Trading Places with Tom Bowley

Bifurcated Action Stymies Global Markets - For At Least One Day

Market Recap for Thursday, May 4, 2017

Happy Cinco De Mayo!

Cuatro De Mayo turned out to be a very flat day, with bifurcated action throughout the market.  Even global markets were bifurcated.  I counted 13 international ETFs higher yesterday with 10 lower.  Markets everywhere are consolidating after mostly higher moves.  The rotation and continuation patterns that are evolving remain quite bullish in my view.  Here's an example:


The Russia ETF (RSX) broke out solidly on heavy volume back in December and has been consolidating in a very bullish symmetrical triangle pattern.   These types of patterns that follow prior uptrends typically resolve themselves with breakouts to the upside.  So that's what I'd look for.

Domestically, we saw defensive stocks lead as the three leaders were consumer staples (XLP, +0.77%), healthcare (XLV, +0.66%) and utilities (XLU, +0.35%).

Pre-Market Action

Crude oil ($WTIC) is flat today after a significant breakdown on Thursday - the WTIC fell nearly 5% yesterday to its lowest level since late November.

Asian markets were mixed overnight and European markets are fractionally higher this morning.  Dow Jones futures are up slightly with 30 minutes left to the opening bell.

Current Outlook

Banks ($DJUSBK) were a major leader of the market's rise back in November and December.  They have a chance to emerge once again as a relative leader to support an S&P 500 breakout to all-time highs.  The 10 year treasury yield ($TNX) is down slightly this morning after the April nonfarms payroll report was released, which will provide some headwinds in the banks attempt to clear right shoulder resistance.  Take a look:

There are many bears that are pointing to this head & shoulders topping pattern as a sign that the stock market has topped and is in the process of rolling over.  I don't buy it.  First, a topping pattern isn't confirmed until we see the heavy volume breakdown beneath neckline support.  Second, I believe the odds of a June rate hike by the Fed has increased after the latest FOMC policy statement.  Higher rates help banks fundamentally achieve higher net interest margins and, ultimately, net profits.  The major trading range on the DJUSBK is 386-414.  Let's see which way this breaks.

Sector/Industry Watch

The Dow Jones REIT Index ($DJR) has been underperforming the financial ETF (XLF) once again in recent weeks and that's a sign of traders moving away from safety and into more aggressive areas within financials.  This type of behavior supports bull markets and underscores their sustainability in my opinion.  Check out this relative chart:

After a steady one month relative ascent, REITs have been underperforming other areas of financials in a big way.  Breaking that relative 13.5 support level would add to the relative bearishness in REITs.

Historical Tendencies

On the S&P 500, May 6th through May 11th has been a bearish period since 1950.  The annualized return during this period is -18.95%, representing a historical period of profit taking.

Key Earnings Reports

(actual vs. estimate):

CI:  2.77 vs 2.44

CTSH:  .79 vs .75

EXC:  .65 vs .61

MCO:  1.47 vs 1.23

TRP:  .61 vs .66

Key Economic Reports

April nonfarm payrolls released at 8:30am EST:  211,000 (actual) vs. 185,000 (estimate)

April private payrolls released at 8:30am EST:  194,000 (actual) vs. 180,000 (estimate)

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

Happy trading!

Tom

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