Trading Places with Tom Bowley

Airlines Catch Seasonal Jet Stream To Lead Transports, Market Higher

Market Recap for Tuesday, October 3, 2017

It didn't take long for the seasonal tailwinds to kick in for airlines ($DJUSAR).  I posted last Friday that airlines were poised to breakout technically and highlighted Alaska Air Group (ALK) as one airline that has performed extremely well during the fourth quarter, especially October.  Well, the breakout happened yesterday for the entire group and it was a sight to see.  The DJUSAR soared 5.64% as transports ($TRAN) added to their already very overbought conditions.  Check out the breakout on the DJUSAR:


Price resistance at 260 and MACD centerline resistance were highlighted with red arrows on Friday and you can see that both were easily cleared with Tuesday's massive gains.  Given the strong seasonal tailwinds, the DJUSAR becomes a very bullish index and its components should be considered for fourth quarter trading, especially on bouts of short-term profit taking.

Airlines paced a strong industrials sector (XLI, +0.43%) with materials (XLB, +0.42%) and consumer discretionary (XLY, +0.42%) not far behind.  Utilities (XLU, -0.28%) were once again the primary laggard, although they had company with energy (XLE, -0.10%) and healthcare (XLV, -0.02%).

Pre-Market Action

Asia was mostly higher overnight, while Europe is mixed this morning.  Crude oil ($WTIC) is slightly lower and gold ($GOLD) is slightly higher.  The 10 year treasury yield ($TNX) is down slightly and treasury prices moving higher, along with a slight miss in the ADP employment report, has U.S. futures on the defensive.  Dow Jones futures are down 23 points as we approach the opening bell.

Current Outlook

The performance ratio of consumer discretionary vs. consumer staples (XLY:XLP) is a very important one as it signals whether those investing in consumer stocks are seeking out capital appreciation and growth or income.  When this ratio is rising, it's quite bullish for equities and helps to sustain bull market advances.  Note the continuing uptrend on the chart below:

The uptrend here since the beginning of 2016 is quite evident.  The only obstacle remains the late-2015 relative high near the 1.68 level.  I'm looking for a breakout in the fourth quarter to continue to support the current bull market rally.

Sector/Industry Watch

Automobiles ($DJUSAU) have been on a roll of late, breaking out of one bull flag formation after another.  This group tends to move slowly, but not this time.  We've seen big gains in General Motors (GM) and Ford (F) over the past month and others like Toyota Motor (TM) and Fiat Chrysler (FCAU) have been strong all summer.  The following are two charts, the DJUSAU and then Tesla (TSLA), which has simply been consolidating and hasn't participated in the recent industry strength:

DJUSAU:

And then there's TSLA:

I actually love this chart of TSLA and fully expect to see an upcoming heavy volume breakout to confirm the bullish ascending triangle pattern.  Yesterday's reversal prints "Point D" in this A-B-C-D-E pattern.  E is the breakout.  TSLA was initiated this morning with a buy and price target at 500.  That should help to ignite the rally.

Historical Tendencies

Since 1971 on the NASDAQ, Wednesdays, Thursdays and Fridays have all posted annualized returns of more than 20% and are clearly the best calendar days of the week on the aggressive NASDAQ index.

Key Earnings Reports

(estimates provided):

AYI:  2.40

MON:  (.08)

PEP:  1.42

YUM:  .65

Key Economic Reports

September ADP employment report released at 8:15am EST:  135,000 (actual) vs. 140,000 (estimate)

September PMI services index to be released at 9:45am EST:  55.2 (estimate)

September ISM non-manufacturing index to be released at 10:00am EST:  55.5 (estimate)

Happy trading!

Tom

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