Trading Places with Tom Bowley

Defensive Stocks Lead Thursday's Rally; Warning Sign?

Tom Bowley | 

Market Recap for Thursday, March 8, 2018

It's never a great signal to see the stock market rally and the three defensive sectors - consumer staples (XLP, +0.91%), utilities (XLU, +0.74%) and healthcare (XLV, +0.67%) - sit atop the sector leaderboard.  But we also shouldn't overreact to one day's trading.  If we see another S&P 500 all-time high in the next few months and this type of defensive leadership continues, then we'd be talking about a major warning sign.  Again, let's not overreact to one day.  A big jobs report was awaiting on the horizon, so it could be a simple case of traders not wanting to take on further risk ahead of such an impactful report.

Thanks to an afternoon rally, our major indices managed to end the session in positive territory, with the lone exception being the small cap Russell 2000.  We'll excuse that index as it's been a relative strength juggernaut in March thus far.  It was quite notable that the U.S. Dollar Index ($USD) was able to clear its 20 day EMA yesterday after failing to do so in the prior two days:

Note that the blue vertical dotted line marks a bottom in both the USD and the RUT:SPX ratio.  Should the dollar strengthen further and clear overhead price resistance with a bullish PPO centerline crossover, I'd look for additional outperformance from small caps.

Pre-Market Action

Futures reacted positively to better-than-expected nonfarm payroll data released this morning at 8:30am EST.  That's a good sign as it could send the Volatility Index ($VIX) spiraling beneath the key 16 support level enjoyed during each of the past two bear markets.  Dow Jones futures are volatile this morning, but up 158 points with roughly 45 minutes until the opening bell.

Overnight in Asia, we saw strength across the board.  However, European markets are much more cautious with fractional losses in key markets there.  Bonds (TLT) and gold ($GOLD) are both being sold on the solid jobs report, while crude oil ($WTIC) is up more than 1%.

Current Outlook

I mentioned above that the defensive groups outperformed yesterday.  It's generally a good idea when you're looking at relative strength or weakness to take a step back and look at the bigger picture to get a feel for what type of rotation is truly taking place.  The following is a chart of the benchmark S&P 500, followed by the relative strength performance of each of the defensive sectors:

Throughout the latest bull market advance, investors have shunned the defensive groups and continue to do so.  That's why I'd ignore the one day of glory enjoyed by these groups on Thursday.  We need to see a much more concerted effort at rotation before I'd grow more cautious.  Instead, I maintain a cautiously bullish view and will grow more bullish when and if the Volatility Index ($VIX) closes back below 16.  We're getting close as the VIX finished at 16.54 yesterday.

Sector/Industry Watch

One industry group that bounced back strongly on Thursday, clearing key short-term overhead price resistance in the process, was the Dow Jones U.S. Gambling Index ($DJUSCA).  A few earnings reports generated the buzz in the group, most notably International Game Technology (IGT), which is perhaps the best name in the group now:

IGT looks very promising as it's now broken out relative to its peers, has broken out on an absolute basis and is part of an industry group that just broke out of a bullish wedge - a bullish continuation pattern.

Historical Tendencies

If we combine technical conditions with seasonal strength, then Discover Financial Services (DFS) should be on our radar.  DFS is likely printing some form of a continuation pattern, possibly an ascending triangle.  Let's look at the chart:

I didn't annotate the negative divergence in late-October/early-November, but you can see that lower PPO readings accompanied price highs back then and DFS promptly "reset" its PPO down to centerline support prior to its next big advance.  Fast forward to today.  The PPO has reset back to centerline support and we've nearly tested a significant trendline.  RSI is in the 40s and a rally from the current price would be no surprise at all.

Since 2003, March (+5.7%) and April (+4.8%) have easily been the best two calendar months of the year in terms of average monthly returns, providing further signs of a possible rally near-term.  

Key Earnings Reports


Key Economic Reports

February nonfarm payrolls released at 8:30am EST:  313,000 (actual) vs. 205,000 (estimate)

February private payrolls released at 8:30am EST:  287,000 (actual) vs. 195,000 (estimate)

February unemployment rate released at 8:30am EST:  4.1% (actual) vs. 4.0% (estimate)

February average hourly earnings released at 8:30am EST:  +0.1% (actual) vs. +0.2% (estimate)

January wholesale trade inventories to be released at 10:00am EST:  +0.7% (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.
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