Market Recap for August 29, 2016
It was a strong, wide participation kind of day for U.S. equities on Monday as August 2016 nears a close. Stocks continue to battle through various sorts of difficulty, including negative divergences, slowing volume, seasonal headwinds, questionable relative ratios (offense vs. defense ratios), uncertainty over the U.S. presidential race and the Fed and so forth. But bull markets do just that. They ignore all the noise, particularly fundamental noise, and simply push higher. We've been living it. Friday marked the second consecutive day of S&P 500 closes beneath its 20 day EMA and that moving average had begun to roll over. Combine that with the nasty negative divergence and stocks were poised to fall.
But they didn't.
Instead, it was an across-the-board increase. Sure we can nit pick and complain about the volume and the NASDAQ's weakness in the final two hours, but prices continue to rise. This persistence has frustrated bears to no end. Why? Because the continuing rise doesn't make sense. Bull markets rarely make sense. By the time they begin to make sense, a bear market emerges.
Materials (XLB, +0.90%) and financials (XLF, +0.87%) led the action yesterday and banks ($DJUSBK) are beginning to make some bullish noise as the following chart demonstrates:
The red arrows highlight the difficulty that banks have had clearing the 315 area. We've seen solid volume the past two days accompany the strength needed to make the breakout - a bullish development. So long as the rising 20 day EMA holds on pullbacks, I'd expect to see continued short-term leadership from banks.
Pre-Market Action
Crude oil ($WTIC) is on the rise this morning, back above $47 per barrel. Stocks in Asia overnight were mostly flat, although the Hang Seng ($HSI) had a solid gain of 0.85%. European stocks are mostly higher as the German DAX rebounds off 10450-10500 support, up 1.00% at last check.
U.S. futures are flat ahead of today's opening bell.
Current Outlook
It would really be nice if consumer stocks began to behave more bullishly. There remains a downtrend in the XLY:XLP (discretionary vs. staples) and that should not be occurring if the market is anticipating a strengthening economy and higher interest rates. Check out the current relationship:
While the S&P 500 has broken out to all-time highs, this XLY:XLP relationship has been trending lower. At a minimum, I'd like to see more money begin to flow towards the XLY on a relative basis, breaking the upper downtrend line of this triangle. Such a move would signal that market participants are growing more aggressive, a sign that's necessary for me to feel secure about the sustainability of the next move higher in U.S. equities.
Sector/Industry Watch
Defense stocks ($DJUSDN) have had a rough last week, dropping 1.65% and perhaps hitting key support in the process. Take a look at the current technical picture:
A negative divergence had emerged on the DJUSDN's last price high, although it was accompanied by very strong volume. Nonetheless, we've seen the group pull back to test trendline support and approach price support. With an RSI reading of 43 now, the reward to risk opportunity in this area has improved greatly.
Historical Tendencies
The Russell 2000 is in the midst of a bullish seven day period where it's produced an annualized return of 34.55% since 1987. August 29th (yesterday) was the best day of the period with annualized gains of 164.73%, but September 2nd (Friday) also has produced very strong results (+88.88%). Unfortunately, August 30th (today) has been the weak link, with a negative annualized return of -90.83%. Overall, the 30th of ALL calendar months has produced annualized gains of +24.69%.
Key Earnings Reports
(actual vs. estimate):
ANF: (.25) vs (.23)
DSW: .35 vs .29
(reports after close, estimate provided):
HRB: (.53)
Key Economic Reports
June Case Shiller home price index released at 9:00am EST: -0.1% (actual) vs. +0.1% (estimate)
August consumer confidence to be released at 10:00am EST: 97.3 (estimate)
Happy trading!
Tom
