Trading Places with Tom Bowley

Defensive Sectors Power S&P 500 Back Above 20 Day EMA

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Market Recap for Wednesday, June 5, 2019

The good news is that the U.S. stock market advanced on Wednesday and that both the Dow Jones (+0.82%) and S&P 500 (+0.82%) were able to clear their respective declining 20 day EMAs.  Another piece of good news is that 10 of the 11 sectors advanced with only energy (XLE, -1.11%) down for the day as crude oil ($WTIC, -3.37%) took another big hit:


The $50-$52 per barrel range appears to be significant short-term support and we are bouncing off this area in early morning trade.  Failure to hold this level, however, would likely lead to a test of the December low in the lower-40s.  The XLE would likely be much lower if it weren't for the falling U.S. Dollar Index ($USD) over the past week.  Materials (XLB, +0.73%) and energy both tend to show relative performance vs. the benchmark S&P 500 that moves inversely to the USD.

The leadership in defensive sectors was obvious on Wednesday and there's more detail on this in the Sector/Industry Watch section below.  In addition, another not-so-great story from yesterday was the performance of small caps.  The Russell 2000 did not participate in the advance, dropping a point on the session.

Telecommunications equipment ($DJUSCT, +2.34%) was one very bright spot in technology (XLK, +1.30%) as it held off sellers at price support once again, this time breaking back above 20 day EMA resistance.  Clearing 1400 would be a huge deal for this group:

Cisco Systems (CSCO, +2.86%) was a big reason for the group's rise, and it was also the best perfoming component in the Dow Jones.

Pre-Market Action

The 10 year treasury yield ($TNX) is down 3 basis points this morning and just below the 2.10% level.  Crude oil prices ($WTIC) have stabilized, even if only temporarily, and are currently trading up close to 1% and just above $52 per barrel.  Gold ($GOLD) continues to rise, up $8 to $1341 per barrel.  I see GOLD potentially rising to challenge multi-year price resistance close to the $1375 per ounce area.  Longer-term, I'm bearish gold.  But short-term fundamentals have improved as the Fed considers lowering interest rates.  The TNX has taken a decidedly lower move vs. the 10 year German treasury yield ($DET10Y) over the past several weeks and that typically coincides with a weaker dollar.  Gold historically moves opposite the dollar.

In Asia overnight, China's Shanghai Composite ($SSEC) made a significant breakdown, closing back below 2850 for the first time since February:

This chart does not include last night's action where the SSEC fell over 1% to close at 2827.

Dow Jones futures are higher this morning by 21 points as the stock market is now beginning to anticipate a rate cut, possibly in July.

Current Outlook

I believe a short-term key for U.S. equities will be the direction of the 10 year treasury yield ($TNX).  We nearly tested the 2017 low on the TNX below 2.10%.  If that level holds and we begin to move higher on the TNX, that would signal rotation away from the defensive treasury market.  That normally coincides with a stock market advance.  It wasn't much, but the S&P 500 did manage to close above its 20 day EMA on Wednesday and this morning's futures point to further gains:

Follow-through buying to more definitively clear the declining 20 day EMA would be a bullish development as the longer-term weekly charts are very bullish in my view.

Sector/Industry Watch

In order to keep it real, it is definitely worth mentioning that Wednesday's rally was suspicious.  Speculation and aggressiveness are critical components of a bull market.  We want investors/traders to have an appetite for risk. That shows up in a number of ways, but perhaps the most visual is by simply comparing sector performance.  One day doesn't make a trend, but the sector leaderboard yesterday was not a confirming signal of market strength:

The defensive sectors littered the top half of the sector leaderboard and that's not what I look for when the S&P 500 is attempting to clear a technical hurdle.  If the S&P 500 continues to rally back to all-time highs and the structure of sector leadership remains as you see it above, I would run for the hills.  I don't believe that will happen, just pointing out what I believe would be a major warning sign.

Historical Tendencies

The NASDAQ has two bearish historical periods during the month of June.  Since 1971, here are the annualized return for each period:

June 8-12:  -26.61%
June 18-26:  -24.34%

Key Earnings Reports

(actual vs. estimate):

CIEN:  .48 vs .40

SAIC:  1.36 vs 1.21

SJM:  2.08 vs 1.97

(reports after close, estimate provided):

BYND:  (.14)

DOCU:  .04

MTN:  7.03

OLLI:  .44

ZM:  .00

Key Economic Reports

Initial jobless claims released at 8:30am EST:  218,000 (actual) vs 215,000 (estimate)

Q1 productivity released at 8:30am EST:  3.4% (actual) vs. 3.4% (estimate)

Q1 labor unit costs released at 8:30am EST:  -1.6% (actual) vs. -0.8% (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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