On Friday, I received a StockCharts Technical Alert in my email inbox letting me know that the Equal-Weight Utilities ETF (RYU) had triggered a new Intermediate-Term Price Momentum Oscillator (PMO) BUY signal. I immediately had to check out the weekly chart.
Earnings Season is now in high gear with thousands of companies getting ready to report their numbers over the next several weeks. Whenever earnings season comes around there are clear winners and clear losers with the sole evidence of success or failure being the performance of a stock. For example, Netflix reported its numbers last week and you can see the positive response below:
You can see the nice bump on strong volume that occurred on January 19 that in fact took the stock to an all time high. On the other hand, take a look at the GE chart below which shows a different picture of a company that disappointed the market:
This is what it always comes down to; does a company meet or beat expectations or disappoint, and how will the market respond?
Over the next few weeks we're going to get a very good look at the overall strength of the market. This will become apparent through the totality of the overall response to thousands of earnings reports. At EarningsBeats we will be tracking the earnings to see which companies beat both their top and bottom line projections. Those that make the cut will be added to our Candidate Tracker for our members to review, many of them potentially high reward to risk trading candidates. If you would like to see a sample of the Candidate Tracker just click here.
There are many things that can affect the market from economic reports to world events. But when everything is said and done it's always the bottom line that traders care about the most.
At your service,
Let's get this out of the way first. If you've been watching business TV, all they've been talking about is the Dow nearing the 20,000 level. Much to their dismay, it came close on Friday but couldn't make it. The Dow touched 19999.63 before backing off. Historically, big round numbers have acted as magnets during market advances. At the same time, traders are often programmed to take some profits as that big number is approached. The hourly bars in Chart 1 shows how close the Dow Industrials came to the 20K level a couple of times over the last month. Technically, the Dow is still in an over-extended condition which explains why it's been moving sideways for the past three weeks. That's not unusual with a market working off a short-term overbought condition. Odds still favor resumption of its uptrend. The bigger market story this week, however, was the stronger action in the Nasdaq market. The Nasdaq closed in record territory on Friday. A rebound in biotechs helped. But most of the buying came from technology stocks, especially those tied to the Internet. It looks like FANG stocks are back in favor.
One of the factors keeping the rally going is that when a leading group stalls (like financials), new money moves into lagging groups like technology (and, to a lesser extent, healthcare). The daily bars in Chart 2 show the Nasdaq Composite Index closing at a new record on Friday. The Nasdaq was the strongest market index for the day and for the week. The Nasdaq has several things working in its favor. First, it's the only major stock index that hasn't reached overbought territory. The 14-day RSI line (top of chart) has remained below the overbought threshold of 70 throughout the recent rally (unlike the Dow and S&P 500 which exceeded that level). Secondly, the Nasdaq has been a market laggard. The solid line in Chart 2 shows the Nasdaq/S&P 500 ratio just starting to turn up after dropping during November. You may recall the post-election rotation out of growth stocks (mainly technology) and into value stocks (like financials) as the market jumped. It now looks like like money is starting to flow back into cheaper technology stocks.
No one can argue with the fact that the market has been fascinating to watch since the election with all of the major indexes substantially higher since the most recent bottom on November 4. There's been a few minor pullbacks along the way, but not many as traders seem to be eager to jump in on any moves lower. And now traders will have another reason to get excited; earnings season is about to begin!
For a long time now the market has recognized Alcoa's earnings report as the "official" start to earnings season. And AA will report its numbers after the bell on Monday. Then you will see thousands of companies reporting their numbers over the next several weeks.
I have found over the years that many things can move the market, from economic reports to Fed statements to world events. But when everything is said and done the one thing traders care about more than anything else is earnings. This includes earnings for the most immediate quarter as well as guidance for the future.
I have also found that the market can react in very unpredictable ways to numbers. For example, you might see a company beat earnings expectations but go lower. Or, you could see a company miss its earnings expectations and go higher. But in most cases if a company beats earnings expectations and guides higher there is a decent chance it will receive a positive response from the market.
At EarningsBeats we always remind our members to know when any stock they are holding is reporting earnings so they are not surprised once results are released. In fact we have always believed it makes sense to avoid being involved - long or short - in a stock on the day it reports earnings because it's simply too risky. Instead we like to see a company report its numbers, watch the market reaction and then get involved in a trade when there is strong reward to risk potential.
For example, you can see in the chart below that Donaldson (DCI) reported its numbers and gapped up sharply on December 1. But it peaked just above $46 before pulling back recently to its 20 day moving average which potentially presents a much better buying opportunity than it did during the post earnings euphoria. So chasing a stock that explodes higher as a results of earnings is not necessarily the best strategy.
At EarningsBeats we keep track of all companies that report and beat earnings expectations. We then consolidate them into our "Candidate Tracker" for our members to review as potential trading candidates. We also use the Candidate Tracker to issue alerts to our members on those stocks we think are strong reward to risk trading candidates. If you would like to see a sample of the Candidate Tracker just click here.
There are many things to consider when trading but none more important than earnings. This is why you need to make sure you know when companies that are part of your portfolio are reporting their numbers so you can avoid unnecessary risks while looking for profitable opportunities.
At your service,
I've been writing relentlessly about the relative strength in energy shares (XLE) over the past several months and here I go again. Go ahead and talk about too much supply. Hang onto the weakening demand argument if you'd like. I'm simply following the charts which is what technicians do. The stock market knows ALL of the fundamental information and it's been priced in. And what the market keeps telling me is that you want to overweight energy. It's that simple and until rotation strips away that technical strength, I'll keep riding this horse. The following chart shows both the absolute and relative performance of energy. Check it out:
Gold traded fabulously last year. Actually Gold surged from January to March then went sideways. Well Gold has started to outperform the $SPX but everything else looks dismal. The SCTR is stuck at 2% even after Gold surged. The volume has started to improve, but it is still a lot less than the selling volume through November and December.
I recently saw the new Star Wars movie, Rogue One, and found a way to tie technical analysis to one of the more interesting characters. This happens all of the time because technical analysis is so ingrained in my membrane. Chirrut Îmwe is a blind warrior monk who repeated: "I am one with the force; the Force is with me". If he were a trend-follower, I think he would simply substitute "force" for "trend". Works for me!
The chart below shows the S&P 500 hitting a new all-time high this week and the force is clearly bullish. In Dow Theory terms, think of the force as the primary trend. The bears may win some battles, but the force ultimately wins the war. After a big surge in 2013 and 2014, the S&P 500 corrected with a big channel that looks like the mother of all falling flags (blue trend lines). The index broke out of this channel in mid-2016 and hit a new all-time high in mid-July. The primary trend can only be up when the index hits a new all-time high.
A regular DecisionPoint webinar viewer and reader emailed me and suggested I take a look at AT&T because as he stated, "ouch". It was definitely a rough day for AT&T and what happened today has some very interesting implications.
We're two weeks away from another stock market year in the books. Where does the time go? Anyhow, since this is the last ChartWatchers newsletter of 2016, it would be an appropriate time to check out the best and worst industry group awards for 2016.
Drum roll please!
Several market messages over the past couple of months used relative strength ratios to paint a more bullish picture of the stock market, and a more bearish picture for bonds. While those ratios have strengthened considerably, especially since the election, I'm a little concerned that they're starting to look stretched. On October 28, I showed a ratio of the S&P 500 divided by the 20+year Treasury Bond ETF turning up in favor of bonds. That's the lower circle in Chart 1. Since then, the stock/bond ratio has soared to the highest level in nearly three years. That puts it up against a potential resistance barrier at its late 2013/early 2014 peak. In addition, its 14-day RSI (top of chart) has reached the 80 level which is the most overbought reading in years. More concerning is the fact that its 14-week RSI line has also reached overbought territory.
For the study of major market trends, weekly indicators are usually more reliable than dailies. Chart 2 shows a "weekly" version of the same stock/bond ratio from Chart 1. The pattern of higher peaks and higher troughs since 2009 has generally favored stocks over bonds. That wasn't true, however, during 2011 when the stock/bond ratio dropped, or during 2014 and 2015. During those three years, bonds did better than stocks. The rising ratio during 2016 shows the pendulum swinging back to stocks, especially since the election. There are a number of points worth noting here. Over the longer run, the shape of the ratio appears to favor stocks over bonds. Over the shorter run, however, there is some concern. First, the ratio is nearing a previous peak from three years ago where it could meet some resistance. The second is the fact that the 14-week RSI line (top of chart) is in overbought territory over 70 for the first time since late 2013 (and early 2011). Both instances led to pullbacks in the ratio. All I'm suggesting here is that the stock/bond ratio appears very stretched. In other words, the steep move out of bonds into stocks may be getting overdone. That would suggest a bit more caution pushing the buy stock/sell bond strategy, especially as we enter the new year. We see the same pattern in several other ratios.