Market Recap for Monday, December 5, 2016
Financials (XLF, +1.19%) were back on top of the sector leaderboard on Monday after taking a "lengthy" one day pause. It's been a crazy run for financial stocks and we're growing accustomed to the almost daily gains in banks ($DJUSBK), life insurance ($DJUSIL), investment services ($DJUSSB) and asset managers ($DJUSAG). They've been among the leaders in the sector over the past month. There's one other industry group that's been hanging with those four and it led the financial group on Monday. It's the Dow Jones U.S. Hotels & Lodging REITs Index ($DJUSHL), which gained an impressive 2.78% yesterday and is now higher by 18.50% over the past month. This surge has occurred off significant price support and Monday's close was its highest in more than a year. Check it out:
This is a lesson in how you go from zero to hero in 30 days or less. Outside of being short-term overbought, the technical conditions here are quite strong given the surging MACD and price breakout on heavy volume.
Crude oil prices ($WTIC) are challenging major price resistance near $52 per barrel and its recent rise has lifted a strengthening energy sector (XLE, +0.88%). I've written in the past about the potential bullish and bottoming reverse head & shoulders pattern on the WTIC weekly chart. A breakout of that pattern would measure to the $75-$80 per barrel range. Well, here's another shorter-term bullish pattern:
I believe we're going to see much higher crude oil prices in the coming months and one area that should benefit is renewable energy ($DWCREE). I'm featuring the DWCREE in the Sector/Industry Watch section below.
Note
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Pre-Market Action
Asian markets were mostly higher overnight and European stocks are following suit this morning. The German DAX surged 171 points on Monday and is now back near a major price resistance level at 10800. Today's fractional gain has the DAX at 10725, tacking on 40 more points today thus far. A closing breakout above 10800 would support the recent S&P 500 breakout to all-time highs as these two indices have a very tight positive correlation over the years.
Dow Jones futures are slightly higher, trying to add on to their all-time high close on Monday.
The VIX fell 14% on Monday to close at a 10 week low. Low volatility remains a very bullish signal so I am looking for additional gains over the coming weeks. Treasuries are mostly flat this morning.
Special Note
I will be joining John Hopkins, President of EarningsBeats.com, tonight at 7:30pm for a FREE webinar. I'll be discussing the importance of setting up ChartLists and running scans against those lists to identify great reward to risk trading candidates. Patience and discipline are key to successful trading and I'll demonstrate how some of the tools here at StockCharts.com can help you improve as a trader in that area. I'll also discuss several potential trading candidates that recently trounced Wall Street earnings estimates and that also have strong charts technically. Finally, I'll provide a brief market overview. Please join John and me if you can. You must REGISTER HERE for the event. Once registered, John will send out instructions for attending the webinar. I look forward to seeing you there!
Current Outlook
I understand that the weakness in many large cap technology stocks is spooky, but you must keep things in perspective. The NASDAQ 100 outperformed the benchmark S&P 500 wildly off the post-Brexit late June lows. So a temporary period of underperformance while the NDX consolidates and money rotates to other areas of the market is not a bad thing. The NDX needed to catch its breath after a stellar advance. Here's the visual:
You cannot keep up the pace of outperformance that the NDX enjoyed forever. There needs to be cooling off periods and, in my opinion, that's what we've seen over the past several weeks. I do expect this recent relative downtrend to reverse and begin moving higher once again. At a minimum, I'd look for technology stocks to at least begin to perform as well as the S&P 500 as money rotates back to the sector. Traders look for bargains and the recent selling in technology has provided opportunities.
Sector/Industry Watch
It's been a very bearish run for the Dow Jones U.S. Renewable Energy Equipment Index ($DWCREE) over the past 2+ years. But with crude oil prices on the rise and threatening a major breakout, I believe the bearish behavior is ending. In fact, the DWCREE was by far the best performing industry group within energy on Monday, rising more than 7%. I look for focus to turn back to the DWCREE, especially if I'm correct about higher crude oil prices. Take a look at the following chart and relationship between the DWCREE and the WTIC:
When oil is cheap, renewable energy isn't nearly as important. But as the price of crude oil marches higher, the importance of renewables grows. I suspect when crude oil makes the big breakout, attention will turn to the beaten-down renewable group. When this group moves, it moves very quickly so building a position at current prices makes sense to me - especially for those willing to take more than average risk.
One stock in this space that recently reported better than expected revenues and EPS is Jinko Solar (JKS). JKS initially gapped higher, but then filled its gap. Yesterday, with renewables at the forefront, JKS surged and broke above recent highs. I'd look for JKS to lead a strengthening renewables group. Here's the current chart on JKS:
Timing bottoms can be very rewarding....or very painful. So be sure you can accept the high risk associated with trading renewable energy stocks. They typically move very quickly in both directions. Disclosure: I own shares in JKS.
Historical Tendencies
The Russell 2000's very bullish historical December performance has been documented here on many occasions. What's strange, however, is that the Russell 2000 has one of its most bearish periods of the year during December, which is very odd. Anyhow, here are the annualized returns of the Russell 2000 for every calendar day from December 7th through December 15th:
December 7th: -65.43%
December 8th: +57.81%
December 9th: -58.88%
December 10th: -28.42%
December 11th: -120.35%
December 12th: +0.95%
December 13th: -70.73%
December 14th: -83.77%
December 15th: -83.71%
Obviously, the rest of December is extremely bullish.
Key Earnings Reports
(actual vs. estimate):
AZO: 9.36 vs 9.36
BMO: 1.60 vs 1.38
HDS: .83 vs .82
TOL: .67 vs .98
Key Economic Reports
Q3 productivity released at 8:30am EST: +3.1% (actual) vs. +3.3% (estimate)
October factory orders to be released at 10:00am EST: +2.7% (estimate)
Happy trading!
Tom
