Trading Places with Tom Bowley

Consumer Stocks, Healthcare Take Their Turn To Lead U.S. Equities To New Highs


Market Recap for Wednesday, October 4, 2017

This bull market advance continues to be about rotation.  Index rotation.  Sector rotation.  Individual stock rotation.  Few areas of the market are breaking down.  It's mostly about gains, consolidation, then more gains.  On Wednesday, the red hot Russell 2000 took a day off.  How can you blame traders for taking some profits off the table.  Check out the recent run in small caps:

The combination of overbought conditions and typical bearishness to begin October for small caps could have contributed to the loss on the Russell 2000 yesterday.  But seeing money rotate to this aggressive index of companies that do all or nearly all of their business domestically aligns with the Fed's belief that economic conditions here at home continue to strengthen.

A few key sectors showed relative weakness on Wednesday, namely technology (XLK, -0.07%) and industrials (XLI, -0.03%), but there was no technical damage inflicted as a result of the fractional losses.

Consumer stocks led the action yesterday with consumer discretionary (XLY, +0.52%) and consumer staples (XLP, +0.32%) both having solid days.  Healthcare (XLV, +0.48%), led by medical equipment stocks ($DJUSAM), also outperformed solidly for the day, testing highs set in the second week of September.

Pre-Market Action

A huge revenue and earnings beat sent shares of Constellation Brands (STZ) soaring in pre-market action.  Given the steady pre-earnings push higher in our major indices, STZ could be setting the stage for more solid earnings surprises to the upside.  This report certainly should provide a boost to consumer staples and perhaps its ETF (XLP), which has been languishing near key price support.  I'm featuring the XLP below in the Sector/Industry Watch section.

U.S. futures are positive this morning, particularly strong on the NASDAQ (+0.36%), as we approach another trading day.  Dow Jones futures are up a much more modest 0.08% at last check.

Current Outlook

Short-term risks have definitely increased, especially with respect to small cap stocks.  After a huge advance in the Russell 2000 (chart reflected above), there's now a haunting 60 minute negative divergence that suggests we need a pullback in that index to relieve the momentum issues.  Check this out:

Please remember that negative divergences do not provide any sort of guarantee that prices will drop.  They simply alert us to the fact that price momentum is slowing and that risks of taking new long positions have greatly increased.  The pink arrows above mark potential MACD centerline and 50 hour SMA tests to help unwind the negative divergence.

Sector/Industry Watch

Consumer staples (XLP), as a defensive-oriented sector, has not performed nearly as well as its more aggressive consumer counterpart, consumer discretionary (XLY).  That's exactly what I want to see during bull market advances - participating, but underperforming defensive sectors.  While the XLP has been relatively weak on an absolute performance basis, it hasn't broken down and Wednesday's action underscored that fact.  Here's the chart:

Technically, the XLP remains solidly in an uptrend with key closing price support close to 53.50.  Yesterday's intraday low of 53.71 successfully held above that support level and I'd look for the XLP to rise from here, helping to support the current leg of the bull market.

Historical Tendencies

Over the past two decades, the S&P 500 has performed best during the calendar months of March and October, gaining an average of 2.1% in each.  Since 1950, however, March ranks as the fourth best calendar month, producing annualized returns of 14.58%.  October ranks seventh, gaining 10.85% on an annualized basis.

Key Earnings Reports

(actual vs. estimate):

STZ:  2.47 vs 2.16

(reports after close, estimate provided):

COST:  2.02

Key Economic Reports

Initial jobless claims released at 8:30am EST:  260,000 (actual) vs. 265,000 (estimate)

August factory orders to be released at 10:00am EST:  +1.0% (estimate)

Happy trading!


Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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