Trading Places with Tom Bowley

What's Wrong With Small Caps And Will June Seasonality Kick In?

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Market Recap for Tuesday, May 21, 2019

The U.S. stock market rebounded on Tuesday after a 90 day temporary license was granted by the U.S. Department of Commerce to Huawei, a Chinese multinational telecommunications equipment company.  Technology stocks (XLK, +1.23%) were a primary beneficiary of this action and trailed only materials (XLB, +1.54%) in terms of Tuesday sector performance.  Semiconductors ($DJUSSC, +2.01%) surged higher, but still face important technical hurdles ahead:


The 2% rise was nice, but note that uninspiring candle.  It wasn't hollow meaning that, after the gap higher, there was no follow through buying whatsoever.  I'm not convinced the selling here is over.  For now, let's watch the short-term trading range, which I've identified as 3200-3350.  3350 would be just the first bullish technical step.  The group will need much more than that to right the ship.

Several retailers reported their quarterly results with mixed reports and reactions.  One solid report was Autozone (AZO, +5.57%), which was able to regain its key moving averages on excellent volume.  There's a good chance AZO moves higher to challenge its April high near 1075.  Then there was Kohls Corp (KSS, -12.34%), which tumbled after doing exactly what its relative chart suggested it would do - miss estimates and lower its outlook.

Consumer staples (XLP, -0.21%) was the only laggard, finishing in negative territory for the session.

Pre-Market Action

Asia was mixed overnight, but Europe is lower.  That has set the stage for a lower open on Wall Street as trade concerns linger.  The 10 year treasury yield ($TNX) is down 2 basis points this morning to 2.41% as money rotates more safely into treasuries.  Crude oil ($WTIC) is down roughly 1.5%.

Dow Jones futures are lower by 91 points as we approach the opening bell.

Current Outlook

I know we're moving into a period when seasonality suggests that we'll see relative strength in the small cap Russell 2000, but we haven't seen it kick in just yet:

The absolute chart simply shows sideways consolidation, but the lower relative chart suggests potential bigger problems.  The RUT:SPX ratio is nearing a new low, which honestly is not a great signal.  The Russell 2000 is comprised of smaller companies that do most, if not all, of their business domestically.  When the RUT underperforms the benchmark S&P 500, which is comprised of large multi-national companies, you have to at least wonder what this relationship is telling us.  Is the U.S. economy as strong as the recently released Q1 GDP would suggest?

Something to think about. 

Sector/Industry Watch

Any guess as to which industry group has been the best performer over the past three months?  If you guessed renewable energy ($DWCREE, +23.12%), you'd be right.  This is a volatile group that can explode in either direction, but right now the bulls are in control.  Short-term, the group could be facing some difficulty, however:

A bit of consolidation or basing would not be a bad thing here at all.  Just watch that gap support zone as the rising 50 day SMA now coincides with that support.  Therefore, a 6-8% pullback would likely represent a solid reward to risk trading opportunity in the group.

Historical Tendencies

As a reminder, here's a relative seasonality chart that shows that the Russell 2000 normally enjoys significant outperformance as we move into summer:

According to this chart, there's a very good chance we'll see the Russell 2000 begin to perk up.  It's outperformed the S&P 500 84% of Junes over the past two decades.  Referring back to the RUT:SPX chart in the Current Outlook section, the RUT needs to outperform soon or it'll face a longer-term relative breakdown.

Key Earnings Reports

(actual vs. estimate):

AAP:  2.46 vs 2.36

ADI:  1.36 vs 1.30

CM:  2.23 vs 2.22

LOW:  1.22 vs 1.33

TGT:  1.53 vs 1.43

VFC:  .60 vs .58

(reports after close, estimate provided):

CTRP:  .23

LB:  .00

NTAP:  1.25

SNPS:  1.09

Key Economic Reports

FOMC minutes to be released at 2:00pm EST

Happy trading!

Tom

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Tom Bowley
About the author: co-founded Invested Central in 2004 and served as the site's Chief Market Strategist for more than 10 years. Invested Central provides stock market education and guidance for those interested in making their own financial decisions. During his tenure at Invested Central, Tom co-hosted Market Open LIVE, a national radio broadcast that covered many of the largest markets across the U.S. In addition, he has spoken at various conferences throughout the United States and Canada and has taught thousands of traders across the globe how to trade equities more wisely with an emphasis on managing risk and intermarket relationships. Learn More
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