Trading Places with Tom Bowley

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Market Recap for Monday, February 11, 2019

Industrials (XLI, +0.53%), energy (XLE, +0.48%) and financials (XLF, +0.31%) were Monday's leaders as bifurcated action was once again present.  The clear index leader was the small cap Russell 2000 index (+0.84%) and that's become a theme in 2019 as discussed more in the Current Outlook section below.  The other major indices hugged the flat line with the Dow Jones (-0.21%) the sole index to finish in negative territory.


I think someone must have read my Monday blog where I indicated that we needed more strength in transportation stocks as the railroad group ($DJUSRR, +1.63%) surged to close at its highest level since October 9th.  Volume increased on this breakout as well, a bullish signal:

It's unusual during bear markets to see daily RSIs climb back to overbought 70 levels.  It's much more typical to see daily RSIs top out near 60 on bear market rallies.  Therefore, the DJUSRR is simply one more example of what appears to be the resumption of the secular bull market.

Communication services (XLC, -1.03%) was the laggard on Monday, dragged lower by a weak broadcasting & entertainment industry ($DJUSBC, -1.53%).  CBS Corp (CBS, -2.97%), Viacom, Inc. (VIAB, -2.26%) and Walt Disney Co. (DIS, -1.86%) all closed at multi-week lows and beneath both their respective 20 day EMAs and 50 day SMAs.  These stocks have much more technical work to do before you should consider entry into them.

Pre-Market Action

A second government shutdown appears to have been averted as lawmakers tentatively agreed to a deal Monday night that included a reduced amount of border security funding.  Dow Jones futures are higher by roughly 190 points with 30 minutes left to today's opening bell.

The 10 year treasury yield ($TNX), which rose 3 basis points on Monday, appears set to rise again today, up two more basis points to 2.68% this morning.  The rise in yields aided industrials and financials yesterday and both these groups should benefit once again today, assuming we see no reversal in the bond market.

Crude oil ($WTIC) is strong this morning, up 2.31% to $53.62 per barrel.  That should provide the energy sector (XLE) a boost in today's trading as well.

Overnight, stocks surged in Tokyo as the Nikkei ($NIKK) gained more than 500 points (+2.61%).  Europe also is trading mostly higher.

Current Outlook

One very positive development in 2019 is the strong relative performance of small cap stocks.  While the 10 year treasury yield ($TNX) suggests we be very careful in our bullish assumptions about the U.S. economy, small caps are painting a much different picture.  The Russell 2000 is comprised of companies that do the majority, if not all, of their business here in the U.S.  As a result, they are not influenced directly by the direction of the U.S. Dollar Index ($USD).  A rising USD typically provides head winds for multinational companies found on the Dow Jones and S&P 500 indices as overseas profits are negatively impacted by currency translations back to the stronger U.S. dollar.  Also, the dollar rises as the U.S. economy strengthens faster (or is expected to strengthen faster) than the rest of the world.  Therefore, it's reasonable to expect that small caps might attract more investment during a rising dollar environment as stronger U.S. economic growth should be captured by domestic companies.  Here's the current picture of small cap relative strength and the impact of the dollar:

While not a perfect positive correlation, small caps do tend to perform much better on a relative basis when the USD is rising.  The relative down channel broke almost simultaneously with the strengthening of the dollar as the dollar has now risen in 8 consecutive sessions. 

Sector/Industry Watch

The Dow Jones U.S. Hotels Index ($DJUSLG) has yet to clear an important overhead resistance level (20 week EMA), but it's definitely worth monitoring:

The red arrows mark failed tests thus far of the 20 week EMA.  However, many groups have broken above this key moving average, so it might just be a matter of time for the DJUSLG to follow suit.  It's important to remember that consumer discretionary stocks are performing well on a relative basis, so if the DJUSLG can break its relative downtrend (parallel red lines), the group could begin to attract technical buyers.

Now check out its seasonal pattern next in Historical Tendencies.

Historical Tendencies

While the DJUSLG may be challenged technically, it's approaching its best time of the year seasonally.  Take a look at March/April performance for this discretionary group:

Over the past two decades, hotels have averaged gaining nearly 10% in just March and April.  Most would consider 10% to be a solid return for a year, yet this group has averaged doing it in just two months.  Based on this strong seasonality, a technical breakout in the group should be viewed particularly bullishly.

Key Earnings Reports

(actual vs. estimate):

FIS:  1.60 vs 1.58

MLM:  1.66 vs 1.71

OMC:  1.77 vs 1.66

SHOP:  .26 vs .21

TAP:  .84 vs .78

UAA:  .09 vs .04

USFD:  .56 vs .60

WEC:  .65 vs .64

WELL:  1.01 vs 1.03

(reports after close, estimate provided):

ACGL:  .37

AKAM:  1.00

AMX:  .22

ATVI:  1.29

OXY:  1.12

TRIP:  .30

TWLO:  .04

UDR:  .49

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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