The last major economic event for 2018, the most anticipated Fed FOMC meeting had concluded yesterday where the Fed had ignored the U.S. White House political pressure and raised the key Fed funds policy interest rate by 25bps to 2.25%/2.5%. The fourth increase for 2018 since the Fed started its tightening/normalising monetary policy since Dec 2015.
Due to the perceived increase in risk for a softening of global economic outlook, the Fed had tapered its “dot-plot” Fed funds rates projections where it reduced the median expectation for 2019 rate hikes from 3 to 2 hikes and maintained one projected interest rate hike for 2020.
In addition, the median 2020 and 2021 U.S. GDP growth forecasts were unchanged at 2% and 1.8% respectively with the longer-run growth forecast upgraded to 1.9% from 1.8%. Median unemployment rate estimated for 2019 unchanged at 3.5%, 2020 unemployment estimate increased to 3.6% from 3.5% while longer-run estimate declined to 4.4% from 4.5%. Inflationary expectations were lowered where the median estimates for PCE and core PCE inflation fell by 0.1% in 2019 to 1.9% and 2% respectively.
The key takeaway is major risk assets has reacted negatively in the aftermath of yesterday’s Fed FOMC meeting that reinforces the major bearish technical elements that have been inherent in the technical analysis charts of the major benchmark stock indices. In our previous big picture report, “A major for global risk assets next week” published last Fri, 14 Dec, we had highlighted those bearish signs and key levels (click here for a recap). At this time of the writing, the S&P 500 had a daily close below the 2530 key long-term downside trigger level and a test on it twice early this week before FOMC. In addition, Asian big boys, the Nikkei 225 and China A50 are both breaking below their key long-term downside trigger level at 20800 and 10740 respectively. Current price actions are indicating that the 9-year cyclical bull run in equities since Mar 2008 is making an exit.
In this report, we will be highlighting are there any sectors that we can seek to take cover due to the on-going bearish movement seen in the broader benchmark stock indices across the globe. We will be using the U.S. S&P sectors ETF as a proxy for our analysis.
From the performance chart of the 11 S&P sectors, we can see clearly that since the start of Q4 2018, the defensive sectors; Health Care, Utilities, Consumer Staples and Real Estate (97% REITs) are outperforming the higher beta/growth-oriented sectors such as Technology, Communication Services, Industrials, Consumer Discretionary.
Next, let us examine the technical charts of the defensive sectors from a weekly time horizon to gauge the directional bias from a multi- month perspective (1 to 3 months)
S&P Utilities Sector (XLU)
- Weekly candlestick pattern has started to trace out an impending bearish reversal “Evening Star” after the completion of a weekly “Hanging Man” formed in the prior week of 10/14 Dec 2018.
- The downside trigger level rests at 51.26 which is defined by the long-term cyclical ascending channel support from Mar 2009 low and the congestion zone of Apr/ Sep 2018.
- Momentum analysis from weekly RSI oscillator has indicated further potential downside momentum as the RSI has staged a bearish breakdown from a significant corresponding ascending support from Jan 2018 after a prior bearish divergence signal at its overbought region. These observations indicate a pre-signal for a bearish breakdown of the 51.26 price level.
- Overall, the technical picture is bearish with key long-term pivotal resistance at 57.23 and a weekly close below 51.26 opens up scope for a potential impulsive down move to target the 42.60/40.90 support (swing low areas of Aug 2014/Aug 2015 & the 50% Fibonacci retracement of the entire cyclical uptrend from Mar 2009 low to Nov 2017 all-time high).
S&P Consumer Staples (XLP)
- Since its Jul 2016 swing high of 56.02, the Consumer Staples sector has traced out an impending major bearish reversal “Head & Shoulders” configuration with the neckline support at 49.55
- The recent medium-term corrective rebound of 16% from its 48.76 low of Apr 2018 has managed to stall and staged a bearish reaction right at the pull-back resistance of the former long-term cyclical ascending channel support from Mar 2009 low.
- Overall bearish bias with key long-term pivotal resistance at 57.00 and a weekly close below the 49.55 neckline support is likely to trigger a potential impulsive down move to target the supports of 44.60/43.50 follow by 40.30/39.15 next (the potential exit target of the “Head & Shoulders” bearish breakdown & 50% Fibonacci retracement of entire cyclical uptrend from Mar 2009 low to Jan 2018 all-time high).
S&P Health Care (XLV)
- Since its Aug 2015 swing low of 56.63, the S&P 500 Health Care sector has started to trace out a major bearish reversal “Ascending Wedge” configuration with its lower boundary now acting as a support at 83.00
- Momentum analysis from weekly RSI oscillator has indicated further potential downside momentum as the RSI has staged a bearish breakdown from a significant corresponding ascending support from Oct 2016 after a prior bearish divergence signal at its overbought region. These observations indicate a pre-signal for a bearish breakdown of the 83.00 price level.
- Overall bearish bias with key long-term pivotal resistance at 96.06 and a weekly close below 83.00 is likely to see a significant potential impulsive down move to target 76.00 (former range resistance from Jul 2015/Aug 2016 follow by 59.20/55.60 (the long-term cyclical ascending trendline support from Mar 2009 low, the swing low areas of Oct 2014/Aug 2015 & 50% Fibonacci retracement of entire cyclical uptrend from Mar 2009 low to Oct 2018 all-time high
In our weekly write-ups on the medium-term (1 to 3 weeks) technical outlook on the major stock analysis, we had warned our readers since H2 2018 that the S&P 500 was in the midst of forming a major top at 2540 as the higher beta/growth oriented sectors such as Technology, Industrial, Consumer Discretionary, Semiconductors and the FAANGs had shown deterioration in their respective technical strength while the defensives (Utilities, Consumer Staples & Health Care) continue to outperform the S&P 500.
Right now, the S&P 500 has staged the bearish breakdown with a daily close below the significant 2530 long-term downside trigger level that has coincided with a key economic major event, the Fed FOMC. In addition, with the above-mentioned weakness seen in the technical charts of the S&P Utilities, Consumer Staple and Health care sectors, the next domino to fall is likely these defensive stocks.
Charts are from eSignal & stockcharts.com
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.