Trading Places with Tom Bowley

Apple Tops $1 Trillion Market Cap, Leads Technology Higher

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Special Note

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Market Recap for August 2, 2018

Technology (XLK, +1.26%) posted a second consecutive strong session of gains, led once again by Apple (AAPL) and the computer hardware group ($DJUSCR, +2.68%).  AAPL became the first company ever to close with a market cap exceeding $1 trillion.  There are likely to be others to follow suit in time, namely Amazon.com (AMZN, $895 billion), Alphabet (GOOGL, $846 billion) and Microsoft (MSFT, $826 billion).  These companies have proven over their long histories that can continue to grow at an inordinate rate despite their size.

Unlike yesterday, the technology advance was not solely powered by AAPL.  Many industry groups within the tech space posted gains in excess of 1%, including the recently beaten-down software ($DJUSSW, +1.48%).  There's still plenty of technical work left for the DJUSSW, but yesterday's close back above its 20 day EMA is a great start:

While the channel is quite impressive alone, the panel below shows the relative performance of the DJUSSW vs. the benchmark S&P 500.  Not only is software showing absolute strength, but the relative strength has begun to turn up again and is very impressive as well.  Just one word of caution here.  As I mentioned in an earlier blog, the DJUSSW does show signs of slowing price momentum on its weekly chart so if the daily chart shows any signs of breaking down, you want to be very careful here.

Materials (XLB, -0.66%) and energy (XLE, -0.55%) were the obvious laggards yesterday, but I see the XLB bouncing off its Thursday reversal.  The XLB was down much more earlier in the session and managed to rally.  More on the XLB in the Current Outlook section below.

Pre-Market Action

Earnings continue to pour in and, overall, traders like what they're seeing as major U.S. indices trade bullishly.  Nonfarm payrolls came up short this morning, but futures seem to suggest a shrugging of the shoulders.  While Asian markets were mixed overnight, European markets are mostly higher.  Dow Jones futures are pointing to a slightly lower open as we approach the opening bell.

Current Outlook

Materials (XLB) was the weakest sector yesterday, but the recovery was very nice as the XLB printed a hammer. I discussed the XLB on MarketWatchers LIVE yesterday and I believe this group is poised to rally.  Obviously, the hammer yesterday just as the XLB hit trendline support suggests a reversal could be underway:

I'm expecting materials to make a run higher to test overhead price resistance near 61.  I don't expect the XLB to lead the market on a relative basis, simply to participate in the upside.  The reward to risk at the current price level is fairly strong.

The XLB's largest component and biggest influencer is DowDuPont (DWDP), which represents roughly 22% of the XLB's performance.  DWDP traded lower yesterday after its underwhelming quarterly earnings report, but it finished the day strong, printing a hammer like the XLB and also appears poised to rally near-term.

Sector/Industry Watch

I've not been a fan of gold ($GOLD) for a long, long time and I'm still not.  However, there are two positives lining up for gold.  First, the daily PPO seems to be turning higher despite the lower prices.  That potential positive divergence is likely to put a lid on the selling soon:

The red circle highlights that the PPO seems to be trying to find a bottom.  A positive divergence could emerge on gold's next move lower in price.  The second positive for gold is that it's seen as a hedge, especially during market consolidation and/or downturns.  The S&P 500 has a history of struggling in August and September, so gold could regain its shine - temporarily.

Again, I'm not a fan and I'm certainly not bullish gold, but the above perhaps provides a glimmer of short-term hope.  The best news for gold would be a move lower in the U.S. Dollar Index ($USD) and I simply don't see that happening.  But if I'm wrong.....

Historical Tendencies

August and September have been notorious months for bearish S&P 500 behavior and gold could benefit if history repeats in 2018.  From a seasonal perspective, gold prices have risen during September and August an average of 2.0% and 1.8%, respectively, over the past two decades.

Key Earnings Reports

(actual vs. estimate):

AEE:  .97 vs .79

CBOE:  1.05 vs 1.03

DISH:  .83 vs .70

ENB:  .62 vs .42

KHC:  1.00 vs .91

LYB:  3.34 vs 2.90

NBL:  .17 vs .24

TM:  4.08 vs 3.73

Key Economic Reports

July nonfarm payrolls released at 8:30am EST:  157,000 (actual) vs. 190,000 (estimate)

July private payrolls released at 8:30am EST:  170,000 (actual) vs. 184,000 (estimate)

July unemployment rate released at 8:30am EST:  3.9% (actual) vs. 3.9% (estimate)

July average hourly earnings released at 8:30am EST:  +0.3% (actual) vs. +0.3% (estimate)

July PMI services index to be released at 9:45am EST:  56.3 (estimate)

July ISM non-manufacturing index to be released at 10:00am EST:  58.8 (estimate)

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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