Trading Places with Tom Bowley

When Financials Lead On A Relative Basis, This Usually Happens

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Market Recap for Wednesday, August 8, 2018

Wall Street ended Wednesday's action in a bifurcated state as the NASDAQ withstood a final 20 minute selloff to finish with a slight 4 point gain.  The other major indices finished lower, but just fractionally so.  In sector performance, slight gains were felt in technology (XLK, +0.27%) and financials (XLF, +0.25%).  It was important to see the latter group strong as the XLF broke above 28.25 resistance earlier this week after several failed attempts over the past several months.  A continuation of strength above that 28.25 level should be viewed bullishly.


Internet stocks ($DJUSNS) managed to lead technology higher, although it does appear to be stalling as it nears significant overhead gap resistance:

The volume has been declining on this advance and there's a clear potential head & shoulders top in play.  While I normally assume that topping patterns will not confirm in a bull market, we still need to be aware that the internet space is one of the more influential groups in the U.S. stock market.  Failure to hold support should be viewed very bearishly in the near-term as other areas of the market would be called upon for strength to avoid an overall S&P 500 selloff.  I'm not predicting an internet meltdown, but I'm certainly aware of the pattern above.

Pre-Market Action

Solid economic news is out this morning with inflation at the producer level apparently in check and initial jobless claims coming in lower than expected.  There's been a mostly muted response in U.S. markets, however, as the 10 year treasury yield is lower by 2 basis points to 2.95% and Dow Jones futures are currently higher by 18 points.

Current Outlook

While nothing is a sure thing, the performance of the financials ETF (XLF) vs. the S&P 500 has been positive correlated to the direction of the S&P 500 itself.  In other words, when financials are outperforming its sector counterparts, the S&P 500 normally moves higher.  Here's the chart to illustrate:

Note that there's not always a positive correlation.  In fact, look where we are now - at one of the lowest relative levels of the bull market.  That tells me one of two things is about to happen.  Either financials will lead the market higher into year end OR the recent absolute breakout in the XLF ultimately fails and the S&P 500 falls as well.  I'm betting on the former.

Sector/Industry Watch

The Dow Jones U.S. Hotels Index ($DJUSLG) fell nearly 2% on Wednesday and was among the worst performing industry groups.  It wasn't so much that the industry was down.  It was that it broke down:

Chartists can still look to the 50% Fibonacci retracement, which is closer to 1900, for a reversal.  But yesterday's action did violate prior closing lows and should be respected until a reversal occurs.

Historical Tendencies

Here's a breakdown of calendar week annualized performance on the S&P 500 since 1950:

Monday-Tuesday:  -1.99%
Wednesday-Thursday-Friday:  +16.10%

Key Earnings Reports

(actual vs. estimate):

ADDYY:  1.22 vs 1.13

NCLH:  1.21 vs 1.03

PRGO:  1.22 vs 1.21

VIAB:  1.18 vs 1.07

WP:  1.04 vs .95

(reports after close, estimate provided):

DBX:  .06

INVH:  .29

MCHP:  1.49

Key Economic Reports

Initial jobless claims released at 8:30am EST:  213,000 (actual) vs. 220,000 (estimate)

July PPI released at 8:30am EST:  +0.0% (actual) vs. +0.3% (estimate)

July Core PPI released at 8:30am EST:  +0.1% (actual) vs. +0.3% (estimate)

June wholesale inventories to be released at 10:00am EST:  +0.0% (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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