Market Recap for Wednesday, April 3
Stocks rallied again on Wednesday, primarily on the heels of materials (XLB, +1.31%) and technology (XLK, +0.81%). The former saw relative strength in both commodity chemicals ($DJUSCC, +1.77%) and specialty chemicals ($DJUSCX, +1.39%). The strength in the DJUSCC was very important technically as it finally cleared overhead resistance in the 450-460 range:
To be clear, the breakout is very nice and bullish, but I would not ignore the bottom part of this chart where we see the DJUSCC badly underperforming the S&P 500 on a relative basis. While the head & shoulders breakout could mark a significant bottom in the group, there are still many technical issues here. For instance, the 470 level has proven to be a key pivot level where the DJUSCC held as support on pullbacks, but also held as resistance on strength. So, the takeaway here? Respect the breakout and consider long positions, but have very little tolerance for any technical failures as the overall relative weakness could return.
In the technology space, semiconductors $DJUSSC, +2.10%) were on fire, closing at their highest level since June 2018. Despite closing off of earlier intraday highs, the group saw tremendous support from a number of key names in the industry as follows:
Advanced Micro Devices (AMD): +8.49%
Lam Research Corp (LRCX): +3.95%
Teradyne, Inc. (TER): +3.76%
NXP Semiconductor (NXPI): +3.65%
Applied Materials (AMAT): +3.51%
Micron Technology (MU): +3.44%
The 10 year treasury yield ($TNX), crude oil prices ($WTIC) and U.S. stock futures are all near their flat lines this morning after each has seen a significant advance recently. Gold ($GOLD) is down $7 to $1288 per ounce, not far from its low 2019 close near $1280. The U.S. Dollar ($USD) has climbed considerably the past two weeks, putting pressure on GOLD.
Any time the stock market is in rally mode, it's important to see what is leading the advance. From a sustainability standpoint, we want to see aggressive areas of the market leading. Among our major indices, the NASDAQ is home to many of our very aggressive technology and consumer discretionary names, in addition to the riskier biotech companies as well. Therefore, I like to watch the NASDAQ performance vs. the benchmark S&P 500. If it's rising, it's certainly a signal that market participants are in a "risk on" mood, which is quite bullish. Take a look at this ratio:
The red shaded areas above highlight the periods when the $COMPQ:$SPX ratio's PPO crosses into negative territory and is pointing lower. It simply tells us that the relative momentum of the NASDAQ is poor. When Wall Street is shunning the aggressive, high growth NASDAQ stocks, we want to be much more alert. However, the opposite is true as well. When the NASDAQ is shining on a relative basis, U.S. equities typically perform exceptionally well. Currently, this relative PPO is above the centerline and bullish relative momentum is accelerating.
Real estate continues to be a very strong area of the market and the hotel & lodging REITs are solid technically and could just be starting another advance as its PPO begins to move off of centerline support:
From the December low at 100, the DJUSHL gained 26% over just two months, and then consolidated those gains. We could be forming a cup right now, which is a bullish continuation pattern. Just be mindful of the recent price support near 117. A close beneath that level should be respected.
REITs have performed extremely well in 2019 and the real estate sector ETF (XLRE) is the top ranked SCTR among sector ETFs. Given that bullish backdrop, we should keep a close eye on the Dow Jones U.S. Hotel & Lodging REITs Index ($DJUSHL) as that group loves the month of April historically. Check this out:
After a strong first two months of the year, the DJUSHL consolidated mostly in March, but April has gotten off to a fast start. Based on the above, we could certainly see more strength ahead for this group.
Key Earnings Reports
(actual vs. estimate):
RPM: .14 vs .11
STZ: 1.84 vs 1.71
Key Economic Reports
Initial jobless claims released at 8:30am EST: 202,000 (actual) vs. 216,000 (estimate)