Market Recap for Tuesday, April 24, 2018
Pre-market action on Tuesday was solid and that's just about where the bullishness ended. With the Kentucky Derby just around the corner, let me summarize Tuesday's action from the opening bell in different fashion: "And they're off! Caterpillar and Bullish Action storm out of the gate, but are quickly overtaken by Increased Volatility, False Breakout and Higher Rates. The leaders are immediately joined by Impulsive Selling, while Aggressive Sectors trails the entire field. Midway around the backstretch, crowd-favorite Talking Heads makes a move but no one takes this threat seriously. As they turn for home, Increased Volatility and Impulsive Selling open up a huge lead. Down the stretch they come!!! As they approach the wire, Increased Volatility hangs on for an impressive Derby victory, holding off a late-charging Ugly Candlestick, while Impulsive Selling fades and Oversold Bounce rallies for a distant third. Nonferrous Metals did not finish."
That about sums it up.
The real key from Tuesday's action is that the bears made a very significant "kick save". The Volatility Index ($VIX) had once again fallen to a level where bull markets typically begin to thrive. But the actual breakdown below price support never materialized and the VIX instead surged off support:
The bulls are looking for a VIX breakdown beneath 14.50. It's as simple as that. Low volatility is synonymous with bull market action. It's a signal that market participants are no longer looking for the wild swings and that typically results in more boring, bullish action ahead. The higher VIX could spell more short-term trouble so be very conscious of 2581 support on the S&P 500.
Industrials (XLI, -2.79%) were the hardest hit as commercial vehicles & trucks ($DJUSHR) tumbled following Caterpillar's (CAT) solid quarterly earnings report. More on that below in the Sector/Industry Watch section. Defense stocks ($DJUSDS) also had a very rough day after initially starting the session in positive territory. Lockheed Martin (LMT) gapped higher in early action, then suffered a fate similar to CAT throughout the balance of the session.
There are tons of earnings reports coming out this week. Thus far, I'd say quarterly results are mostly positive. However, an argument could be made that the huge advance into early 2018 had these results already priced in as we continue to consolidate.
A couple of leaders - Boeing (BA) and Twitter (TWTR) - helped to turn the futures around this morning after they began the morning on the negative side. It remains to be seen, though, whether any early strength will be sustained throughout the session.
Dow Jones futures are roughly flat as we approach the open. The 10 year treasury yield ($TNX) is at 3.01% in early action and that's certainly got traders on edge.
If the current weakness morphs into something stronger and the S&P 500 loses key closing support at 2581, it'll surprise the heck out of me. The relative performance of consumer stocks continues to show no signs of economic weakness ahead:
Gap and trendline resistance held on the last rally and we've turned lower again. I realize bear markets can take many different shapes and sizes, but one truth remains. Consumer spending accounts for roughly two-thirds of GDP. I cannot imagine the stock market approaching a bear market/recession with money rotating towards the more aggressive area of consumer spending - discretionary stocks. I guess time will tell.
Caterpillar (CAT) reported strong results on Tuesday morning and appeared to be poised for solid technical action as well. All that changed after the opening bell, however, as sellers permeated Wall Street and the Dow Jones U.S. Commercial Vehicles & Trucks Index ($DJUSHR) was an apparent target:
On the daily chart (not shown above), the DJUSHR retreated to the 1950 area to retest recent price support. But the DJUSHR is a perfect example of why it's important to take a step back and look at the big picture. Commercial vehicles & trucks have been in an unabated trend to the upside for more than two years, culminating in a massive advance from September 2017 to the January 2018 high. Its weekly RSI was near 90! The group deserves a break, doesn't it? A ton of good news was already priced into the group and that helps to explain the reaction to CAT's strong earnings report. I suspect we'll see more consolidation and frustration with the DJUSHR. The weekly chart above shows the initial Fibonacci retracement level (38.2%) to be approximately 160 points beneath the current level. Therefore, if this short-term support near 1950 fails to hold, a further drop should be expected.
Given the recent dollar breakout, small caps could be the leading index over the coming quarter as smaller, domestic companies are not negatively impacted by a rising dollar. This also lines up with history, where May has been one of the best calendar months on the Russell 2000 since 1987. There are two particularly strong bullish periods upcoming for small caps, with annualized returns as follows:
April 28th through May 5th: +38.11%
May 26th through June 5th: +64.49%
Key Earnings Reports
(actual vs. estimate):
ANTM: 5.41 vs 4.83
BA: 3.64 vs 2.59
BSX: .33 vs .31
CMCSA: 2.62 vs 2.59
GD: 2.65 vs 2.47
NOC: 4.21 vs 3.63
NSC: 1.93 vs 1.77
ROK: 1.89 vs 1.80
SIRI: .06 vs .05
TEL: 1.42 vs 1.36
TMO: 2.50 vs 2.42
TWTR: .16 vs .12
(reports after close, estimate provided):
Key Economic Reports