Market Recap for Wednesday, July 27, 2016
Crude oil ($WTIC) continues to remain under pressure with its fifth consecutive drop on Wednesday. Crude oil has now fallen nearly 20% since topping at $51.53 per barrel on June 8th. From a technical perspective, it shouldn't really be all that surprising. A potential bottoming reverse head & shoulders pattern appeared to be in the works with the recent drop likely printing the required reverse right shoulder. Check it out:
Weak crude oil prices led energy (XLE, -0.98%) toward the bottom of the sector leaderboard but this space wasn't the worst sector on Wednesday. In fact, both consumer staples (XLP, -1.49%) and utilities (XLU, -1.15%) performed worse as money rotated away from several defensive areas yesterday.
Technology (XLK, +0.83%) was the leader as AAPL's earnings lifted the entire group, especially computer hardware ($DJUSCR). Facebook's (FB) solid results reported after the bell on Wednesday should provide another lift today. Technology is now the leading sector over the past day, week, month and three month periods - a big change from earlier in the year.
There wasn't a huge reaction to the FOMC policy decision on Wednesday. Interest rates were left unchanged as expected. Despite the Fed acknowledging an improving economy, treasury yields actually dropped as is reflected in the Current Outlook section below.
Pre-Market Action
Asian markets were mostly lower overnight and European indices are, for the most part, fractionally lower this morning. The German DAX continues to struggle with overhead resistance from 10400-10500. A breakout there would certainly encourage buyers in the S&P 500, but we haven't seen that breakout yet.
Today is a HUGE day for earnings. Ford (F) has already posted results that have disappointed Wall Street and that's putting some pressure on futures this morning. F is down 8% in pre-market trading and Dow Jones futures were down 21 at last check. After the bell, stalwarts Amazon.com (AMZN) and Alphabet (GOOGL) will be reporting and that should have a huge impact on the NASDAQ's attempt to clear all-time high closing resistance just above 5200.
Current Outlook
The Federal Reserve meeting has come and gone - and not much has changed. The Fed did upgrade its view on the economy and that's leading more market participants to speculate that the next interest rate increase could be as soon as September. The treasury market disagrees. Despite the FOMC announcement on Wednesday, nothing has really changed in terms of the recent downtrend in yields. If the market is building in another rate hike, you wouldn't know it by looking at this chart:
The significance is that the S&P 500 typically follows the lead of the treasury market. When yields fall, so too does the S&P 500 usually. But this has been no usual year as defensive stocks are much higher on a relative basis, leading U.S. equities to all-time highs. Despite all these warning signs, the S&P 500 trudges higher and that's the common denominator of bull markets. They overlook everything and keep moving higher. So until we see a more significant price breakdown and an escalation of volatility, it's likely to be the same ole, same ole.
Sector/Industry Watch
While the S&P 500 has been up roughly 6% year-to-date, the Dow Jones U.S. Medical Equipment index ($DJUSAM) has surged approximately 15%. Based on the current technical picture, look for the relative strength to continue. Take a look:
Price action, relative strength and momentum are all climbing. Perhaps the biggest issue is that the DJUSAM is very overbought on this weekly chart with RSI and stochastic at 76 and 91, respectively. The 20 week EMA is at 1070 and would be a solid reward to risk entry point into the group.
Historical Tendencies
Since 1971, here are the annualized returns for the month of August:
S&P 500: -1.18%
NASDAQ: +0.85%
August is the 2nd worst calendar month of the year in terms of annualized returns on both the S&P 500 and NASDAQ. Only September's returns are more bearish.
Key Earnings Reports
(actual vs. estimate):
ALXN: .93 vs .91
BMY: .69 vs .67
CELG: 1.28 vs 1.24
CL: .70 vs .69
CME: 1.14 vs 1.11
COP: (.79) vs (.62)
DOW: .95 vs .85
F: .52 vs .60
GPN: .73 vs .68
HOG: 1.55 vs 1.53
IP: .92 vs .84
LLL: 1.88 vs 1.68
MA: .96 vs .90
RTN: 1.75 vs 1.70
(reports after close, estimate provided):
AMZN: 1.14
BIDU: .94
EXPE: .44
GOOGL: 6.47
KLAC: 1.43
MTD: 3.13
STMP: .91
SYNA: .09
WYNN: .97
Key Economic Reports
Initial jobless claims released at 8:30am EST: 266,000 (actual) vs. 264,000 (estimate)
Happy trading!
Tom
