Market Recap for Wednesday, February 14, 2018
Wall Street sure did look like it was heading for a very rough day at 8:30am EST on Wednesday. Very poor economic news hit traders with a 1-2 punch as the consumer price index jumped 0.5% instead of the 0.3% that everyone was expecting. On the heels of that, we saw the worst retail sales report in 11 months. Retail sales fell 0.3%, while consensus estimates had predicted a rise of 0.3%. That was a double jackpot hit for the bears. Dow Jones futures were up approximately 130 points just before the reports hit the wires and down more than 350 points just after. That was a near 500 point drop in the matter of a few minutes. As Yogi Berra would say, "it was deja vu all over again!"
But the reaction was much different this time.
Futures settled down and the Dow Jones opened with a 100 point loss and that seemed to give the bulls more reason to buy as the Tuesday low held and our major indices advanced throughout the session. By Wednesday's close, the Dow Jones, S&P 500, NASDAQ and Russell 2000 were higher by 1.03%, 1.34%, 1.86% and 1.82%, respectively. Note that the more aggressive indices - NASDAQ and Russell 2000 - outperformed on a day where awful economic news could have sent the market spiraling lower. Furthermore, the strength came from financials (XLF, +2.38%), technology (XLK, +1.84%) and consumer discretionary (XLY, +1.60%). These are three of the four aggressive sectors. The other, industrials (XLI, +1.26%), also had a very strong day led by railroads ($DJUSRR, +3.01%):
During the recent selling, the DJUSRR held key support in my opinion. There was trendline support just above 1700 and price support closer to 1675. We saw long tails (intraday lows) beneath these levels, but they turned out to be head fakes. Support held and the uptrend here continues for now. Yesterday's close was slightly above the 20 day EMA (blue arrow) - a small victory for the bulls.
Pre-Market Action
Cisco Systems (CSCO) delivered a strong quarterly earnings report after the bell on Wednesday and is up 7.6% in pre-market trade, helping to lift U.S. futures.
The 10 year treasury yield ($TNX) finished at 2.91% yesterday and is up fractionally to 2.92% this morning. Money continues to pour out of the bond market and that typically is very bullish for equities.
Economic reports this morning were mixed, but much better than what we saw on Wednesday morning. It seems that relief is in the air as U.S. indices shoot for a 5th consecutive session of gains today.
Crude oil ($WTIC) managed to hold onto price support at $59 per barrel on Wednesday and is just above the $60 per barrel level this morning.
With about 45 minutes left to the opening bell, Dow Jones futures are higher by 185 points.
Current Outlook
Ok, we've seen a nice rally off the recent bottom and we're now approaching very significant overhead resistance in the form of 20 and 50 day moving averages, key Fibonacci retracement levels (both 50% and 61.8%), gap resistance at 2741. In other words, the bears will be throwing everything at the bulls, including the kitchen sink, the baby and the bath water. As a short-term trader, I'll be looking to use the current strength to lock in at least partial profits from this week's rally and let others fight the good fight. If you decide to stick it out on the long side, I'd be very careful if the rising 20 hour EMA is lost. That would be the first solid signal that the sellers are regaining short-term control of the action:
Those green arrows show that rising 20 day EMA can be excellent support during uptrends. Given the heavy volume selling and escalating fear (VIX) that we just witnessed, I'd be extra cautious if 20 hour EMA support is lost. I believe 2725-2745 will be a critical area of resistance for this rally.
Sector/Industry Watch
I own the retail ETF (XRT) and I had already conditioned myself that I was likely going to be forced to sell it given the weak retail sales report yesterday morning and the huge immediate drop in futures. But a strange thing happened. The XRT outperformed both the Dow Jones and S&P 500, gaining 1.82% in the process. Awful economic news in the retail space followed by a surge in the XRT. And many are calling this the start of a bear market? Hhhhhmmmm. The XRT is facing a stiff technical test today as it approaches recent reaction highs and key moving averages overhead. A reversing candle today will trigger a sell order from me. Take a look:
The 46.00-46.25 reaction high resistance zone (red ellipsis) will be the issue today. If we can't sustain a rally through this area and then finish on the lows today, a short-term top would likely be in. I have been on record calling for a decline in retail stocks setting up a great buying opportunity and we saw it. The "big picture" weekly chart shows accelerating bullish momentum with key rising 20 week EMA holding as support - bullish for the intermediate- to long-term:
This is a bullish pattern where we've seen sideways consolidation for 3-4 years. The consumer discretionary sector (XLY) is now the best performing sector so an eventual breakout here should really be respected as very bullish. On the most recent test of price resistance at 49, momentum (PPO) was accelerating. When I see this type of upward momentum, I look to rising 20 week EMA support (green arrow) to hold. Thus far, it has. So while short-term issues remain for the XRT, I believe any short-term decline to that 44 area remains an excellent reward to risk entry into a group that could significantly benefit from the relative strength in its sector.
Historical Tendencies
On Monday, I provided the NASDAQ's annualized return for the February 11th to February 15th period since 1971. It was a very bullish +46.48%. Well, today is February 15th and those historical tailwinds not only subside, but they quickly turn into historical headwinds. From February 16th through February 22nd, the NASDAQ has produced annualized returns of -28.59%. Again, this is over a 47 year period beginning in 1971.
Key Earnings Reports
(actual vs. estimate):
GPN: 1.07 vs 1.05
INCY: .02 vs (.52)
OMC: 1.55 vs 1.54
TRP: .65 vs .58
WM: .85 vs .83
ZTS: .69 vs .66
(reports after close, estimate provided):
ANET: 1.45
CBS: 1.15
DLR: 1.52
ED: .78
Key Economic Reports
Initial jobless claims released at 8:30am EST: 230,000 (actual) vs. 229,000 (estimate)
February Philadelphia Fed Survey released at 8:30am EST: 25.8 (actual) vs. 21.0 (estimate)
January PPI released at 8:30am EST: +0.4% (actual) vs. +0.4% (estimate)
January Core PPI released at 8:30am EST: +0.4% (actual) vs. +0.2% (estimate)
February Empire State manufacturing survey released at 8:30am EST: 13.1 (actual) vs. 17.5 (estimate)
January industrial production to be released at 9:15am EST: +0.2% (estimate)
January capacity utilization to be released at 9:15am EST: 78.0% (estimate)
February housing market index to be released at 10:00am EST: 72 (estimate)
Happy trading!
Tom
