Market Recap for December 23, 2015
All nine sectors finished higher on Wednesday, led by energy (XLE) which gained a very impressive 4.35%. Materials (XLB) also showed outsized gains of 2.36%. Aggressive sectors like technology (XLK) and consumer discretionary (XLY) rose but underperformed. This rally has been marked by the lack of participation of aggressive areas on a relative basis. This development is of serious concern, especially if our major indices continue to rally and the underpinnings of the rally don't change. We've seen three days of rally thus far this week, which is not unusual. We generally see equity strength this time of year. What's a bit alarming, however, is the fact that the XLY:XLP ratio declines every day, about to top off what is likely to become the ratio's worst month in a long, long time. Put another way, money is rotating towards DEFENSE in the consumer space. Not good. Take a look:
Since mid-November, the S&P 500 has advanced 1%-2%, but check out what's been developing in the consumer space. Money is rotating away from the more aggressive discretionary area (XLY) and toward defensive staples (XLP). Keep in mind this is a very short-term chart and the longer-term looks much better. Still, if this rally in our overall market continues without support from this ratio, I'll grow much more cautious. Another key ratio, $TRAN:$UTIL (transportation vs. utilities), is also not faring very well in the near-term. We need to monitor both of these ratios closely as they tell a story about the intent of traders.
Pre-Market Action
Expect light action and little volatility. U.S. markets are closed on Friday due to the Christmas holiday. The German DAX is closed today. Overnight, there was mixed action in Asia and there's mixed action this morning in Europe. Initial jobless claims were reported this morning slightly better than expected, 267,000 vs. 270,000. While the S&P 500 continued rising on Wednesday, the 10 year treasury yield ($TNX) did not really participate to the upside after early strength. This morning, the TNX is lower so that would favor a bit of profit taking on U.S. equities. Keep in mind, however, that historical tendencies favor the bulls through year end. I'll call it a standoff and move on to next week.
Current Outlook
Over the past month the S&P 500 has been quite volatile, but the net result has been a relatively flat period. Looking at the one month sector performance is quite revealing, though. Consumer staples (+3.61%). utilities (+2.33%) and healthcare (+1.89%) are all defensive sectors and are the only three sectors showing positive one month results. Despite a dollar that's shown recent weakness off its prior uptrend, materials (-2.30%) and energy (-6.96%) have performed very poorly. That leaves our four aggressive groups - consumer discretionary (-3.08%), industrials (-2.33%), financials (-1.59%) and technology (-1.03%) - and they are ALL trailing all of our defensive groups. I can live with this relative weakness during S&P 500 consolidation, but not during periods of strength and breakouts. This week the S&P 500 is rallying, but aggressive sectors are making little headway on a relative basis. In fact, industrials are really the only aggressive sector showing relative life and that's mostly due to renewed buying in railroads ($DJUSRR). Railroads have shown awful relative strength vs. its transport peers and has tons of work to do technically on an absolute basis as well. Check this out:
Railroads are important because if our domestic economy is improving as the Fed would have us believe, more goods will need to be shipped. Railroads should thrive and traders will anticipate this economic strength by buying railroads. So the awful performance and relative performance is a head scratcher. If you're a bull in 2016, you want to see significant improvement on this chart.
Sector/Industry Watch
The energy sector (XLE) lost 65 support in early December with little price support until August lows were reached. That's exactly where the XLE dropped to before rebounding off Monday's low. The XLE is now up against 20 day EMA resistance and then will face price resistance back near 65-66. Check out the chart:
The green arrows mark double bottom price support, which now becomes a crucial level for the bulls to hold. The red arrows, in the meantime, mark the two key levels of short-term price resistance that will be faced. Volume has been HUGE in the XLE so big bets are being placed. Time will tell who wins - those following the downtrend or those seeking value.
Historical Tendencies
December is one of the strongest months of the year for equity performance. Despite the gains the past three trading sessions, though, the S&P 500 still remains lower by 16 points, or roughly 0.8%. Since 1950, December has produced gains on the S&P 500 49 times in the past 65 years, including 6 of the past 7. 2014 snapped a 6 year winning streak as the S&P 500 fell 0.4% in 2014.
Key Earnings Reports
None
Key Economic Reports
Initial jobless claims released at 8:30am EST: 267,000 (actual) vs. 270,000 (estimate)
Merry Christmas, happy holidays and happy trading!
Tom
