Market Recap for Wednesday, June 7, 2017
Crude oil ($WTIC) took a dive on Wednesday as inventories rose unexpectedly, causing a bit of panic among traders. Inventory supplies had fallen for eight straight weeks and traders were anticipating another drop of 3.5 million barrels. Instead, at 10:30am EST, the petroleum report hit Wall Street and it showed that inventories had actually risen 3.3 million barrels, a miss of 6.8 million barrels. It was too much for this beaten down commodity to handle and prices quickly plunged. Look at the intraday chart from Wednesday:
There is no intraday chart for $WTIC, but the OIL (crude oil ETN) chart above shows quite clearly the reaction of traders to the inventory build announced at 10:30am EST. It wasn't pretty and this simply adds to the overall weakness of the energy sector (XLE, -1.41%).
Financials (XLF, +0.77%) led the action on Wednesday and Retail REITs ($DJUSRL) were a big reason. The DJUSRL has actually performed worse than retail stocks (XRT) in general, but the group was hitting support with a rising MACD so the sudden strength may continue for a bit as positive divergences in the past have proven to be short-term bullish signs. Check it out:
The 1.81% gain in the industry group yesterday is setting up the possibility of a further advance to test the 50 day SMA and MACD centerline (blue arrows) as we saw in late 2016 and again in April after divergences began appearing as a sign of slowing selling momentum. We'll see if the group can once again reset its MACD with a bit more price strength. Banks ($DJUSBK) also were able to bounce once again from the 380s as head & shoulders neckline support holds for now near 385. Keep an eye on the 10 year treasury yield ($TNX) as we approach the next Fed meeting, which starts on Tuesday with the FOMC decision on Wednesday at 2pm EST. A rising TNX is good for banks while a continuing decline would likely result in a head & shoulders breakdown - a potentially very bearish development.
Pre-Market Action
Initial jobless claims were reported slightly higher than expected (245,000 vs 241,000) this morning, but there are no other significant economic reports due out this week. Also, there are no significant earnings reports so equity traders will continue to focus on happenings globally and what's taking place in the bond market. The upcoming Fed meeting is on everyone's radar so it will be interesting to see if the 10 year treasury yield ($TNX) begins to rise into next week to anticipate another rate hike. Currently, the bond market appears to be disagreeing with the Fed's stance that we'll need additional rate hikes in 2017 as yields have been in steady decline.
Dow Jones futures are up slightly ahead of today's opening bell. We've seen mostly mixed and flat market action around the globe overnight and this morning.
Current Outlook
Recent weakness nearly tested solid price support on the Russell 2000 ($RUT) and now this small cap index is poised for a bullish breakout of rectangular consolidation. It'll take a close above 1420 to do it and we reached 1415 at the end of last week. Small caps tend to lead so a breakout should be seen as bullish for U.S. equities. Here's the chart:
We can't assume the breakout will be made, but after months of consolidation, a breakout - if and when it occurs - should be viewed very bullishly.
Sector/Industry Watch
Health care providers ($DJUSHP) have quietly become leaders and are worth pursuing on pullbacks to relieve overbought conditions. Below is a weekly chart to show the significance of the recent breakout:
While the recent breakout and rising MACD suggest accelerating bullish momentum, the three red circles could be short-term obstacles. Volume has been lessening to the upside while both weekly RSI and stochastic are quite overbought at 74 and 95, respectively. This isn't a great time for entry from a reward to risk perspective, but a pullback could provide a solid opportunity.
The technical strength here shouldn't be overlooked as the DJUSHP has been one of the best performing industry groups during the summer months over the past couple decades. More on that in the Historical Tendencies section below.
Historical Tendencies
Interestingly, the Dow Jones U.S. Health Care Providers Index ($DJUSHP) is one of very few industry groups that seasonally performs quite well over the summer months. In fact, over the past 18 years, the DJUSHP has averaged gains during every month from June to September. Here's the seasonal recap for the group:
Keep in mind that the S&P 500, along with our other major indices, tends to struggle historically during the summer months. So it shouldn't be overlooked that the DJUSHP enjoys relative strength during these months. There aren't many industry groups that look better technically and seasonally as we enter summer.
Key Earnings Reports
(actual vs. estimate):
SJM: 1.80 vs 1.73
Key Economic Reports
Initial jobless claims released at 8:30am EST: 245,000 (actual) vs. 241,000 (estimate)
Happy trading!
Tom
