Trading Places with Tom Bowley

Financials Hit Resistance And Weaken As Yields Fall

Market Recap for Tuesday, July 11, 2017

Only two of nine sectors - energy (XLE, +0.54%) and technology (XLK, +0.22%) were able to finish in positive territory on Tuesday.  Given that overall weakness, it was interesting to see that only one of our major indices lost ground (S&P 500 down less than 2 points).  Financials (XLF, -0.88%) saw some profit taking to hold back that benchmark S&P 500 index ($SPX):


Momentum in financials is quite strong so I'm expecting that any handle to form down to the rising 20 day EMA will be an excellent entry opportunity into this area of the market.  The culprit for short-term selling?  A declining 10 year treasury yield ($TNX).  After rising solidly recently to break a key downtrend line, the TNX is pulling back temporarily.  That pullback should ignite more profit taking in banks ($DJUSBK), life insurance ($DJUSIL) and other financial industry groups.  I've reviewed the current outlook for the TNX in the Current Outlook section below.

Energy's short-term bounce is not surprising off the recent hammer that printed on price support.  But I won't grow more bullish on the sector until we clear the range of price resistance from 66.00-67.00.  That also coincides with trendline resistance that intersects the price resistance range.  Increasing volume and a close above 67.00 would represent the potential for a trend reversal and become a much better buying opportunity.  Here's the current chart:

One group helping the XLE is renewable energy ($DWCREE), which has bounced beautifully off price support and its rising 20 day EMA.  Continuing strength in the DWCREE could be one catalyst to drive the XLE above 67 resistance.

Pre-Market Action

Crude oil ($WTIC) is higher this morning by 1.75% and that's likely to add to the recent reversal and strength in energy shares (XLE).  Treasuries are being bought - perhaps as a hedge ahead of next week's seasonal weakness in equities - and the TNX has fallen back to 2.30% this morning.

Fed Chair Janet Yellen has signaled gradual rate increases ahead and that's sparked buying in both treasuries (driving yields lower this morning) and equities, with Dow Jones futures rising 84 points 30 minutes before the opening bell.  NASDAQ futures are up almost twice as much as the Dow Jones on a percentage basis.

Current Outlook

The 10 year treasury yield's ($TNX) break of its downtrend line and bullish wedge resistance will likely lead to higher treasury yields.  After a significant short-term selling episode in treasury prices, however, we're seeing a bit of buying in treasuries.  As that inevitable bounce occurs, we'll see yields fall and that combination has caused some profit taking in financials.  Check out the current TNX chart:

Both the rising MACD above its centerline and the RSI reaching 70 for the first time this year suggest that this upside reversal has legs.  The green arrow marks the rising 20 day EMA, which is where I'd look for the TNX to find support on any further drop.

Sector/Industry Watch

Financial administration ($DJUSFA) stocks have done quite well since the November bottom, rising more than 20% since that time.  Recent attempts at breakouts, however, have stalled as the daily MACD has rolled over and momentum appears to have slowed.  The following chart illustrates this slowing momentum and failed breakout attempts, but one component - Square, Inc. (SQ) - saw a heavy volume breakout on Tuesday:

I'm bullish this group during the second half of 2017 as rising treasury yields are likely to lift all financial boats (REITs being a possible exception).  However, we should recognize that we're well above the rising trendline and that line would represent the best entry into this space.

Historical Tendencies

The S&P 500 has typically seen weakness from June through September over the past two decades, with July being the lone exception:

The highlighted areas provide average monthly returns for each calendar month from June through September.  You can see that July has produced an average return of +0.3% over the past 20 years.

Here's a breakdown of July's S&P 500 performance since 1950:

July 1-17:  +23.76%
July 18-23:  -23.73%
July 24-31:  +17.93%

Just beware that while July overall is a decent month for stock performance, next week historically has been very weak.

Key Earnings Reports

(actual vs. estimate):

FAST:  .52 vs .50

MSM:  1.09 vs 1.09

OZRK:  .73 vs .73

Key Economic Reports

Beige book to be released at 2pm EST

Happy trading!

Tom

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