Trading Places with Tom Bowley

Energy Has All Guns Blazing, Leads Bifurcated Market

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Market Recap for Thursday, May 17, 2018

There's a new sheriff on Wall Street and it's the energy ETF (XLE, +1.51%).  Its SCTR has soared to 97.1 with the second best SCTR (XLK - technology ETF) at 86.8.  The distance between the two is widening.  The XLE not only led the action yesterday, but it is also the sector leader over the past week, month, three months and six months.  Only three sectors have gained ground over the past three months and they're as follows:


Energy (XLE):  +16.38%
Technology (XLK):  +3.27%
Consumer Discretionary (XLY):  +o.50%

Crude oil prices ($WTIC) are on the rise and energy stocks have a strong tendency to follow the lead of crude oil.  Check out the following chart:

Focus on the 2018 action where crude oil prices began rising (blue directional line), but the XLE stalled, triggering a pretty decent decline in the correlation indicator (red circles).  It's hard for energy companies not to make more money when crude oil prices are rising.  So this type of short-term movement toward inverse correlation sets up a trading opportunity.  Crude oil prices are currently rising so I'd expect to see continuing leadership from the XLE.

Utilities (XLU, -0.81%) were the weakest sector on Thursday as the 10 year treasury yield ($TNX) continues to push higher.  That provides headwinds for the XLU and it's showing up on the chart.  The XLU is down roughly 3% during the month of May as most other areas have recovered nicely.  I would avoid utilities (and REITs) during periods of rising treasury yields like the one we're currently experiencing.

Pre-Market Action

The 10 year treasury yield ($TNX), gold ($GOLD) and crude oil ($WTIC) are all down fractionally this morning. We saw mostly strength overnight in Asia, while Europe is currently trading primarily in negative territory, though losses are minor.

Applied Materials (AMAT) reported its latest quarterly earnings after the bell on Thursday and this semiconductor giant is down 6% in pre-market action.

Dow Jones futures were up earlier, but currently show a loss of 13 points as we approach a fresh trading day.

Current Outlook

Transports ($TRAN) once again tested that key short- to intermediate-term price resistance at 10800 on Thursday, only to fail.  The stock market gets a ton of "fuel" from transports so pay close attention here.  A breakout would add strength to the current market rally:

Most technicians would agree that the more times you test a key level and fail, the more significant it becomes when you finally clear it.  Check out that 10800 level.  It should be fairly obvious that 10800 has been a wall and that sellers dominate the action every single time the TRAN hits that level.  A close above 10800 would send shorts running for the exits, in my opinion, and trigger a big advance.  Watch for it.

Sector/Industry Watch

Industrial suppliers ($DJUSDS) have been marching higher in May and they're not far from a critical test of price resistance.  The group has been consolidating in bullish fashion since topping in late-January with the overall market.  Here's the visual:

The strength seen thus far in May is quite obvious as the daily PPO is screaming higher.  There was a bit of consolidation earlier this week, but note that it held above the rising 20 day EMA.  So far the DJUSDS is showing very bullish characteristics and as long as it holds that 20 day EMA, I would be bullish the group.  Ultimately, what you're looking for here is a close above the price resistance at 318 established back in January.  I believe it's simply a matter of time as its relative performance vs. its industrial peers has been very strong.

Historical Tendencies

After early May weakness, Vertex Pharmaceuticals (VRTX) has stormed back and looks to move higher during the balance of May into June.  From a seasonal perspective, the best two calendar months of the year for VRTX are May and June, where VRTX has averaged moving higher by more than 17% over the past two decades.  After nearly printing a double bottom to the penny near 146, VRTX has risen more than 10 points over the past couple weeks.  It's closed above its 20 day EMA the past five sessions and appears to be regaining its typical seasonal strength.  VRTX has closed the month of May higher than it's opened for the past seven years.

I wrote about VRTX in a recent ChartWatchers article, detailing its seasonal tendencies and suggesting that recent underperformance has been more about the biotech group ($DJUSBT) than about VRTX itself.

Key Earnings Reports

(actual vs. estimate):

AZN:  .48 vs .28

CPB:  .70 vs .60

DE:  3.14 vs 3.33

Key Economic Reports

None

Happy trading!

Tom

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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