Trading Places with Tom Bowley

Dow Jones Tops 21000 For Second Time

Market Recap for Friday, May 5, 2017

The headline news from Friday is that the Dow Jones was able to clear psychological overhead resistance at 21000 for only the second time in history (March 1st was the other) and that the S&P 500 managed to clear its all-time high close at 2396.  The S&P 500 technical picture is addressed below in the Current Outlook section so let's focus here on the Dow Jones.  Despite the close above 21000, the Dow Jones still fell short of its all-time high close of 21115 from March 1st.  Check it out:


All of our major indices are lining up bullishly together.  Also, money has been rotating towards aggressive sectors and areas of the market, giving this latest uptrend more credence.

Energy (XLE, +1.58%) and materials (+1.42%) led the action on Friday with both benefiting from the lowest U.S. Dollar Index close since early November.

Pre-Market Action

Dow Jones futures are pointing to a lower open to start the week with futures down 35 points with 30 minutes left to the opening bell.  The 10 year treasury yield ($TNX) is up slightly this morning with the TNX at 2.36% at last check.

From a global perspective, the Tokyo Nikkei ($NIKK) surged more than 400 points overnight to close at its highest level since 2015.  Its close of 19895 is within striking distance of 20000, a psychological barrier that's only been cleared once since the turn of the century - in 2015.

Current Outlook

The S&P 500 closed at 2399 - an all-time high on Friday.  That eclipsed its previous all-time high close of 2396 with a final hour surge.  The good news is that the S&P 500's weekly MACD was at a high on that early March high.  Currently, there's a slight negative divergence, but that could easily be erased on another push higher in the S&P 500.  Put another way, I'd be careful to jump to bearish conclusions based on the weekly negative divergence - unless the rising 20 week EMA at 2326 is lost.  In the very near-term, the SPX hourly chart is very bullish and that suggests to me that Friday's breakout will continue unless the rising 20 hour EMA is lost.  That level is at 2390 and rising.  Here's the visual:

Loss of 2390 could change the short-term picture, but I believe we're going higher before we lose that support.  Historically, the stock market does have the tendency to see some profit taking from the 7th through the 10th of calendar months so if we're going to see some selling, look for it today and/or tomorrow - to test that rising 20 hour EMA.

Sector/Industry Watch

Toys ($DJUSTY) have been one of the best performing industry groups of late and its chart is quite bullish as it currently trades in one of its best calendar months of the year (see Historical Tendencies section below).  The DJUSTY is overbought so entering the group now represents higher risk than I'm willing to take.  However, a pullback in coming days or weeks could allow a very strong reward to risk entry into this industry group.  Take a look at the current setup:

Excellent price support resides just above 830 and the rising 20 day EMA is currently at 840 so that's the support range, 830-840.  The black circles highlight overbought RSI conditions (readings above 70 are generally considered overbought) and the DJUSTY has struggled in the past when its daily RSI has moved above 70.  Its current RSI reading is 74.

Monday Setups

Caterpillar (CAT) reported great results on April 25th, topping both revenue ($9.8 bil vs. $9.3 bil) and EPS ($1.28 vs. $.62) expectations.  That led to a $6 gap higher.  Since then, however, CAT has steadily drifted back and is now near both price support and its rising 20 day EMA as you can see below:

Should CAT fall below key support near 98.00, gap support at 96.81 would be the next level where I'd look for buyers to emerge.

Historical Tendencies

The Dow Jones U.S. Toys Index ($DJUSTY) has the tendency to outperform during the month of May, suggesting that any technical test of its rising 20 day EMA would be a solid entry level into stocks within this industry group (see technical price action in Sector/Industry Watch section above).  Here's how seasonality stacks up for toys:

The average return of 2.7% in May over the past 18 years ranks the DJUSTY as the best performing industry group within the consumer discretionary sector and 6th among all industry groups in all sectors.  While June and July are neutral historically, August is another very solid month for toys as the group ranks 10th among all industry groups in that calendar month.

Key Earnings Reports

(actual vs. estimate):

FDC:  .21 vs .21

JD:  .08 vs (.05)

NWL:  .34 vs .29

SYY:  vs .51

TSN:  vs 1.06

(reports after close, estimate provided):

EOG:  .15

MAR:  .90

PAA:  .36

Key Economic Reports

None

Happy trading!

Tom

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