Trading Places with Tom Bowley

Small Caps And Healthcare Take Brunt Of Monday's Selling

Market Recap for Monday, October 30, 2017

Weakness permeated the U.S. stock market on Monday with the small cap Russell 2000 losing more than 17 points, or 1.15%.  Other U.S. indices mostly followed suit, although the NASDAQ gave back very little from Friday's massive gains as large cap technology giants continued to perform well.  Traders in Apple (AAPL) now are gearing up for what they believe will be blowout numbers on Thursday after the close.  AAPL gained 2.25% yesterday to close at an all-time high.  Facebook (FB) reports its quarterly results on Wednesday after the close and also finished at an all-time high close Monday.


Technology (XLK, +0.22%), along with energy (XLE, +0.52%), were the two best performing sectors on Monday.  Technology was lifted by AAPL as the Dow Jones U.S. Computer Hardware Index ($DJUSCR) broke out to new highs:

While we are just now moving into overbought territory, the MACD has moved higher after consolidating for awhile so I'd expect to see more strength ahead, especially if AAPL beats its revenue and earnings estimates Thursday afternoon as many as its peers have already done.

Things haven't been so rosy for consumer staples (XLP, -0.85%) stocks, which have dropped nearly 4% in the past 2-3 weeks.  Technically this selling has hurt as key price support has been lost:

Last week we saw that intraday move beneath 53.50 and subsequent recovery and it looked as if maybe the XLP would hold onto support, but that strength lasted just one day to test its declining 20 day EMA (red arrow) before additional selling kicked in.  If there's a silver lining, it's that the XLP is very defensive in nature and the more aggressive part of consumer stocks is consumer discretionary (XLY, -0.45%), which has performed very well of late, printing a triple top breakout on Friday to an all-time high close.

Pre-Market Action

U.S. futures are poised to begin the day in bullish fashion as the Dow Jones futures are higher by 22 points with 30 minutes left until the opening bell.

The 10 year treasury yield ($TNX) is flat this morning.  Crude oil ($WTIC) is just above $54 per barrel and it's not closed above $55 per barrel since July 2015.  A breakout would be a further boost for energy shares (XLE).

Current Outlook

One reason for recent stock market strength has been traders' fleeing the bond market.  In less than two months, the 10 year treasury yield ($TNX) rallied from 2.04% to 2.47%, easily clearing multiple tops in the 2.40%-2.42% zone spanning seven months.  A rising yield is synonymous with falling treasury prices.  Proceeds from those sales tend to find their way into equities, helping to fuel a significant rise in the stock market.  Since that bottom on the TNX, the benchmark S&P 500 has risen 111 points, or roughly 4.5%.  The problem now is that the S&P 500 has a negative divergence and the TNX has failed to hold onto yield support in that 2.40%-2.42% range.  Check this out:

While it's difficult to slow down a bull market freight train - and this one may not slow down either - do keep in mind that a period of selling to send the S&P 500's MACD down to centerline support and to allow a 50 day SMA test would not be bearish at all.  It wouldn't feel good during the process, but it would actually set the index up for a more sustainable advance into year end and 2018.

Sector/Industry Watch

Healthcare (XLV, -1.07%) was clearly the worst sector on Monday, but the weakness has alleviated overbought issues and the pullback has sent its RSI down just below the 40 level - a key support level during an uptrending index, sector or stock:

Given the selling that we've seen in healthcare and consumer staples, it's fairly obvious that the stock market is casting its collective vote for more aggressive areas of the market and avoiding defensive areas.  While the XLV has been trending lower, similar to consumer staples, the big difference is that the XLV has not broken down technically and appears to be at a very solid reward to risk entry area.

Historical Tendencies

Yesterday, I highlighted end of month and beginning of subsequent month annualized returns on the NASDAQ.  Today, let's look at these numbers for the benchmark S&P 500 (since 1950):

31st day of all months:  +30.00%
1st day of all months:  +45.72%
2nd day of all months:  +38.04%

Keep in mind that the S&P 500 has averaged gaining 9% per year since 1950.  Clearly, the 31st through the 2nd are extremely strong days historically.  Today is the 31st of October.

Key Earnings Reports

(actual vs. estimate):

ADM:  .45 vs .55

AET:  2.45 vs 2.06

AMT:  1.73 vs 1.67

CMI:  2.71 vs 2.47

ETN:  1.25 vs 1.26

FIS:  1.18 vs 1.06

PFE:  .67 vs .65

(reports after close, estimate provided):

APC:  (.56)

CHKP:  1.24

EA:  .55

FISV:  1.30

Key Economic Reports

August Case-Shiller HPI to be released at 9:00am EST:  +0.5% (estimate)

October Chicago PMI to be released at 9:45am EST:  62.0 (estimate)

October consumer confidence to be released at 10:00am EST:  121.0 (estimate)

FOMC meeting begins with its latest policy statement to be issued tomorrow at 2pm EST

Happy halloween and happy trading!

Tom

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