Author: Neeraj Khanna
US Focus Long
The U.S Indices continued their declines that began last week as Brexit fears increased,
reflective of new poll figures favoring an “out vote”. However, the resiliency of the market
remains impressive, trading 3% off highs and only one distribution day on Monday for the
Nasdaq. The market avoided a significant distribution on Thursday after it staged a strong
upside reversal. The next week is likely to see similar volatility leading up to the Brexit vote on
Thursday. We maintain a Confirmed Uptrend for the indices as the distribution days over the
trailing five weeks is subdued at three each for the S&P 500 and Nasdaq and they continue
to trade constructively in ranges established since April. We would change our view should
distribution days increase and the indices are unable to find support at their moving averages.
Earlier in the week, the Fed announced the decision, largely expected, to leave rates
unchanged. Comments by Yellen were more dovish then previously and bode well for fewer,
if any, interest rate increases for the remainder of the year. Once the Brexit event is decided,
the lack of concern regarding imminent rate increases may be the catalyst to drive the markets
higher.
European Focus Long
Fears of a Brexit consumed markets this week, and a Friday
rally was only able to minimize the damage. On average, major
European indices declined 2.6%, including an average gain of
1.6% on Friday. This was the third consecutive week that the
indices finished lower, with most of them now in a Downtrend.
Finland and Luxembourg are the only two countries not in a
Downtrend. Four countries, Belgium (-3%), the Netherlands
(-3.3%), Portugal (-4.1%), and Denmark (-5.1%), fell more
than 3% this week, while four countries, Sweden (-1.5%), the
U.K. (-1.6%), Italy (-1.6%), and Spain (-1.7%), fell less than
2%.
Global Focus Developed Long
The Australia ASX All-Ordinaries Index lost 2.7% this week, its
largest weekly loss since February. It picked up one distribution
day and now has four in the past five weeks (one also fell off due to
time). It is 4% off recent highs and in an Uptrend Under Pressure.
Global Focus Emerging Long
Mainland China markets recovered somewhat from a Monday selloff
but still finished down for the week, with the Shenzhen declining
nearly 1% and the Shanghai slipping 1.4%. Volatility remains as the
markets continue to find resistance at the 40-week moving average. Two
distribution days were added this week, bringing the total to three for
both indices. Markets are now Under Pressure.
Global Focus Frontier Long
US Focus Long
The U.S Indices ran into technical resistance this week after testing the highest levels of 2016.
Early in the week, we upgraded the U.S. market condition to Confirmed Uptrend as the
indices continued the broad-based strength that began a few weeks ago. The rally has been led
by the Energy and Material sectors, however, we have recently identified an increasing number
of constructive ideas from the Technology and Retail sectors. As long as the number of ideas
continues to expand in growth-oriented sectors and the distribution day count does not
become elevated again, we will remain patient with the short-term increase in volatility.
The S&P 500 and Nasdaq have four and three distribution days, respectively, over the trailing
five weeks.
European Focus Long
Concerns about global economic health were renewed this week after
the World Bank cut its global growth forecast to 2.4% from 2.9% and
Chinese exports and imports declined year-over-year 4.1% and 0.4%,
respectively, in May. European markets fell on the news, with selling
intensifying towards the end of the week. Friday’s average decline of
more than 2% pushed the markets into negative territory for the week,
down 2% on average. Every market was down, with Italy (-3.4%) and
Spain (-3.1%) declining more than 3% and Norway (-1.5%) and Finland
(-1.7%) performing the best.
Global Focus Developed Long
The Australia ASX All-Ordinaries Index was down just slightly this
week. It picked up one distribution day and now has four in the past five
weeks. However, it remains just 2% from year-to-date highs.
Global Focus Emerging Long
Mainland China markets were relatively muted in a three-day trading week
with the Shenzhen rising 0.2% and the Shanghai slipping 0.4%. The markets
logged their first distribution day although on below average volume. The
Shenzhen continues to test the 40-week moving average, an area of key
resistance that it has not traded above since December 2015. Last week’s
follow through and volume were positive but we advise a “wait and see”
approach before initiating any long positions. We view a strong break above
resistance to be a more confirming indictor of a possible longer-term
move higher. The markets’ volatility is still a concern and we advise keeping in
perspective the overhead supply that still remains for both the Shenzhen (39%
below 52-week highs) and Shanghai (23% below 52-week highs) markets.
