Market Recap for Friday, November 6, 2015
We didn't make any major breakouts on Friday, but after initial weakness we did see the aggressive indices - NASDAQ and Russell 2000 - close nicely. In addition, the exceptionally strong October jobs report sent financial stocks soaring, especially banks ($DJUSBK), life insurance ($DJUSIL) and investment services ($DJUSSB). Higher yields tend to coincide with higher profits for each of these indices so traders reacted appropriately in my view. In the meantime, utilities and REITs absorbed the brunt of the selling as higher treasury yields make their dividends less attractive on a relative basis. I posted a chart recently that showed the XLU was testing key resistance on its weekly chart and you can see how traders reacted at this important trendline:
In a rising rate environment, which I believe we've entered, utilities represent a sector to avoid. While we'll see bounces along the way, I expect that the recent downtrend in the XLU will continue.
Pre-Market Action
U.S. futures are modestly lower this morning as traders react to mixed results overnight in Asia and fractional losses in Europe. In addition, the key earnings report this morning - priceline.com (PCLN) - was not received well at all. Both revenue and EPS topped forecasts, but future guidance was light. In the past 5-6 weeks, PCLN gained more than 20% so traders were not likely bracing for the reduced guidance. As a result, PCLN is lower by 86 dollars, or nearly 6%, in pre-market trading. Because momentum has been so strong, I'd look for a bounce by PCLN after its morning gap lower. If PCLN can finish above its rising 20 day EMA, it will have a better chance of extending recent gains. Failure to hold 20 day EMA support, however, would likely suggest further short-term downside.
Current Outlook
Here are the current resistance levels I'm following on our major indices:
Dow Jones: 18312.39
S&P 500: 2130.82
NASDAQ: 5223.18
Russell 2000: 1202.98
We're fairly close to all of them after the straight up move off the late September lows. Now that the bullish historical period ended on November 6th, we face what typically can be a difficult period - usually profit taking. We've also heard from most of the larger cap stocks in terms of earnings so there'll be less to trade off of. There will be little economic news of substance until later in the week as we now have October jobs in the rear view mirror. The treasury market is pricing in a December rate hike. What traders are likely to focus on in the near-term are overseas developments and technical conditions. Technically, I'd respect the resistance levels above. I suspect we'll clear all of them before 2015 ends, but whether it happens over the next couple weeks is the big question mark. The Dow Jones, S&P 500 and NASDAQ all reflect all-time closing highs so the resistance is clear. The Russell 2000's resistance is a reflection of prior support that was lost in 2015. Here's the visual:
The red arrow highlights price resistance and the green arrow highlights 20 day EMA support. Which breaks first? That will provide me another clue. I do know that small caps tend to perform VERY strong from late November through the end of the year, so the next couple weeks will be the bears chance - both historically and technically - to stem the tide of recent buying. We'll see.
Sector/Industry Watch
The Dow Jones U.S. Travel & Tourism index ($DJUSTT) typically performs well during the months of November and December, perhaps ahead of end of year holiday travel. Over the past 11 years, the DJUSTT has averaged gains of 4.8% during the month of November. Some key components of this index are priceline.com (PCLN), Expedia (EXPE), TripAdvisor (TRIP) and Ctrip.com (CTRP). We've seen mixed reactions to reports in this space with PCLN a casualty this morning. TRIP also saw a negative reaction after its earnings report, while both EXPE and CTRP have performed well technically after releasing their latest quarterly results - especially CTRP which now sports a SCTR rank of 99.9, indicative of extremely strong price momentum. The impact of PCLN's lower guidance could provide an opportunity for a key price support test on the travel index. Check this out.
Broken price resistance becomes price support. That level is approximately 585. Also, on the weekly chart, the rising 20 week EMA is at 571. The combination of these two levels should provide excellent support on this index. Because the DJUSTT tends to perform well in November and December, this weakness could provide a solid reward to risk entry into the group if this 571-585 support area is tested.
Historical Tendencies
The October 28th to November 6th period is historically bullish and I provided annualized returns by day on each of our major indices as that period approached. As we look ahead over the next couple weeks, the bears have the historical advantage. On the NASDAQ, the 7th to the 10th (through tomorrow) tends to move lower, followed by historical strength through the 15th. Then the 16th through the 22nd is bearish once again. Once we move pass November 22nd, historical tendencies are bullish throughout most of the balance of the calendar year.
The Russell 2000 tends to be bearish from now through November 22nd, then turns VERY bullish as we move into its best calendar month of the year (December) BY FAR. I'll provide more details on this bullish month as it approaches.
Key Earnings Reports
(actual vs estimate):
BID: (.26) vs (.27)
DISH: .42 vs .40
PCLN: 25.35 vs 23.11
SNI: 1.06 vs .97
(reports after today's close, estimate provided)
CZR: (.22)
RAX: .21
Key Economic Reports
None today.
Happy trading!
Tom
