Market Recap for Thursday, September 10, 2015
I wouldn't view Thursday's action to be bullish as few technical resistance levels were cleared, but the fact there was no follow through to the downside after Wednesday's bearish candlesticks at major resistance was a moral victory for sure. Eight of nine sectors finished the session higher with only utilities losing ground. Utilities remain the one sector under the most pressure technically. Besides the quick push higher in August that accompanied the steep fall in treasury yields, the XLU has been trending lower since February. A further rise in the 10 year treasury yield ($TNX) would NOT be good for utilities. While that alone might not mean lower prices on the XLU, I would expect higher treasury yields to result in relative underperformance by this sector. Take a look at the downtrend and how treasury yields impact the relative performance of utilities:
The red shaded areas highlight the fact that falling treasury yields enhance the performance of utility stocks on a relative basis. So if the market perceives that the Fed is concerned about economic growth moving forward and there is no rate hike, expect utilities to benefit from falling treasury yields - at least on a relative basis if not on an absolute basis. If the Fed follows through and hikes interest rates, then utilities would very likely be the one sector to avoid.
Technology was the leader on Thursday and that's one thing the bulls would like to see continue - whether the overall market rises or not. So long as money remains mostly concentrated in aggressive areas, we're not likely to see another panic selloff. But should volatility escalate and the four aggressive sectors - technology, industrials, financials and consumer discretionary - lead to the downside, then I'd expect another test of recent lows in our major indices.
Pre-Market Action
Futures are lower this morning on the anniversary of 9/11 as the U.S. again follows the lead of global markets. Asian markets were slightly lower, but Europe is weak once again as the German DAX is down another 0.5% this morning after falling close to 1% on Thursday. This is the one European index that the S&P 500 tends to follow very closely. While the negative action in Germany and other parts of Europe doesn't guarantee us further weakness here in the U.S., it definitely paints a picture of caution.
Finisar (FNSR) and Marvell (MRVL) both reported disappointing results and are being slammed in pre-market action. The interesting part is that both of these companies have been mired in lengthy downtrends PRIOR to the earnings announcements. This justifies what we do as the market looks AHEAD and prices stocks accordingly. For example, take a look at FNSR:
FNSR lost roughly one third of its market cap and broke its prior uptrend BEFORE the news about its earnings shortfall. The market knows what's coming in most cases and it's been screaming that things were not good at FNSR. Now we know WHY FNSR has been selling for the past 2 1/2 months. The first technical clue occurred in late June as trendline support was lost on heavy volume. That was a game changer and FNSR has been a terrible underperformer ever since.
Current Outlook
I believe the U.S. stock market is bracing for one of two events. Either the Federal Reserve follows through with its recent discussions about a rate hike and provides a bit more clarity about their future intentions (bullish for equities in my view) OR they decide to delay the decision (bearish). Personally, I'd expect that latter would create much confusion and nervousness among traders - and they're already very unnerved of late with the VIX remaining in the 20s. Of course, we can all speculate as to how the market would react, but lack of action would likely send the message that the Fed is not confident in the pace of economic growth here in the U.S. and given all the economic concerns in China and Europe, I believe such non-action would send the market on its next leg lower. While it was comforting - from a bullish view - to see no follow through selling after such bearish market action on Wednesday, the fact remains that key resistance is holding and the bears remain control of the technical action near-term. Below is a chart of the Dow Jones to illustrate:
After the August breakdown on heavy volume, the Dow Jones recovered but it was only enough to test the rapidly-declining 20 day EMA. And even if the Dow were able to clear that technical hurdle, price resistance awaits another 3% higher. The two red arrows mark the levels to watch.
Sector/Industry Watch
Internet stocks ($DJUSNS) remain one of the industry groups I'd continue to watch very closely. The technical pattern here is bullish and internet stocks have been a leader since a few of its component companies blew earnings estimates away last quarter. Furthermore, as I've posted previously, the DJUSNS is the best performing industry group during the month of September historically. Therefore, failure to break out by one of the current and historical leaders would not be good for the overall market. There are a couple of levels I'd watch and I've highlighted those on the chart below:
Sometimes we get so caught up in the noise of a selloff that we don't pay attention to what's taking place beneath the surface of the selling. In this case, the red dotted line shows that on an absolute basis internet stocks have performed poorly since their July high. But note that during the U.S. equity selloff the past few weeks, internet stocks have strengthened on a relative basis (blue dotted line), a very good sign for the market overall. It's this type of leadership that the bulls continue to cling to. In the chart above, look for key resistance (red arrow) just above 950 and key support on the recent reaction low close to 900.
Historical Tendencies
Apple (AAPL) managed to close above its 20 day EMA on Thursday, a necessary first step to repair all the recent technical damage. But the close didn't clear AAPL's most recent candle body high of 113.76 that was established on Wednesday's open. From a bullish perspective, that's what I'd look for next. History will be providing headwinds, however, as AAPL has only finished the month of September higher 40% of the time over the past 20 years and its average September return of -1.7% ranks it dead last among the 12 calendar months. Take a look:
Key Earnings Reports
KR: $.44 (actual) vs. $.40 (estimate)
Key Economic Reports
August PPI released at 8:30am EST: 0.0% (actual) vs. -0.2% (estimate)
August Core PPI released at 8:30am EST: +0.3% (actual) vs. 0.1% (estimate)
September consumer sentiment to be released at 10:00am EST: 91.0 (estimate)
Have a great weekend! I hope you're able to enjoy some quality time with family and friends.
Happy trading!
Tom
