Market Recap for Tuesday, August 30, 2016
Eight of nine sectors fell on Tuesday, with financials (XLF, +0.90%) the lone gaining sector. This behavior seems to be setting the stage for a Fed rate hike, probably sooner rather than later. Banks ($DJUSBK) continue to lead the recent action and that's generally a bullish development for equities down the road so we'll need to keep a close eye on this group. Here's the latest technical picture:
Banks typically advance only if economic prospects are improving or expected to improve. So the fact that we've seen a price breakout should not be ignored. Banks relative to the S&P 500 ($DJUSBK:$SPX) also are trending nicely higher and quickly approaching a major relative resistance line. A relative breakout would add to the bullishness here. However, one negative is that banks are very overbought with RSI and stochastic at 77 and 92, respectively. I doubt we'll see a relative breakout above .151 until we've seen some profit taking and consolidation.
Outside of financials, the market struggled. While higher rates certainly would help much of the financial sector, that same possibility is crushing utilities (XLU, -1.05%) as the XLU finished near 49, a key short-term support level. Momentum is very bearish in that group right now, however, so be careful if that support is lost.
Consumer stocks also suffered on Tuesday as both consumer discretionary (XLY, -0.55%) and consumer staples (XLP, -0.59%) were toward the bottom of the sector leaderboard. Home construction ($DJUSHB) bucked the consumer trend, though, rising 0.85% off 20 day EMA support.
Pre-Market Action
The ADP employment report for August was released an hour or so ago and the jobs number was just above consensus estimates. Many believe that Friday's government nonfarm payrolls report could be the final nail in the coffin for a second interest rate hike. We'll see.
Bifurcated markets dominated action overnight in Asia and this morning in Europe. The waffling in U.S. equities of late is no doubt playing a role in the indecision around the globe. Of note, the Tokyo Nikkei ($NIKK) rose nearly 1% overnight and is closing in on a key price resistance level near 17000. That bears watching as a breakout could reverse its downtrend and set the stage for a more significant rise.
U.S. futures are pointing to a lower open, albeit a fractional one. Dow Jones futures were lower by 30 points at last check.
Current Outlook
The NASDAQ ran into trouble as we moved into the more difficult period of the calendar month (19th through 27th). Key short-term price and gap support have continued to hold in the 5190-5200 range. So long as that holds, I'd remain neutral. A breakout above the recent downtrend line would be bullish, while a break below 5190 would turn the short-term action more bearish. Check this out:
Since the blue uptrend line failed to hold a week or so ago, the hourly MACD turned negative and momentum has remained that way. But the green arrows show that price support is strong. So I'd watch this support line, along with the red dotted short-term downtrend line for further clues about the short-term direction of the NASDAQ.
Sector/Industry Watch
Financials have clearly been on the rise relative to the S&P 500 and Tuesday's performance once again highlighted that recent fact. While banks ($DJUSBK), life insurance ($DJUSIL), investment services ($DJUSSB) and asset managers ($DJUSAG) are grabbing most of the headlines as the market braces for the potential of higher interest rates, full line insurers ($DJUSIF) have quietly moved within striking distance of a major price breakout. Take a look:
The price resistance near 49 is formidable, but with financials moving more into favor, I'd look for this industry group to continue its recent relative strength. The red circle above shows the DJUSIF faltering relative to its financial peers in the past few weeks, but keep in mind it's done this since testing key overhead price resistance. A price breakout is likely to alleviate the recent relative weakness and send the DJUSIF back to the front of the financial pack.
Historical Tendencies
Every calendar month has risen more often than it's fallen on the S&P 500 since 1950.......except September. September has posted a loss 36 of the last 65 years and its annualized return is -6.17% over this period. This century, it's been a toss up with 8 years showing gains during September while the other 8 have posted losses. Currently, there's a two year losing streak with the S&P 500 falling during both September 2014 (-1.55%) and September 2015 (-2.64%).
Key Earnings Reports
(actual vs. estimate):
BOBE: .48 vs .45
CHS: .25 vs .22
(reports after close, estimate provided):
CRM: .05
CTRP: (.21)
Key Economic Reports
August ADP employment report released at 8:15am EST: 177,000 (actual) vs. 175,000 (estimate)
August Chicago PMI to be released at 9:45am EST: 55.2 (estimate)
July pending home sales to be released at 10:00am EST: +0.6% (estimate)
Happy trading!
Tom
