Market Recap for Monday, October 24, 2016
Technology (XLK, +0.97%) led the U.S. stock market advance on Monday as mobile telecommunications ($DJUSWC) and software ($DJUSSW) were the primary reasons for the bulls' assault to open what normally is a very bearish week historically. Technically, however, price action has been bullish and for now at least the bulls are following the bullish technical conditions. Both of the technology industry groups above made significant price breakouts yesterday and that's likely to lead to further strength down the road, albeit with profit taking along the way. First, check out the DJUSWC:
The DJUSWC had been consolidating the past few months....until T-Mobile (TMUS) delivered a blowout earnings report on Monday prior to the open. Clearly, investors were thrilled with the report and quickly sent the mobile telecommunications index to fresh highs. The MACD is just now turning up off its centerline support area so I'd look for more strength from this group in the days and weeks ahead, more good news for a technology sector that's already been the best performing sector over the past three and six month periods. Software added to the bullishness in the group and is being featured below in the Sector/Industry Watch section below.
Seven of the nine sectors advanced on Monday with healthcare (XLV, -0.19%) and energy (XLE, -0.30%) the only two failing to post a gain. Despite the overall weakness in healthcare, medical equipment stocks ($DJUSAM) managed a slight gain and remains in a bullish pattern as shown below:
Off of its recent uptrend, it's sideways consolidating which is a bullish continuation pattern after an advance. A breakout above 1162 on a closing basis would confirm it. Support near 1100 represents the best reward to risk entry into the group.
Pre-Market Action
U.S. futures are up slightly on the heels of fractional gains throughout most regions of the globe overnight and this morning. We've seen a couple of nice earnings beats this morning from the likes of Caterpillar (CAT) and DuPont (DD), although most market participants are awaiting the truly big report that can drive prices, especially on the tech-laden NASDAQ, as Apple (AAPL) will report its latest quarterly results later today after the bell.
The 10 year treasury yield ($TNX) is inching higher, back to 1.77% this morning in early bond market action. A breakout above 1.80% would signal a shift in mentality away from the defensive treasury market. That could set up a nice advance in equities later in the year.
Current Outlook
It's difficult to look at much else in terms of market outlook than Apple (AAPL) on its earnings day. After today's close, AAPL will report its latest results and if current technical conditions are any indication, it's likely to be a very good one. Here's the current technical view of AAPL:
AAPL broke out of its descending triangle during the third quarter and the weekly MACD has been strengthening, pointing skyward, as an indication of its bullish price momentum. The price action in 2016 has been very similar to what we saw in 2012-2013 after AAPL broke a significant downtrend. In both cases, we've seen a trendline breakout, a back test (green arrows) and another breakout. During the fourth quarter, I expect we'll see AAPL test price resistance near 130 while the rising 20 week EMA should offer up support just as it did during pullbacks from 2013-2015. Stay tuned for this afternoon's big report.
Sector/Industry Watch
The Dow Jones U.S. Software Index ($DJUSSW) has been lifted recently by Microsoft's (MSFT) better-than-expected earnings report, which was released last Thursday after the closing bell. The follow through yesterday triggered yet another breakout in this industry group. The DJUSSW has doubled since the beginning of 2012. Here's a look at the most recent breakout:
Like mobile telecom shown earlier, software consolidated for a few months and is just now beginning to see the acceleration of price momentum. Look for the rising 20 day EMA to offer up great support, along with gap and price support at 1300 and 1310, respectively, as the MACD keeps pushing higher.
Historical Tendencies
We've yet to see any of the historical weakness that is typical during this period in October. Certainly, AAPL's earnings report could provide that with an earnings miss or downward guidance, neither of which I'm anticipating. The good news is that once this period (October 22-27) ends, bullish historical behavior is normally felt. It's as if the faucet is turned from cold to hot. Check out the annualized returns on the S&P 500 (since 1950) for each of these two diametrically opposed periods:
October 22-27: -42.44%
October 28-November 6: +69.76%
Others have written in the past about the market's tendency to find bottoms in late October and I'd say the above annualized returns sum it up as well as anything. October 28th (this Friday) seems to be the day when the bulls arrive.
Key Earnings Reports
(actual vs. estimate):
AMTD: .35 vs .38
BAX: .56 vs .44
BHI: (.15) vs. (.43)
CAT: .85 vs .75
DD: .34 vs .21
GLW: .42 vs .38
GM: 1.72 vs 1.48
LLY: .88 vs .96
LMT: 3.61 vs 2.86
MMM: 2.15 vs 2.14
MRK: 1.07 vs .98
NLSN: .74 vs .71
NVS: 1.23 vs 1.18
PG: 1.03 vs .98
S: (.04) vs (.07)
SHW: 4.23 vs 4.34
T: .74 vs .74
UA: .29 vs .25
UTX: 1.76 vs 1.68
VLO: 1.24 vs .91
(reports after close, estimate provided):
AAPL: 1.65
AKAM: .48
BXP: 1.43
CB: 2.64
CMG: 1.63
CNI: .92
COF: 1.94
DFS: 1.48
ESRX: 1.74
EW: .68
Key Economic Reports
August FHFA home price index to be released at 9:00am EST: +0.5% (estimate)
August Case-Shiller index to be released at 9:00am EST: +0.2% (estimate)
October consumer confidence to be released at 10:00am EST: 101.0
Happy trading!
Tom
