds futures strip not quite pricing in three hikes this year (or two more).  

We suspect that the so-called "Greenspan Put," which is the market's shorthand for expecting the central bank to take action in the face of a precipitous and potentially destabilizing drop in equity prices, is still in place.  It strikes us as a basic principle that a central bank seeks to do no harm and minimize the impact of a significant threat.  However, because of moral hazard issues, and a judgment that valuations have been elevated, we suspect that the strike price of the put, or what officials would regard as destabilizing or potentially be threatening the Fed's mandates is lower than it may have been perceived in the past.  

Speculators in the futures market are carrying nearly a record large gross short 10-year note position.  With the sell-off in equities and economic data that suggests the curse of disappointing Q1 US GDP continues, the bears appear vulnerable. A break of 2.80% on a closing basis could spur short-covering that sees the yield fall toward 2.70%.  

The Dollar Index snapped a four-week advance with a 0.8% decline.  It is near the bottom of this month's trading range seen near 89.40.  The upper end of the range near-term range is around 90.40.  The broad sideways movement neutralizes the technical indicators we use.  The tone is heavy, but the bears have to break through 88.40 to signal a new leg down for the greenback.  

The technical indicators do not appear to be generating a robust signal in the euro either, as its range-affair continues.  The euro has moved broadly sideways after making moving higher in the first few weeks of the year.  The range is defined by $1.2200-$1.2240 on the downside and $1.2400-$1.2440 on the upside.  

While the Dollar Index and euro may be in a range, the yen is threatening to break out.  The dollar closed below  JPY105 for the first time since November 2016.  It is the second weekly loss for the dollar and the third in four weeks.  It will carry a three-day losing streak into the start of the new week.  The technical indicators warn of further downside risk for the dollar and JPY100 is the next important chart area.  

Since the beginning of February, speculators in the futures market have dramatically reduced their net short yen position from over 120k contracts to 22k, the least since late 2016.  The change can be almost fully explained by buying back of previously sold positions.  The gross short position has been reduced by 90k contracts. 

Constructive developments from on Brexit negotiations, a robust labor report and stronger than expected retail sales sent sterling higher.  The market is a bit more confident that the Bank of England will hike rates in May.  Sterling was the second strongest currency with a 1.35% advance (trailed the Canadian dollar 1.55% rise).  Sterling has appreciated for three consecutive weeks and finished last week with a 0.25% advance.  There is little from a technical perspective that stands in the way of a return of the high set in late January near $1.4350, and beyond that is the $1.4500 area.  

After making new lows for the year to start last week, the Canadian dollar recovered.  However, the US dollar found support in front of CAD1.28.  The data before the weekend--stronger than expected CPI but weaker than expected retail sales--captures the conflicting pressure on the central bank--and illustrates why the market is pushing out into Q3 the next rate hike.  

The CAD1.28 area represents a 38.2% retracement of the US dollar's rally since early February when it was near CAD1.2250.  A move above CAD1.30 would signal the end of the correction, while a break of CAD1.28, especially resistance can be tested first, could signal a better period Q2 outlook for the Canadian dollar.  It has lost 2.5% against the greenback since the start of the year, making it the weakest of the major.  

Year-to-date, the Australian dollar's 1.4% decline secures is place as the second weakest of the major currencies.  The key reversal in the middle of the week, (it make a new low for the move and year before turning higher and closing above the previous day's high) did not spur much follow-through buying, and the Aussie returned to its near-term base a little below $0.7700.  The technical indicators give little reason to pick a bottom here, and equity market weakness may also discourage buyers.  A break of $0.7670 would likely spark a test on stronger support near $0.7600.  

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