Market Recap for Thursday, June 14, 2018
Utilities (XLU, +1.24%) led a bifurcated market on Thursday, but the real story of June has been consumer discretionary (XLY, +1.04%). The XLY has not only posted gains each of the 10 trading days in June thus far, but it's also closed above its open in each of those days as well. I can't recall the last time I've seen that happen and it underscores the incredible strength of the current rally. Retail (XRT) has dominated the past two weeks, but even this scorching-hot industry has paused the past two days on profit taking. The XLY has pushed higher, however, in unabated fashion as other consumer discretionary industries have taken charge - groups like broadcasting & entertainment ($DJUSBC, +2.69%) and recreational services ($DJUSRQ, +2.04%). But retail has been behind much of the June strength as you can see below:
The PPO is showing that bullish price momentum is accelerating as more and more industry groups participate in the XLY rally. The XRT shows a nice relative uptrend vs. the XLY so the profit taking the past two trading sessions in the XRT is likely providing an opportunity for entry. The XRT has nearly reached price support after two days' worth of profit taking.
The XLU appears to be bouncing as traders are relieved that FedSpeak has not resulted in another surge in the 10 year treasury yield ($TNX). Higher yields put a damper on trader enthusiasm for high-yielding dividend stocks found in the XLU. I do eventually expect to see a higher TNX so the XLU is not likely to be a good relative performer in my view.
The lack of follow through in the TNX, however, is taking its toll on financials (XLF, -0.93%), which was Thursday's worst performing sector. Banks ($DJUSBK) were weak again, but regional banks (KRE) continue to perform much better than their larger counterparts:
The pullback in the KRE has occurred after the group broke out to a 2018 high. That cannot be said for the Dow Jones U.S. Banks Index ($DJUSBK), which has lagged the regional banks by a very wide margin the past 4-5 months.
Pre-Market Action
The bond market is in play this morning as the 10 year treasury yield ($TNX) has fallen nearly 4 basis points to 2.91%. We remain in a fairly wide 2.73%-3.11% range for now as the bond market weighs the merits of potentially two more rate hikes in 2018.
Gold ($GOLD) is down $10 this morning to $1297 per ounce after touching a one month high on Thursday. The rising dollar (UUP) yesterday may have spooked gold traders this morning. Crude oil ($WTIC) is down fractionally and currently trades just beneath $67 per barrel.
Dow Jones futures are set to drop nearly 200 points with less than 30 minutes left to the opening bell. S&P 500 and NASDAQ futures look to fall less on a relative basis.
Adobe Systems (ADBE) reported another very solid quarter, but is down in pre-market trade as traders assess whether the company's growth rate may slow in the quarters ahead.
Current Outlook
As we've seen the past few months, the U.S. Dollar Index ($USD) can play quite a role in determining where to invest your money. I'm of the belief that the dollar's rise is just beginning and many traders seem to agree with me:
The weakness in the USD resulted in the very strong underperformance in small cap stocks (declining RUT:SPX ratio). But the strength in the dollar this year has signaled full speed ahead for small caps (increasing RUT:SPX ratio). This relative ratio has broken out and I believe foreshadows the next breakout in the USD above 95 resistance.
Sector/Industry Watch
The Dow Jones U.S. Internet Index ($DJUSNS) is one of the most widely followed in the technology space. Yesterday, the group did what many traders had been waiting for - they broke out to fresh all-time highs:
Price momentum is bullish and accelerating, although it is a bit stretched. We'll see a pullback fairly soon, but the rising 20 day EMA is very likely to provide excellent support if price reaches that moving average.
Historical Tendencies
Mid-month action in U.S. equity markets tends to favor the bulls, but to a lesser extent than the beginning of calendar months. On June 15th, the NASDAQ has produced annualized returns of +20.57% since 1971. Too bad June 16th falls on a Saturday this year, because the NASDAQ has provided annualized returns of +85.87% on that day for nearly five decades.
Key Earnings Reports
None
Key Economic Reports
June empire state manufacturing survey released at 8:30am EST: 25.0 (actual) vs. 19.1 (estimate)
May industrial production to be released at 9:15am EST: +0.1% (estimate)
May capacity utilization to be released at 9:15am EST: 78.0% (estimate)
June consumer sentiment to be released at 10:00am EST: 98.5 (estimate)
Happy trading!
Tom
