Market Recap for Thursday, August 25, 2016
For the first time since late June, the S&P 500 closed beneath its 20 day EMA. We've seen plenty of closes near its 20 day EMA, but yesterday marked the first one beneath. Normally that's a pretty big deal with a negative divergence in play, but we'll have to see how this plays out today. Traders will have the weekend to mull it over if it happens for a second day in a row.
Financials (XLF) have been holding up well as banks ($DJUSBK) continue their climb to a potential breakout. The following chart reflects how close the group currently is to breaking out:
The last two tops just above 315 came with RSIs at or approaching 70. On Thursday, the RSI finished at 67.
Pre-Market Action
Because this report is being published later than normal, the stock market is already open with the Dow Jones and S&P 500 already higher by 111 points and 14 points, respectively. Fed Chair Janet Yellen is speaking and the stock market is rising in response to her comments that prospects for higher interest rates is strengthening. While some may view higher interest rates as a roadblock to further economic growth, the majority view the threat of higher rates as a sign that the Fed believes the U.S. economy is gathering steam.
Current Outlook
Despite early gains in Friday action, the Volatility Index ($VIX) remained high as the stock market remains on high alert for further possible weakness. But before any of that weakness can occur, key short-term price support will need to be broken. The following chart shows clearly what the bears face today and in the days ahead:
This chart highlights the fact that the S&P 500 has consolidated in a fairly tight 25 point range from 2168-2193 for most of August. Action in the treasury market generally provides us clues about the possible direction of U.S. equities. Currently, the 10 year treasury yield ($TNX) is threatening once again a breakout of key 1.60% yield resistance. In the short-term, there's typically a tight positive correlation between the direction of the TNX and the direction of the S&P 500. So keep an eye on this chart:
We are squeezing in a narrowing 1.55%-1.60% range with a breakout above 1.60% on a closing basis a likely trigger for bullish S&P 500 action ahead.
Sector/Industry Watch
In the consumer discretionary space (XLY), the Dow Jones U.S. Restaurants & Bars Index ($DJUSRU) had been very weak after nearly breaking out in late July. August has not been kind, however, and the DJUSRU is now threatening to close at its August high:
With its RSI at 54 and its stochastic below 80, this group still has plenty of room to run and I'd for continuing strength. One component - Starbucks (SBUX) - has been on a one week tear and has been leading the group higher.
Historical Tendencies
The end of calendar months is usually very bullish but the NASDAQ shows a mixed picture with annualized returns as follows for each of the remaining days in August:
August 26th: +47.23%
August 27th: +2.42%
August 28th: -33.93%
August 29th: +63.81%
August 30th: -58.84%
August 31st: +10.27%
Key Earnings Reports
(actual vs. estimate):
BIG: .52 vs .45
Key Economic Reports
Q2 GDP 2nd estimate released at 8:30am EST: +1.1% (actual) vs. +1.1% (estimate)
July wholesale trade released at 8:30am EST: +0.0% (actual) vs. +0.3% (prior)
August consumer sentiment to be released at 10:00am EST: 90.7 (estimate)
Happy trading!
Tom
