Market Recap for Tuesday, September 4, 2018
Our major indices rallied to end the day well off their intraday lows. All did finish in negative territory, however, as healthcare (XLV, -0.80%) and materials (XLB, -0.69%) were the weakest sectors. The XLV was led lower by biotechs ($DJUSBT, -1.29%) and medical supplies ($DJUSMS, -1.09%). The XLB, meanwhile, continues to carry the lowest SCTR score among the major sector ETFs and was no doubt hurt by the strengthening U.S. Dollar Index ($USD):
The USD bounced the past few weeks off of trendline support and that strength has coincided with renewed selling in materials stocks. The XLB is currently mired in a four month trading range between 57.50-61.00.
Financials (XLF, +0.49%) dodged the selling on Tuesday as banks ($DJUSBK, +0.52%) reversed course after falling intraday beneath its 20 day EMA. The close on the DJUSBK was back above its 20 day EMA, a short-term positive. Financials and banks were helped by a rapidly rising 10 year treasury yield ($TNX), which jumped 5 basis points to close at its highest level (2.90%) in nearly a month. Rising treasury yields tend to result in higher bank profits.
In individual stock news, Facebook (FB) traded below post-earnings price support at 170 intraday, but rallied to finish above that key level. Failure to hold price support at 170 could result in FB testing its key price support from March near the 150 level.
Pre-Market Action
Earnings season has slowed considerably and there's really nothing today from an economic standpoint, so the market will look to global market behavior and technical conditions for direction. Unfortunately, the former will not offer up much bullishness as most markets around the world are under selling pressure. Overnight, Hong Kong's Hang Seng Index ($HSI) dropped 729 points, or 2.61%. It was the $HSI's worst performance since its 800 point plunge in mid-June. China's Shanghai Composite ($SSEC) also was weak, falling 1.68%.
In Europe, the German DAX ($DAX) continues its descent, threatening to break to fresh five month lows. The S&P 500 and DAX have historically had a very strong positive correlation, but that has not been the case over the past 3-4 months as the following chart shows:
I'd keep a very close eye on the head & shoulders pattern on the DAX. A break below the most recent price low would make it very difficult for the S&P 500 to sustain its push into all-time record high territory.
With a half hour to go to the opening bell, Dow Jones futures are lower by 112 points.
Current Outlook
Railroads ($DJUSRR) bounced off its rising 20 day EMA support yesterday, but the group is certainly vulnerable to more downside action as bullish price momentum is waning:
I'd consider short-term support to be the rising 20 day EMA, currently at 2168 and short-term resistance to be the August 28th high just above 2525. A close below the 20 day EMA would likely result in a trip to the 50 day SMA to "reset" the PPO at or near centerline support (pink arrows) - very similar to what we saw in June. Negative divergences during uptrends generally suggest short-term selling and consolidation to unwind the momentum issues, not necessarily a long-term top. That's what I'd be looking for here. If selling does in fact kick in, I'd still remain bullish railroads so long as the key area of support from roughly 2050-2100 holds.
Sector/Industry Watch
Healthcare stocks struggled on Tuesday with all five industry groups in the space finishing lower. Medical supplies ($DJUSMS) were particularly weak, but did manage to hang onto its rising 20 day EMA after recently breaking to a multi-month high. The PPO was strengthening at its most recent price high, so normally pullbacks will find buyers when that 20 day EMA is tested. We'll see today if this key moving average continues to provide support:
The triple top breakout occurred closed to 956. That price resistance level then became price support, which didn't hold. If this is truly a breakout, however, I'd expect to see buyers step up today at the 20 day EMA. A close below the 20 day EMA would open the door to another test of trendline support near 930.
Among the large cap medical supply companies, Henry Schein (HSIC) has pulled back recently and appears to be at a solid reward to risk entry point currently:
A close beneath 76 would lose price, trendline and 50 day SMA support levels. The 20 week EMA, which should also provide solid support from a longer-term perspective, resides just beneath 76. Therefore, I'd consider a closing stop in the 75.00-75.50 area with an eye on an 85 price target. Building a position from current price down to 76 would improve the reward to risk.
Historical Tendencies
The Volatility Index ($VIX) opened a bit higher yesterday and ended the session up 2.33%. Higher VIX readings are customary in September as fear tends to ramp up when we see stock market weakness and historically September is the worst month for equities. Over the past 20 years, the VIX has averaged gaining 7.5% and 8.6% in August and September, respectively.
Key Earnings Reports
(actual vs. estimate):
HDS: .99 vs .96
(reports after close, estimate provided):
DOCU: .01
GWRE: .76
OLLI: .37
Key Economic Reports
None
Happy trading!
Tom
