Trading Places with Tom Bowley

Stocks Rebound, This Relative Ratio Will Be Important To Watch

Market Recap for Thursday, May 18, 2017

Technology (XLK, +0.59%) and consumer discretionary (XLY, +0.58%) led the market's rally on Thursday after mobile telecom ($DJUSWC) managed to hang onto 20 week EMA support after a drubbing on Wednesday.  The bad news is that there remains an ugly negative divergence on its weekly chart that still needs to be resolved.  Check it out:


As you can see from the chart, the DJUSWC has been a very strong performing industry group so any pause due to the negative divergence will not help the technology sector moving forward.

Despite a rebound in financial stocks (XLF, +0.39%), banks were unable to make much headway after getting trounced on Wednesday and this group remains threatened by a potential topping head & shoulders pattern.  The key neckline support remains in the 385-390 area.  A heavy volume breakdown would be bearish for the group.  Unfortunately, much of the bounce in the XLF came from strength in REITs, the defensive part of financials.

Pre-Market Action

Applied Materials (AMAT) reported a strong quarter last night after the bell and that should again help semiconductor stocks today.   The Dow Jones is showing slight gains as we approach the opening bell, just 30 minutes away.

Current Outlook

Intermarket analysis is important so that we can follow how market participants view the sustainability of a bull market rally.  Money shifted in a major way towards defensive sectors and areas during 2007, just before the last severe bear market.  The shifting of assets from aggressive to defensive sectors makes us aware that traders are growing nervous, as does a rising Volatility Index ($VIX).  My favorite intermarket relationship is a simple one.  I like to watch to see how consumer stocks perform.  If traders are expecting a better economic environment ahead, consumer discretionary (XLY) should outperform consumer staples (XLP) and that ratio (XLY:XLP) can be plotted against the S&P 500.  A flat to rising XLY:XLP is important as it suggests traders have a "risk on" mentality.  Taking risks is very important to sustaining a bull market.  Check out this chart:

This ratio has failed to break out even though the S&P 500 has.  I do like the fact that we've seen a rising ratio the past year or so, but I really want to see a breakout here to match the S&P 500's breakout.  The correlation indicator shows that this relationship has not been as positively fashioned as it could be, however, so look for this indication to rise and for the XLY:XLP ratio to climb as well.

Sector/Industry Watch

The Dow Jones U.S. Telecommunications Index ($DJUSCT) has fallen back to test long-term price support after a very rough last two weeks.  It's one of the worst performing industry groups within the technology sector as it attempts to stabilize itself above key support.  Check it out:

The DJUSCT is down 4.2% over the past week, but it's at a level where buyers need to step up. 

Historical Tendencies

Since 1971, the months from June through October have been underperformers on the NASDAQ.  Here are the annualized returns for each of these months:

June:  +8.83%
July:  +2.50%
August:  +0.27%
September:  -6.05%
October:  +9.74%

Key Earnings Reports

(actual vs. estimate):

DE:  2.49 vs 1.70

CPB:  .59 vs .64

FL:  1.36 vs 1.38

Key Economic Reports

None

Happy trading!

Tom

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