Market Recap for Tuesday, October 11, 2016
There was a lot of carnage on Tuesday for sure. Every sector declined, led by a very weak healthcare sector (XLV, -2.51%). Biotechs ($DJUSBT) were primarily responsible for the sector's underperformance as this aggressive part of healthcare tumbled 3.27% in its worst showing since bottoming in June. Of course, this type of selling can create opportunities and Amgen (AMGN) could be one of those. Check out this chart on AMGN as price support approaches:
Biotechs were not alone in their losses. Industrial suppliers ($DJUSDS) and heavy construction ($DJUSHV) lost 3.53% and 3.29%, respectively, in the industrial sector. Both of those industry groups remained within well defined trading ranges, though. That's been the pattern on the benchmark S&P 500 for months - sideways consolidation. Here's a short-term view on what to fear from the S&P 500 and from the Volatility Index ($VIX):
Volatility is clearly back on the rise, but I've highlighted the key VIX level. During the past two bear markets, the VIX soared past 16-17 and did not retreat below that level during the entire bear markets of 2000-2002 and 2007-2009. So while the selling yesterday was painful, it's yet to leave a lasting mark technically. Short-term price support is holding and the VIX has not elevated itself to the point where I'd grow more concerned. A push below 2120 on the S&P 500 and a rise in the VIX back to June levels or above - that's when I'd turn more neutral to bearish.
Pre-Market Action
Thus far this morning, there doesn't seem to be much carryover from Tuesday's throttling by the bears. Dow Jones futures are down 48 points with about 15 minutes to go before a new trading day begins. Asian markets were weak overnight and Europe is down this morning as well.
A couple of transport stocks will be reporting their latest quarterly results after today's close as CSX (railroad) and JB Hunt (JBHT - trucker) will hope to continue the recent winning streak among transportation stocks. Transports ($TRAN) are featured below in Sector/Industry Watch section.
Current Outlook
The S&P 500 topped on August 15th with an all-time high close of 2190. Since then, we've seen selling take this benchmark index back down to 2137 at Tuesday's close. We're not too far from "blue sky territory", which represents the fact that all-time highs have no price resistance worries. So should we be concerned by the big losses yesterday?
Possibly, but not yet. First, we have key short-term price support at 2120. If that price support level fails to hold, then we'd need to re-evaluate for sure. But at this point in time, there's been little "under the surface" damage as key relative ratios have actually been climbing. This suggests money is rotating in a risk-on fashion, typically a bullish development. Look at how previous declines in 2016 have impacted our relative ratios and then compare that to the current environment:
Normally, traders grow nervous and money moves or rotates toward much more defensive areas during pullbacks. We saw that behavior on three separate occasions (red shaded areas) earlier in 2016, but the opposite is occurring right now (green shaded area). Money is turning more aggressive as we near a key price support level (horizontal line) at 2120. For now, I'd expect that level to hold. Of course, nothing is guaranteed in the stock market so if support is lost, we must consider the fact that the longer-term relative ratio performance is much more suspect and a break of short-term price support could quickly escalate into a correction, or possibly even a bear market. That is pure speculation at this point. First, let's see if short-term price support holds.
Sector/Industry Watch
While the S&P 500 has continued to consolidate in a trading range the past several months, the Dow Jones U.S. Transportation Average ($TRAN) has quietly been strengthening as it's gained approximately 15% since late June to challenge its 2016 price high from April. Here's the latest technical view:
In addition to the above absolute performance, transports have been dominating utilities ($TRAN:$UTIL) of late, as reflected by the relative ratio chart provided in the Current Outlook section above.
Historical Tendencies
Since 1950, October is one of seven months that has produced double digit annualized gains on the S&P 500, rising 11.37%.
Key Earnings Reports
(reports after close, estimate provided):
CSX: .45
JBHT: 1.02
Key Economic Reports
FOMC minutes from its September 21st meeting to be released at 2pm EST
Happy trading!
Tom
