Trading Places with Tom Bowley

Equities Surge On Dovish Fed Remarks

Market Recap for Wednesday, July 13, 2017

Fed Chair Janet Yellen provided the Fed's semiannual monetary policy to the House Financial Services Committee on Wednesday morning, just prior to the opening of the stock market and both the bond market and stock market loved what it heard.  The Fed Chair sounded very accommodative and dovish in her remarks and bond prices immediately rose.  An hour later, the S&P 500 followed suit, gapping higher and never looking back.


All nine sectors finished in positive territory with the Dow Jones closing at an all-time high.  The NASDAQ, which four days earlier had closed beneath 6100 for the first time since mid-May, surged 1.10% to approach 6300.  The NASDAQ has climbed approximately 2.8% since last Thursday's close.

Technology (XLK, +1.30%) once again provided leadership for the market as internet ($DJUSNS), semiconductors ($DJUSSC) and software ($DJUSSW) rose 1.81%, 1.64% and 1.62%, respectively.  Here's a current view of the XLK:

It appears that the month-long down channel has been broken and that could set up further strength in technology.  However, be aware that there is likely to be a nasty negative divergence on the XLK weekly chart if we see a breakout above the early June high.

As you might expect, financials (XLF, +0.32%) lagged on a day when the 10 year treasury yield ($TNX) struggled.

Pre-Market Action

The Hang Seng Index ($HSI) surged last night more than 1% to close at a fresh two year high.  Other Asian markets were mixed, while most European indices are hugging the flat line in early trading.

We're a day away from several key earnings reports from the banking group.  In light of more dovish remarks from Fed Chair Yellen and the "gradual" increases in rates, it will be very interesting to see what guidance the banks offer up.  JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC) and PNC Financial (PNC) will report its latest quarterly results before tomorrow's opening bell.

Dow Jones futures are up slightly this morning, up 9 points at last check and roughly 30 minutes before the opening bell.

Current Outlook

We are closing in on the end of a bullish historical period for equities and seasonal bearishness could kick in next week.  With that backdrop, it'll be interesting to see if the Russell 2000 can make a fresh breakout prior to that historical weakness.  Here's an hourly chart that shows how difficult the 1430-1435 level has been:

The Russell 2000 has been stuck in a 1400-1435 trading range since the second week of June, but the daily MACD is suggesting that momentum is accelerating to the upside so the small cap bulls will get a chance to breakout again as the week comes to a conclusion.

Sector/Industry Watch

The Dow Jones U.S. Toys Index ($DJUSTY) rose nearly 3% to break out from a bullish wedge, as highlighted below:

The blue circles show that the RSI had touched 40, which is typically solid support during an uptrend.  Also, the daily MACD had returned to centerline support and is now just turning higher as prices break out.  This group has been a tremendous performer in 2017 and I'd expect to see continuing strength based on current technical indications.

Historical Tendencies

At Monday's close, the Russell 2000 turns very bearish for the balance of the week.  July 18th through July 24th has been a difficult period for small caps since 1987 as the Russell 2000 has produced annualized returns of -54.39% over the past three decades.

Key Earnings Reports

(actual vs. estimate):

DAL:  1.64 vs 1.65

TSM:  .42 vs .50

Key Economic Reports

Initial jobless claims released at 8:30am EST:  247,000 (actual) vs. 246,000 (estimate)

June PPI released at 8:30am EST:  (actual) vs. +0.0% (estimate)

June Core PPI released at 8:30am EST:  (actual) vs. +0.2% (estimate)

Happy trading!

Tom

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