Trading Places with Tom Bowley

Weakening Aluminum, Steel And Gold Pressure Materials Stocks

Market Recap for Thursday, March 9, 2017

The March 6th to 9th period once again produced not-so-good S&P 500 results.  The S&P 500 did break its recent string of losses, gaining two points on Thursday.  Technically, it bounced exactly where we would expect - off the rising 20 day EMA.  Take a look at the following chart:


The blue directional lines show that the daily MACD is rising along with price action.  That's the definition of accelerating momentum.  After becoming very overbought, the S&P 500 used its typical profit taking period (historically the 7th to 10th is weak, although in March it's been the 6th to 9th) to relieve those overbought conditions.  Given the successful test off the rising 20 day EMA, I'd consider the current trading range on the S&P 500 to be 2350-2400.

While our major indices rose (the Russell 2000 was the exception), materials (XLB, -0.31%) were one of five sectors not participating in the recovery.  Aluminum ($DJUSAL), steel ($DJUSST) and gold mining ($DJUSPM) were three big reasons why materials fell on Thursday.  Here's a chart of all three:

While these three industry groups contributed to weakness in the materials sector, the charts are most definitely not the same technically.  The former two are in bullish formations where I'd expect upcoming breakouts while the DJUSPM has consolidated following a downtrend.  This bear flag typically results in another breakdown.  For more on gold, check out the Current Outlook section below.

Pre-Market Action

The February nonfarm payrolls report is out and it confirmed what we saw on Wednesday from the ADP employment report - jobs were stronger than expected.  That strength has the 10 year treasury yield pressing against key yield resistance at 2.62%.  If we don't make the breakout today, I'd expect to see a little consolidation in the 2.50%-2.62% over the next few days until the FOMC announces its next rate hike.  A hawkish tone looking forward could certainly be the catalyst to push the TNX toward 3.00%.

Crude oil prices ($WTIC) have had a tough week, but a strong day today could enable it to hold onto weekly trendline support.  This area of the market has certainly been teetering on a significant breakdown.  Watch oil prices closely today in order to anticipate the direction of oil stocks in coming days and weeks.

The Tokyo Nikkei ($NIKK) jumped 286 points overnight and European markets are higher this morning.  The German DAX ($DAX) has pushed back above 12000.  Here in the U.S., the strong jobs report has the Dow Jones futures up just over 100 points 30 minutes from the opening bell.

Current Outlook

I believe gold ($GOLD) has made a very bearish breakdown on its daily chart by failing to hold its rising 20 day EMA.  When I look at a chart, the long-term weekly chart trumps the intermediate-term daily chart, which in turn trumps the short-term 60 minute chart.  Therefore, when I'm looking for an underlying trend, I look at the weekly chart to focus on the big picture.  Check out gold's long-term look:

This becomes my blueprint for trading gold.  We're in a downtrend so I'm not interested in trying to catch the short- to intermediate-term downtrends.  If I did anything, I'd short gold.  However, in a raging bull market I rarely short anything.  So I'm just ignoring this part of the market for now.  But given this downtrend, the recent breakdown beneath the rising 20 day EMA becomes a very significant technical development.  Take a look:

The blue directional lines show short-term momentum was accelerating, but a downtrend line was approaching and the long-term chart was bearish.  As a result, in recent webinars, I suggested that if you were holding gold, to think about keeping a stop below that rising 20 day EMA.  From the initial breakdown, gold has tumbled and appears headed for a test of support at 1130.  Based on the long-term chart, however, I believe gold will ultimately fail to hold that support level and head toward $1000.  We'll see.

Sector/Industry Watch

The 10 year treasury yield ($TNX) has been on the move higher in anticipation of another rate hike by the Fed and potentially more hawkish rhetoric.  Jobs data this morning came in at the upper end of expectations and above consensus estimates - following the lead of the ADP employment report that was released on Wednesday.  The initial reaction in the TNX today was a move to 2.61% to challenge the mid-December high at 2.62%.  A breakout today in the yield would be a very bullish development for banks ($DJUSBK) and life insurance companies ($DJUSIL), while utilities (XLU) and REITs ($DJR) would likely suffer from that move higher in the TNX.  Here's the current look at the TNX:

This is a very bullish pattern, suggesting that we are in for higher treasury yields.  Look for a quarter point hike on Wednesday.

Historical Tendencies

March has risen 43 of the last 66 years on the S&P 500 and its 14.81% annualized return ranks as the fourth best performing calendar month during the year, trailing only December, November and April.  The November-December is the best consecutive calendar month period of the year for S&P 500 stocks, while the March-April period is a fairly close second.

Key Earnings Reports

(actual vs. estimate):

MTN:  3.63 vs 3.45

Key Economic Reports

February non-farm payrolls released at 8:30am EST:  235,000 (actual) vs. 200,000 (estimate)

February non-farm private payrolls released at 8:30am EST:  227,000 (actual) vs. 200,000 (estimate)

February unemployment rate released at 8:30am EST:  4.7% (actual) vs. 4.7% (estimate)

February average hourly earnings released at 8:30am EST:  +0.2% (actual) vs. +0.3% (estimate)

Happy trading!

Tom

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