Market Recap for Friday, October 21, 2016
Consumer stocks were back in charge on Friday as discretionary (XLY, +0.80%) and staples (XLP, +0.54%) were the best and second best performing sectors. Restaurants & bars ($DJUSRU) were among discretionary leaders and just in time too. The DJUSRU had fallen back and was testing pre-Brexit price lows and needed buyers to return - and they did on Friday. Check out the rally off price support:
Note that the DJUSRU topped in late July just as the S&P 500 was nearing its all-time high. Money has rotated away from this industry group since that time, but the group did manage to bounce on Friday, where price support suggested technically it was an important pivot area. The move back above the declining 20 day EMA on increasing volume was technically bullish. It also made sense to see the group rally on options expiration day as there were many in-the-money puts in play after the strong three month decline.
Perhaps the best news regarding the performance of consumer discretionary is how the group has been performing relative to its staples counterparts. The XLY is the aggressive part of consumer stocks and should be rising relative to the XLP. Why? Because it's telling sign that traders are in a "risk on" mindset, which typically confirms that a rally is sustainable. The S&P 500 has been consolidating after a strong run over the summer and the XLY:XLP ratio has been climbing during this period. But it needs to continue as it nears an intermediate-term relative resistance level. Check it out:
A breakout in this relative ratio that coincides with another S&P 500 breakout would make me much more bullish the short-term outlook.
Pre-Market Action
U.S. futures are strong this morning to open a new week. Dow Jones futures are higher by 85 points with 45 minutes to go to the open. Global markets are higher, Microsoft (MSFT) set a new all-time closing price high on Friday and AT&T announced a potential buyout of Time Warner (TWX).
The 10 year treasury yield ($TNX) is at key yield support as its rising 20 day EMA is at 1.71%. Those in the rate hike camp should expect to see the selling of treasuries and a further rise in the TNX in the days and weeks ahead.
Current Outlook
In the words of the famous Yogi Berra, "it's like deja vu all over again". I'm trying to find new and meaningful clues as to where the U.S. stock market is heading, but little seems to change from day to day. Some of the "beneath the surface" signals point to a potential top here, but the longer-term charts of our major indices are quite bullish, consolidating in a continuation pattern that followed a breakout of a bullish inverse head & shoulders pattern. Continuation patterns generally break in the direction of the prior trend - and that's higher. As a reminder, let's look at a long-term chart of the S&P 500:
There are two sides to every coin and certainly two lines of thinking that relate to the stock market. There's a constant debate on both sides of the action. Most of my price analysis points to higher prices. There's an inverse head & shoulders pattern that follows a solid uptrend in 2013 and 2014. That "measurement" on the July breakout points to 2375-2400 in time. The most recent consolidation from 2120-2190 has occurred after that breakout and is normal behavior - so long as price support at 2120 and neckline support closer to 2100 holds.
The bearish argument suggests that this rally is running out of steam as evidenced by the weekly MACD above that is now falling rapidly. If the S&P 500 does to push to new highs, it's almost certain to do so with a lower MACD reading - a negative divergence. These types of indications, in my experience, tend to lead to further weakness to "reset" the MACD at its zero line while prices tend to fall to test rising 50 period SMAs. That could potentially result in a test of neckline support closer to 2100 as the S&P 500's rising 50 week SMA approaches that level as well.
Sector/Industry Watch
The healthcare sector (XLV, -0.83%) was the weakest sector on Friday and its relative weakness vs. the S&P 500 doesn't appear to have reached its bottom just yet. Below shows the current technical weakness of the XLV, together with its inability to keep up with the benchmark S&P 500:
The overall 2016 relative downtrend in healthcare continues. The short-term relative uptrend broke at the beginning of August and the XLV has been in trouble ever since. It looks to me that the underperformance will likely continue until the XLV hits 68 support and the March relative lows are tested. At that point, areas within healthcare might make sense from a long perspective. Short-term oversold bounces will most likely fail at 20 day EMA tests (red arrows).
Historical Tendencies
Last week I discussed the upcoming annualized returns for the most bearish week historically for the S&P 500. This week is also the worst historically for the NASDAQ. Check out the annualized returns by day from today through Thursday (October 27th):
October 24th (today): -62.22%
October 25th (tomorrow): -75.45%
October 26th (Wednesday): -75.60%
October 27th (Thursday): -94.81%
The good news historically is that once October 27th is behind us, all of our major indices turn very bullish as we wrap up October and head into November.
Key Earnings Reports
(actual vs. estimate):
KMB: 1.52 vs 1.54
TMUS: .27 vs .22
VFC: 1.14 vs 1.15
(reports after close, estimate provided):
AVB: 2.12
V: .73
Key Economic Reports
October PMI manufacturing index to be released at 9:45am EST: 51.2 (estimate)
Happy trading!
Tom
