Trading Places with Tom Bowley

The Dow Jones Ends Its 2018 Winning Streak.....Barely

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Market Recap for Monday, January 8, 2018

After mostly a weak start on Monday, our major indices resumed their bullish ways and finished with positive returns.  The lone exception was the Dow Jones, which dropped 13 points to end its impressive winning streak to open 2018.  Weakness in Unitedhealth Group (UNH), Goldman Sachs (GS), Walt Disney (DIS) and General Electric (GE) held back an otherwise strong Dow Jones.  Caterpillar (CAT) rose another 2.5% yesterday and is off to a stellar start in 2018.


Biotechnology ($DJUSBT) pulled back to test its rising 20 day EMA and that weighed on the healthcare sector (XLV, -0.36%) - the weakest sector on the session.  Financials (XLF, -0.14%) also lost ground with banks ($DJUSBK) and insurance brokers ($DJUSIB) retreating.  The latter's weakness was particularly discouraging as an attempt to clear its declining 20 day EMA failed - at least for now:

One more low on this index, however, would likely print a very nice positive divergence just as the DJUSIB hits key price support in the 280-285 zone.

The oversold utilities sector (XLU, +0.94%) finally saw some relief and led the action on Monday.  After a brief one day pause, energy (XLE, +0.60%) bulls were back at it again with the XLE above 75 to test the price high from December 2016.  More on this in the Sector/Industry Watch section below.

Pre-Market Action

In a significant development, the 10 year treasury yield ($TNX) has climbed above 2.50% this morning and it's the first time we've seen that since March 2017.  Rising treasury yields typically coincide with rising equity markets.  So it should be little surprise to see Dow Jones futures up another 65 points in pre-market action with approximately 35 minutes to go to the opening bell.

Overnight, Asian markets were mostly higher and the same goes for European markets this morning.  The global rally continues.

Current Outlook

The Dow Jones Transports ($TRAN) touched 11,000 for the first time on Monday and now looks to close above it for the first time.  But the TRAN is another area in the market that could really use a little consolidation or basing.  Since the November low, the TRAN has risen more than 16%, aiding the major indices in their never-ending climb to the stratosphere.  Weekly RSI is back at 75 and, while not at the 80 level it reached in late-2016, it is very overbought:

We should begin to expect some short-term weakness.  The bullish seasonal strength that we almost always see from October 28th through January 18th in the benchmark S&P 500 is nearing an end.  While history also tells us that strength normally is a precursor to more strength, it simply makes sense to see at least a little pause in the transports to allow its overbought oscillators to unwind somewhat.

Sector/Industry Watch

Energy (XLE) has been on a huge roll since the summer of 2017.  After reversing its downtrend and breaking above its 20 week EMA, it's held that level on pullbacks and that's a signal of a bullish uptrend in place.  Here's the longer-term weekly chart:

Momentum is accelerating and the XLE is actually overbought with a weekly RSI at nearly 74.  Overbought and at price resistance could be a troublesome combination over the next few weeks, we'll see.  But whether the XLE consolidates here or not, there's no doubt that the XLE has been a tremendous performer for months and it's an area to consider in 2018, especially during periods of profit taking.

Historical Tendencies

Specialized consumer services ($DJUSCS) has enjoyed two solid years of outperformance and, based on history, it's doubtful that we'll see it come to an end in January.  Over the past two decades, the DJUSCS has averaged gaining 2.0% during the month of January, which ranks January as its best calendar month of the year in terms of average monthly performance.  That tends to lead to solid first quarter performance right through March, a month where the DJUSCS has risen 72% of the time - its highest frequency among all calendar months.

Key Earnings Reports

None

Key Economic Reports

None

Happy trading!

Tom

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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 StockCharts.com'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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