Market Recap for Friday, July 15, 2016
It was another day of bifurcation on Friday as the Dow Jones and Russell 2000 were able to eke out gains while both the S&P 500 and NASDAQ finished in negative territory. Similar bifurcation was found among sectors with materials (XLB, +0.35%) and utilities (XLU, +0.29%) leading while consumer discretionary (XLY, -0.44%) and financials (XLF, -0.17%) trailed. Biotechs ($DJUSBT) had a nice day in the healthcare space, but have still been unable to break the downtrend line on its longer-term weekly chart as reflected below:
A close above 1760 would break the downtrend line and also clear recent highs. That would encourage more technical buyers into the group and from there I'd expect relative outperformance from the group. Until that occurs, however, I'd respect the current downtrend.
Pre-Market Action
Global markets are hovering mostly near the breakeven level today. Overnight, the Shanghai Composite ($SSEC) fell slightly while both the Tokyo Nikkei ($NIKK) and the Hang Seng ($HSI) rallied somewhat. In Europe this morning, the London FTSE ($FTSE) is higher and remains in favor, while both the German DAX ($DAX) and French CAC 40 ($CAC) are under slight pressure.
After hitting 1.60%, the 10 year treasury yield ($TNX) is down to 1.56% this morning and that could weigh on the overall equity market and especially groups that have been rallying on the higher yield like key financials such as banks. Fundamental data has been strong for banks thus far, however, as JP Morgan Chase (JPM) reported better than expected earnings last week and Bank of America (BAC) has done the same this morning.
Current Outlook
Volatility ($VIX) has been under pressure and that's very good news for bulls everywhere. It's difficult for selling to gain any traction with a declining VIX and since Brexit, we've seen a consistently falling VIX. We have reached a level where the VIX has bounced over the past couple years and given the 60 minute negative divergences present and a historically weak period beginning today. First, take a look at the negative divergence on the Russell 2000:
The S&P 500 has had a very nice run since late June and made the breakout to an all-time closing high, but we're battling a very overbought RSI and slowing momentum on the 60 hour chart. Perhaps a bigger problem is the VIX hitting a key support level over the past several months. A bouncing VIX would likely coincide with at least a brief period of profit taking. Here's the VIX hitting support:
It's hard to imagine the S&P 500 falling apart quickly from this low VIX level, but a bit of profit taking in equities could lead to at least a short-term bounce in the VIX to the 15-16 level. From a bear's perspective, that would be a start to perhaps deeper selling. We'll see.
Sector/Industry Watch
The Dow Jones U.S. Software Index ($DJUSSW) is once again challenging its critical 1250 resistance level. If you're looking for possible short setups, this is an area to look as you can cover quickly if the group breaks out. Here's the current view:
The bulls have been rejected repeatedly at the 1250 level. So if you're convinced that the poor sector rotation, summer months, short-term overbought conditions, etc, will result in a period of selling, software would seem like a reasonable area to consider shorting. A breakout above 1250 should be respected, however, especially given that strong MACD.
Monday Setups
I am now providing setups each Monday that I'll discuss in much more detail during my 1pm EST "Trading Places LIVE" webinar this afternoon. You'll need to be a current StockCharts member to access this webinar. Here's a description of the various membership levels and how you can become a member. Keep in mind that you can try it out for 10 days for FREE!
Now onto one setup that I'll be discussing later:
The negative divergence is one short-term problem for entry here, but do you see another? (Hint: It's another momentum issue). Join me this afternoon at 1pm EST and I'll discuss the other BIG problem here. The good news is I like this chart, I just wouldn't enter here because there's too much short-term risk.
Historical Tendencies
We have entered one of the worst historical weeks of the year. Here are the annualized returns on the NASDAQ (since 1971) for each of the calendar days this week:
July 18 (today): -72.87%
July 19 (tomorrow): -20.18%
July 20 (Wednesday): -9.72%
July 21 (Thursday): -75.97%
July 22 (Friday): -12.18%
July 23rd falls on a Saturday this year, but the 23rd has produced annualized returns of -103.65%. History is NOT on the side of the bulls this week.
Key Earnings Reports
(actual vs. estimate):
BAC: .36 vs .34
HAS: .41 vs .39
JBHT: .92 vs .97
SCHW: .30 vs .30
(reports after close, estimate provided):
EMC: .33
IBM: 2.87
NFLX: .02
VMW: .69
YHOO: .02
Key Economic Reports
July housing market index to be released at 10:00am EST: 61 (estimate)
Happy trading!
Tom
