Market Recap for Friday, April 1, 2016
The market rally continues. While the majority of money seems to be flowing toward defense, which isn't a great sign of strength nor one of sustainability, it's difficult to argue with day after day of gains. So caution makes sense in the event the uptrend falters, but right now we cannot ignore the breakouts of sectors and industry groups that are materializing one after another. On Friday, food products ($DJUSFP) was one of the latest industry groups to reach new heights. Check it out:
The good news is that the breakout occurred. The bad news is that there's a negative divergence indicative of slowing momentum. A reversing candle or failure to hold the breakout on a pullback would be reason to be less optimistic in the near-term. But the point here is that we continue to see breakouts and that is not bear market behavior.
Food products are a part of the consumer staples sector (XLP), which gained 1.06% on the session. That still trailed healthcare's (XLV) 1.14% rise, fueled by biotechnology stocks ($DJUSBT). I'm featuring the current outlook of biotechs below in the Sector/Industry Watch section.
Energy (XLE) again struggled Friday as it was the only sector to lose ground on the day, falling 1.34%. The XLE fell 1.26% for the week, the only sector to drop for the week as well. In fact, all other sectors climbed at least 1% for the week with consumer staples' 2.48% gain leading the charge. Technology (XLK) also gained 2.48% last week.
Pre-Market Action
It's the calm before the storm. There are no key earnings reports due out today, but we're only a week or two away from several giants providing their latest results and guidance. The only economic report of substance today is February's factory orders and that number tends to be quite volatile.
Markets in China and Hong Kong were closed overnight while Japan's Nikkei finished higher by 0.3%. European markets are mostly higher this morning as we begin a new trading week.
In acquisition news, Alaska Air (ALK) agreed to acquire Virgin America (VA) for $57 per share.
U.S. futures are up slightly this morning.
Current Outlook
The failure of aggressive areas of the market to lead equities higher throughout March is a major concern of mine. But bull markets have a way of rewriting the history books and making doubters look silly at times. Therefore, I'm respecting the current uptrend, but will turn very cautious as the first sign of a near-term breakdown. The reason for the cautious approach is very simply in how the relative ratios failed to move higher to support the March advance. This chart says it all:
It truly has been the tale of two different months in terms of "risk on" and "risk off". Sustainable market rallies tend to occur when traders have a "risk on" mentality, meaning that money rotates toward aggressive areas of the market. The green shaded area above represents the market rally and "risk on" mentality throughout February and into early March. The red shaded area, however, shows that aggressive money dried up on a relative basis as the S&P 500 continued pushing higher in March. Is this a sign that the current rally is unsustainable? I don't know, but I use technical analysis to identify my risks, not to provide me guarantees.
I'm okay with trading on the long side so long as short-term technical conditions remain strong, but short-term breakdowns would change my outlook altogether.
Sector/Industry Watch
The Dow Jones U.S. Biotechnology Index ($DJUSBT) has been very slow to react to the upside but did begin to show life the past couple trading sessions with volume escalating. Take a look at the daily chart first:
The 1650 level has been key from a price perspective over the last 6-7 months. There have been multiple tests of price support and resistance, marked by the green and red arrows. The daily MACD appears to be crossing over centerline resistance in bullish fashion so the daily chart appears to be improving. There's still significant 20 week EMA resistance to contend with on the weekly chart, however, as shown below:
The weekly MACD made fresh lows on the latest price low and that's a signal to respect the declining 20 week EMA as resistance and that currently resides at 1684. Therefore, even if we clear 1650 price resistance, the DJUSBT still has a very significant test another 2.0% higher. Conditions are improving in this space, but warning signs remain.
Historical Tendencies
April is a solid month for equities, so I'll highlight a few groups over the next week or so that tend to perform well as the spring season kicks in. Over the past 17 years, the Dow Jones U.S. Tires Index ($DJUSTR) has only risen 59% of the time in April, but its average monthly gains have been outstanding. Check out this seasonality chart:
November and December rise more often, but no month outperforms April's average gain of 7.3%. That's not an annualized return, that's an actual average return for the month of April. You might want to kick the tires.
Key Earnings Reports
None
Key Economic Reports
February factory orders to be released at 10:00am EST: -1.6% (estimate)
Happy trading!
Tom
