Trading Places with Tom Bowley

Home Construction Breaks Out Ahead Of FOMC Announcement

Market Recap for Tuesday, June 13, 2017

Technology (XLK, +0.72%) rebounded after two days of brutal selling.  It occurred after a hammer printed off a 50 day SMA test on Monday.   That was a relief for many market participants as the XLK has been the undisputed sector leader for many, many months.  Throughout technology's selling, however, other sectors have stepped up to lead and keep the overall market conditions quite bullish.  Yesterday, basic materials (XLB, +1.25%) took a turn and its current technical outlook couldn't be much brighter.  Take a look:


The red arrows mark price resistance that, once broken, becomes solid price support (green arrows).  Solid price support now resides just beneath 54.00 and the rising 20 day EMA, currently at 53.61, should also provide excellent support on any profit taking.

Energy (XLE, +0.75%) had another strong day, its third consecutively.  As a result, Exxon Mobil (XOM) is trying once again to clear significant overhead price resistance near 83.00.  Check this out:

With all the failed attempts, it becomes more significant technically if XOM can clear this price hurdle.

Pre-Market Action

It's Fed day.  We'll get the latest policy decision and statement at 2pm EST.  I would expect a rather quiet day heading into that announcement, but wouldn't be surprised to see heavy volume and volatility after 2pm, especially given the nervousness that we saw the past few days with regard to the tech sector.  Retail sales were extemely weak this morning and the Fed no doubt will factor this into their decision.

Crude oil ($WTIC) is down nearly 1% this morning and remains close to its recent lows, despite a resurgence in the energy sector (XLE) since Friday.  

Dow Jones futures currently are higher by 38 points with a half hour to go to the opening bell.  Asia was mixed overnight but we're seeing strength in Europe, especially the German DAX, which is up more than 1% at last check.

Current Outlook

The FOMC will make its latest policy announcement at 2pm EST today.  The bond market has been behaving as though the Fed may change its recent tune and become a bit more accommodative in its language that accompanies the announcement.  The actual rate hike, if made, and the Fed's language will obviously be very important, but I'll be watching the stock and bond market's reaction more than I will the actual news from the Fed.  I'm looking for a move higher in the 10 year treasury yield ($TNX), which in turn would likely benefit the two sectors that led U.S. stocks during the last period of rising treasury yields in November and December of 2016 - financials (XLF) and industrials (XLI).  Take a look at how these three rose strongly together to close out 2016:

The concerning part of this chart is that the declining TNX in 2017 means that money is moving into the defensive treasuries while also moving into both the XLF and XLI.  That isn't likely to be sustainable and we may get a definitive answer at 2pm EST this afternoon.  The bullish case for equities would be a rise in the TNX to suggest money is rotating away from defense....and another breakout is U.S. equities.

Sector/Industry Watch

I believe that price action precedes fundamental news.  That's the basic premise of technical analysis.  So when I see a group like home construction ($DJUSHB) making a breakout ahead of a huge FOMC announcement, I take notice.  The DJUSHB should do well when the stock market is anticipating economic growth ahead.  A strengthening economy means more jobs and personal disposable income and also a firm housing market.  Therefore, pay attention to this:

The key level of support on any selling would appear to be close to 630 as both price and trendline support intersect near that index value.

Historical Tendencies

Since 1950, the S&P 500 has historically performed about equal to its 9% average annual return for the calendar days from the 11th to the 15th of the month.  However, the days following the 15th have typically been very strong and as follows:

16th:  +34.02% (57.17% chance of an up day)
17th:  +14.55% (56.99% chance of an up day)
18th:  +17.06% (51.79% chance of an up day)

For comparison purposes, the S&P 500 has moved higher 53.29% of the days since 1950.  As we wait to hear from the Fed later today, it's important to realize that we are trading during the part of the calendar month where we do tend to be somewhat bullish.

Key Earnings Reports

(reports after close, estimate provided):

JBL:  .22

Key Economic Reports

May CPI released at 8:30am EST:  -0.1% (actual) vs. +0.0% (estimate)

May Core CPI released at 8:30am EST:  +0.1% (actual) vs. +0.2% (estimate)

May retail sales released at 8:30am EST:  -0.3% (actual) vs. +0.1% (estimate)

May retail sales excluding autos released at 8:30am EST:  -0.3% (actual) vs. +0.2% (estimate)

Happy trading!

Tom

|

Subscribe to Trading Places with Tom Bowley to be notified whenever a new post is added to this blog!
comments powered by Disqus