Finding a Bottom
Featuring Mark Newton
Published on: June 4th, 2019 • Duration: 15 minutesMark Newton, CMT, president and founder of Newton Advisors, examines the current risk-off environment across markets and analyzes its potential bottom. He highlights sentiment and momentum indicators in both equities and bonds, and discusses how investors should position themselves in the months ahead, in this interview with Justine Underhill. Filmed on June 3, 2019.
JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today we're sitting down with Mark Newton of Newton Advisors. Great to have you back.
MARK NEWTON: Thank you.
JUSTINE UNDERHILL: So you've seen bond yields plunge in the markets. We've seen stocks, they're well off their highs. Some sectors, like semis, we've seen them nosedive. What do you see going on in the markets right now, and how long do you think this carnage will last?
MARK NEWTON: We've definitely seen a pickup in volatility obviously over the last month. It has been a sell in May. I just don't know if you really want to go away at this point. You know, we have one of the best quarters and the best four-month period we've had in over 20 years. So momentum was certainly very sharply positive for quite some time, and it has reversed very dramatically.
Many people pin that on the tariffs and ongoing trade tension. From my perspective, technically, it's interesting because we saw crude oil along with treasury yields and equities almost all peak out at the same time, or in the latter part of April. And a lot of this happened before the tension started in May.
So interestingly enough, we saw technology start to roll over, Treasury yields started to move down very quickly, and stocks followed suit. Typically, when these asset classes tend to correlate very positively, all at the same time, it really pays to watch all of them to see for evidence that they could be bottoming out.
Now as we enter the month of June, interestingly enough, we're seeing sentiment start to get very bearish and stocks are really not all that much below their all time highs. They're about 6.5% off all time high territory. So you know, yes, technically momentum is certainly negative it's bearish. Trends are certainly down from the early part of May.
However, the combination, in my view, of near-term oversold conditions, along with bearish sentiment, it makes sense to consider buying into this dip thinking that we should, in fact, start to turn higher. Everybody I talked to is certainly very concerned about what's happening now that tariffs are being extended to other trade partners, and not just China.
I'm thinking this could begin a prolonged trade war. However, near-term, that seems to have been factored in. We see things like AII sentiment, which is completely inverted now. So there's almost a 15% percentage now of more bears than bulls. That's a concern to me.
For the first time last week, we saw VIX backwardation, where's spot VIX is higher than both July and also September among futures and the VIX. And so that is a short-term sign of concern. So that's just a couple of things. Daily sentiment index has gotten almost down to single digits. So pessimism is certainly on the rise.
That's one part of the equation. The second is that near-term oversold conditions are now present we only see about 15% of all stocks above their 10-day moving average, traditional technical metrics such as RSI, the Relative Strength Index, is now back to right near where we were in the middle part of May.
However S&P is now 60 points lower than that. So it's actually-- momentum has actually held up. The final piece of the equation is the technology, after it's really been taken out to the woodshed, is actually starting to act relatively less bad in the last week. Technology was the third, what we call less worst sector.
So many sectors were down last week, and have been really down. But technology is based on that movement in semiconductors, and trying to stabilize and rally, are actually starting to show some evidence of minor stabilization. The bottom line is that when I look across the spectrum, crude oil, treasury yields, and equities are all getting down to levels that I think are attractive to play for a bounce in the next two to three months.
So I'm pinpointing the area between June 3 and June 13 for a bottom in all three. I think Treasury yields bottom. I think crude oil bottoms. I think equities bottom. And we can rally up into early part of September without much trouble.
JUSTINE UNDERHILL: What do you see the relationship going forward between Treasury yields and stocks. Treasury yields have plunged a lot more than stocks have over the past few weeks.
MARK NEWTON: No, you're absolutely right. And that degree of correlation was certainly more prevalent last year. This year, yields have gone straight down. Stocks really had not. Now, stocks have seemed to have caught on and are pulling back sharply. The Treasury picture is interesting, because the Fed obviously did a complete 180 on their stance and going from almost a 50% chance of a hike of 50 bips now to a cut of 50 bips in a very short period of time.
So the bond market has lost a lot of conviction about the economy growing. And my thinking is a lot of that at this point is baked in. I'm looking at yields down at anywhere from 2% to 2.06% as being an excellent time to consider selling treasuries, and considering going the other way. I think that yields could stage an above average bounce.
For S&P, you look at levels like 2,722 up to 35 right there were equities were at the start of this week, as being an area that's likely going to provide some cushion on the downside for equities. And crude oil, for the same notion, down near $53, $52, $53 is a decent area for crude to start to bounce. So there shouldn't necessarily always be this degree of correlation between treasury yields and stocks.
I think lately we've started to see that pick up a bit as yields pull back sharply. It was more the yield curve pulling back that really caused or coincided with stocks pulling back dramatically. And now, the yield curve, the two-year has dropped down to 190. Well below 2%.
And we've seen stocks start to, at least, show a few signs that I look at technically as being at levels where they can stabilize and rally. So we'll see what to make of it. But it seems like a really good risk-reward versus thinking you just, you know, head for the hills at a time when sentiment has gotten this negative, and really equities have gotten pretty oversold.
JUSTINE UNDERHILL: What are the key things that you're looking at specifically in terms of equities, and making sure that they've stabilized? And is earnings and potential comps that are going to be tough in the next few quarters part of that?
MARK NEWTON: Yeah. That's an interesting-- I mean, that's a great point. I don't look it necessarily at earnings and comps. I think most of those had come in online, pretty much in line of late. We did see some downward revisions, I think, to many earnings, which coincided right with things starting to pullback.
But technically speaking, I want to see signs of S&P getting back over 2,800. That was a really important level for stocks that was hit back in the middle part of May. So that's the real key level for investors to focus on, where stocks start to move above that is a much higher chance that we can start a more meaningful rally back to the upside.
For now, granted, you're trying to buy this dip within a downtrend. And so you have to lean on measures like sentiment, seasonality thinking, oversold conditions as being a reason why you'd want to take a stab at really buying into this. I'm willing to take a stand versus a couple months ago. It was right to be more defensive and look at buying implied volatility.
And now I think that it's just tough to see equities go straight down, when we haven't really seen all that much weakness off the highs. A lot of it's about combination of sentiment with just near-term oversold conditions with an equity market that largely is still in OK shape. We haven't seen that much damage to really turn real negative on an intermediate term basis.
JUSTINE UNDERHILL: OK so let's review some of the levels that you're looking at. Would you wait to get into the S&P until it hits that 2,800 level? And then how high do you see it potentially going?
MARK NEWTON: For intermediate-term investors, that might be the proper thing. I don't necessarily want to give up 60 or 70 points, so I'm willing to buy it at current levels, anywhere between 2,720 and 2,740. But I think current levels makes sense. You can certainly add to longs over 2,800.
And I think my upside target is between 3,040 and 3,070 between now and the early part of September. So I do think that S&P can get back to new highs. However, I would really use that as a chance to lighten up heading into the fall. So I'm very much-- I'm playing this from a tactical standpoint.
I'm not saying the market's going to continue going up for the rest of the year, or next year. I do think there's been some meaningful damage done based on going from hugely overbought conditions back last January, 2018. Longer-term momentum has started to roll over, and that that is a concern for me next year. However, it's more of a tactical area to take a stand.
JUSTINE UNDERHILL: At what point would you back out or consider getting out of the S&P 500?
MARK NEWTON: So if S&P does get down under 2,700, that would certainly change things in the near-term and suggests that if we're going to pull back to right near 2,650. That is also an important level. But for the purposes of stopping out longs, one would want to really exit under 2,700.
JUSTINE UNDERHILL: And what levels are you looking at for treasuries?
MARK NEWTON: So it's really right near 2% is going to be very key, not only psychologically, but also it lines up with the few other technical factors. So I would really be a seller of treasuries into that 2.01% to 2.06% yield area, thinking that yields stop there and turn back higher. If we get under 2%, then you would obviously stop that.
JUSTINE UNDERHILL: How high do you see yields going?
MARK NEWTON: Well, I think probably initially we could move up at least 20 or 30 basis points from there. So it's not a big move. A lot needs to be done. We need to get up over 240 to have conviction that yields can start to trend higher. So for me right now, it's about trying to really buy a dip in yield. Or in this case, sell treasuries as yields, get that low.
Over 240, you can make a more meaningful case for a larger yield rally. That would be a break out of the entire downtrend, very similar to what I was speaking up on the S&P getting up over 2,800 structurally would be important.
JUSTINE UNDERHILL: And would this be the same September timeframe?
MARK NEWTON: I do believe that's possible, just because they've trended very similar. Yeah, so if we can start to see yields make a stand. Right now, I have a little bit more conviction that equities are closer than treasury yields.
But it's unlikely that we're going to see one take off and see the other just sit there, just given the degree that they have all moved lower together. So it's going to be important to watch all three.
JUSTINE UNDERHILL: What do you see as the biggest risk to this overall? Would you say the trade war is a big issue here? Are there other factors that you're watching as well?
MARK NEWTON: Yeah, it's really difficult to really quantify how all this can play out, and how much it's affected things already. We've seen the trade tension. Really, it's been ongoing since the middle part of last year. So equities have largely ignored a lot of this. We obviously had the October to December selloff.
But then we had a very sharp rally while a lot of this tension was ongoing. So to pin this all on the trade war is really tough. A lot of these have to do with just cycles and sentiment. I do think if we continue to ratchet up pressure, it could become an even bigger deal. Not only extending tariffs to Mexico, if we turn towards Europe next, and that the administration wants to seek out that, that would certainly cause the markets some discomfort.
I personally think that as the next month or two, something really is going to have to be done if China and the US can't come together. We have meetings obviously set for the back half of June. If nothing happens by the middle part of July, I think you might see Trump soften his stance a bit, knowing that at least the stock market is not comfortable with what's happening, and the administration has obviously the goal of being re-elected next year.
So in election years, you can't see things that cause potentially the economy to go off the cliff. And so it's one thing to say one thing, and to do another behind closed doors. But certainly the perception for most companies is that they would start to shift resources elsewhere, because of the degree of uncertainty. So it's more about that uncertainty that in my mind, is a bigger concern for the economy, versus right now the data still is arguably OK.
Even though we've taken down GDP. So we need to do something to restore that confidence right now. So consumer confidence at very high levels, for business, I think there's an understandable cloud, because of the trade tension.
JUSTINE UNDERHILL: All right. Can you summarize your trade thesis in 30 seconds?
MARK NEWTON: Yeah, sure. So I like taking a stab at buying into S&P on this recent pullback. I think the first leg down that we've seen since the beginning of May is nearly complete. Makes sense to buy S&P between 2,720 to 2,740.
And then the next week or two, and thinking that we're going to start to have a more meaningful rebound. For Treasury yields, I like selling treasuries into 2% at the 2.06%, thinking that yields also slow down and start to turn higher.
JUSTINE UNDERHILL: All right, Mark. Thank you so much.
MARK NEWTON: Thanks, Justine. Great to be back. So Mark is bullish on equities, specifically he likes buying the S&P 500 between 2,720 and 2,740 with the stop loss at 2,700, and the target between 3,040 and 3,070 over the next four months. Mark also suggests selling treasuries.
Specifically, he likes shorting the US 10 year Treasury between 2.01% and 2.06%. His stop loss is below 2% with a target near 2.40% over the next four months. Just remember, this is a trade idea and not investment advice. You should do your own research, consider your risk tolerance, and invest accordingly. For Real Vision, I'm Justine Underhill.