Market Recap for Thursday, January 26, 2017
It was another bifurcated day on the U.S. stock market Thursday as the Dow Jones was able to muster up another gain after piercing the psychological 20000 level on Wednesday. It was a small gain and it wasn't mirrored by the S&P 500, NASDAQ and Russell 2000 - all of which finished with minor losses - but it was a reminder that this bull market lives on and clearing such an important level will likely be followed by further gains.
Materials (XLB, +0.26%), financials (XLF, +0.25%) and industrials (XLI, +0.23%) led Thursday's action while weakness was felt in the defensive healthcare (XLV, -0.77%) and consumer staples (XLP, -0.43%) areas. The hallmark of bull markets is the constant rotation into groups breaking out while others simply consolidate prior gains. Thursday's industry group winners included recreational services ($DJUSRQ - featured below in the Sector/Industry Watch section) and airlines ($DJUSAR). The latter broke a short-term ascending triangle pattern as reflected below:
Airlines clearly broke to a fresh high and check out the increase in volume to confirm the move. A negative divergence had emerged on the early December high and we saw airlines consolidate in this bullish pattern for the next several weeks, but yesterday's breakout bodes well for the group heading forward.
Pre-Market Action
There were a couple of disappointing economic reports this morning as both durable goods and the first reading of GDP came up short of estimates. It's had little impact on U.S. futures this morning as Dow Jones futures are down just 12 points 30 minutes from the opening bell.
Current Outlook
In early July, the Russell 2000 broke out of a bullish inverse head & shoulders pattern. After breaking out, this small cap index retested the breakout level in the 1150-1200 area and has since proceeded to march toward its pattern measurement of approximately 1450. Currently, the RUT is roughly 5-6% from reaching that target. Here's the visual:
An inverse head & shoulders pattern is a continuation pattern, meaning that it follows a prior trend. On the above chart, there's no apparent trend, but if you go back to 2011, you'll see that the Russell 2000 had been in a very significant uptrend prior to this inverse head & shoulders pattern forming. I chose to use a 3 year chart here to better illustrate the pattern and measurement.
Sector/Industry Watch
Yesterday, the Dow Jones U.S. Recreational Services index ($DJUSRQ) soared after Royal Caribbean Cruises (RCL) reported their latest quarterly EPS that exceeded Wall Street consensus estimates. That extended this week's gain in the DJUSRQ beyond 7%, but the group is nearing a long-term wall of price resistance as shown below:
Making matters worse is the fact that the DJUSRQ is extremely overbought on both its weekly RSI and weekly stochastic. That doesn't guarantee we'll see profit taking, but it's certainly difficult to pull the trigger on new positions in the space given the overbought conditions and sellers awaiting at key price resistance.
Historical Tendencies
January 28th marks the beginning of a very bullish historical period for U.S. equities. Since 1971, the NASDAQ has produced annualized returns of +51.14% for the period from January 28th through February 3rd.
Key Earnings Reports
(actual vs. estimate):
AAL: .92 vs .92
ABBV: 1.20 vs 1.20
APD: 1.47 vs 1.48
CL: .75 vs .75
CVX: vs .64
GD: 2.62 vs 2.54
HON: 1.74 vs 1.74
Key Economic Reports
December durable goods released at 8:30am EST: -0.4% (actual) vs. +2.6% (estimate)
December durable goods ex-transports released at 8:30am EST: +0.5% (actual) vs. +0.5% (estimate)
Q4 GDP - first estimate released at 8:30am EST: +1.9% (actual) vs. +2.2% (estimate)
January consumer sentiment to be released at 10:00am EST: 98.2 (estimate)
Happy trading!
