Market Recap for Thursday, October 7, 2016
It was mostly a flat day, although basic materials (XLB, +0.82%) managed to produce a stronger gain on a relative basis. Paper, aluminum and commodity chemicals were the three industry groups helping to lead the materials sector. While commodity chemicals ($DJUSCC) have been the worst performing industry group in materials over the past six months, the more recent periods (weekly, monthly, three months) have shown that the DJUSCC has begun to lead the group. Here's a chart that reflects the improving technical conditions of the DJUSCC:
A break above 400 would clearly be the next technical positive, but the DJUSCC:XLB ratio at the bottom of the chart shows that money within the sector has been rotating very bullishly towards the DJUSCC. So any short-term selling would likely provide opportunities within the group.
Once again, the only weakness felt was in defensive sectors. Healthcare (XLV, -0.37%) and utilities (XLU, -0.02%) were the only two sectors that finished trading on Thursday in negative territory. All of our major indices finished close to the flat line as most of the action was one big collective yawn as traders awaited the government nonfarm payrolls report for September (released this morning at 8:30am EST).
Pre-Market Action
Well......jobs came in slightly below expectations, likely holding the Fed at bay once again. Unfortunately, that uncertainty simply won't allow our major indices to make a definitive break in one direction or the other and this morning's futures reflect that. At last check, Dow Jones futures are up 14 points while both the S&P 500 and NASDAQ look to open with fractional losses.
Current Outlook
The dollar ($USD) is in a very bullish longer-term pattern as it has consolidated for months since its parabolic rise occurred in late 2014 to early 2015. That surge is what sent gold ($GOLD) and gold stocks reeling. So as long as the greenback remains in a bullish pattern, I'd avoid gold. Yes, it's been in a short-term uptrend, but the longer-term view, in my opinion, remains quite bearish. Take a look at this relationship below:
That sideways consolidation following the uptrend is technically a bull flag pattern, which typically breaks to the upside. Despite the recent strength in gold, it has barely outperformed the S&P 500 and the longer-term relative underperformance remains intact as far as I'm concerned. Unless the dollar loses support in the 92-93 range, I would look for the prior downtrend in gold to resume.
Sector/Industry Watch
Railroads ($DJUSRR) have been one of the best performing industry groups in 2016 and transportation stocks ($TRAN) have been gaining relative to utilities, making this area of the market much more attractive. Below is the current technical outlook for the DJUSRR on a longer-term weekly basis:
A bottoming reverse head & shoulders pattern was broken in early summer and every pullback has held the rising 20 week EMA. The weekly MACD shows that momentum remains very strong and volume trends have become much more positive. The measurement on this pattern is close to 1500 so we could see railroads leading the market for quite some time.
Historical Tendencies
October has been the best performing calendar month on the S&P 500 over the past two decades, producing average monthly gains of 2.1% over this period.
Key Earnings Reports
None
Key Economic Reports
September nonfarm payrolls released at 8:30am EST: 156,000 (actual) vs. 168,000 (estimate)
September nonfarm private payrolls released at 8:30am EST: 167,000 (actual) vs. 170,000 (estimate)
September unemployment rate released at 8:30am EST: 5.0% (actual) vs. 4.9% (estimate)
September average hours released at 8:30am EST: +0.2% (actual) vs. +0.3% (estimate)
Happy trading!
Tom
