Market Recap for Thursday, January 12, 2017
Healthcare (XLV, +0.10%) and utilities (XLU, +0.08%) finished in positive territory and provided sector leadership on Thursday, but the remaining sectors and all of our major indices finished the day in negative territory. Financial stocks (XLF, -0.85%) performed worst as aggressive components like banks ($DJUSBK) and life insurance ($DJUSIL) struggled while the safer REIT stocks provided the only strength in the sector.
Railroads ($DJUSRR) managed to show strength yesterday and are on the verge of a key breakout above 1400. Check it out:
The pattern is bullish and the DJUSRR looks to break out in the very near-term. Railroad performance also is a signal of potential economic strength in the months ahead.
Pre-Market Action
The Dow Jones is trying to hold onto slight gains in early trading today as bank earnings are rolling in ahead of estimates, but with December retail sales that fell short of expectations. Currently, Dow Jones futures are higher by just 12 points.
Asian markets were mostly higher overnight and European markets are also trading higher with the German DAX rebounding off key support close to 11500.
Current Outlook
Today will be a very, very interesting day for banks. On the back of higher treasury yields and less regulation, the Dow Jones U.S. Banks Index ($DJUSBK) has absolutely exploded since early November. Many years ago while in public accounting, I was responsible for bank audits and I know that higher treasury yields means higher net interest margins. Soaring treasury yields translate into a bonanza in terms of bank profits and the DJUSBK reflects the anticipation of expanding profits. Take a look:
Bank stocks have been consolidating for the past month after rising approximately 20% during the prior month. A lot of good news has been built into price action and I discussed this during my Bowley Briefing webinar on Wednesday. I was not at all surprised when I woke up this morning to the following headline:
"Bank of America Tops Earnings Forecast, Predicts Significant Increase In Net Interest Income".
The question at this point is whether the bank run has ended in the near-term because if interest rates continue to rise, so will bank earnings and their respective stock prices. The best news of all is that if economic conditions improve in 2017 with higher - but still low - interest rates, I'd expect to see a major stock market rally unfold as banks will take additional credit risks amid higher profits and lesser regulation.
Sector/Industry Watch
The Dow Jones U.S. Travel & Tourism Index ($DJUSTT) has quietly been moving higher in January, breaking out of a bullish wedge pattern in the process. This is significant because the DJUSTT historically has performed extremely well over the next few months as discussed below in the Historical Tendencies section. Take a look at the emerging technical strength here:
A month ago, we had a similar bullish MACD crossover that failed as the rising 20 day EMA failed to offer support during a period of strengthening momentum. That's an early hint of technical failure and leaves me questioning the MACD signal. Yesterday, however, the DJUSTT fell intraday to test that rising 20 day EMA (green arrow) and it rallied strongly off of it. The technical pattern here (bullish wedge breakout) also leads me to believe that travel stocks are poised for a rally. Expedia (EXPE) and priceline.com (PCLN), two component stocks within the DJUSTT, are both showing similar bullish signs.
Historical Tendencies
Over the last 13 years, the DJUSTT has outperformed significantly during February, March and April with average calendar month gains of 5.8%, 2.7% and 5.7%, respectively.
Key Earnings Reports
(actual vs. estimate):
BAC: .40 vs .38
BLK: 5.14 vs 5.04
JPM: 1.71 vs 1.42
PNC: 1.97 vs 1.86
WFC: 1.03 vs 1.00
Key Economic Reports
December PPI released at 8:30am EST: +0.3% (actual) vs. +0.4% (estimate)
December Core PPI released at 8:30am EST: +0.2% (actual) vs. +0.4% (estimate)
December retail sales released at 8:30am EST: +0.6% (actual) vs. +0.7% (estimate)
December retail sales less autos released at 8:30am EST: +0.2% (actual) vs. +0.5% (estimate)
Happy trading!
Tom
