Market Recap for Monday, November 14, 2016
The dollar shot higher on Monday as treasury yields continue to soar. This combination has set the stage for a major rally in financial stocks (XLF) and they have not disappointed. Also, all the selling that's taken place in bonds have left those traders with lots of cash and much of it seems to be finding its way into U.S. equities. The U.S. Dollar Index ($USD) has been consolidating in a very bullish pattern and momentum has begun to turn in favor of the bulls. Check this out:
We witnessed a parabolic rise in the dollar from mid-2014 through early 2015 and the greenback has been consolidating ever since. But the odds at this point are that we'll see a breakout in the dollar shortly and that's a bearish development for gold (GLD) and silver (SLV). GLD and SLV charts are featured below in the Sector/Industry Watch section.
Financials continued their roll on Monday as the sector gained 2.45%, followed by energy (XLE, +0.56%) and industrials (XLI, +0.43%). The energy gains were very important as crude oil ($WTIC) reversed and closed above $43 per barrel, holding onto short-term price support. Take a look:
That long tail beneath price support was suggesting a breakdown intraday, but the strong recovery now sets up crude oil for higher prices near-term and that should help the energy sector. I'd look for leadership from the XLE in the coming days.
Technology (XLK, -1.52%) was hammered on Monday as internet stocks ($DJUSNS) lost 2.56% to fall all the way back down to price support at 1100. I suspect we'll soon find money returning to different areas of technology, but it may be a case of rotation within the sector, not leadership from it. Here's the DJUSNS support highlighting the test of support:
Internet stocks are now overbought with RSI and stochastic readings of 29 and 15, respectively. That's normally a point at which we'll see a bounce at least and given the price support test, I'd expect that bounce to be sooner rather than later.
Pre-Market Action
Home Depot (HD) reported quarterly results this morning and beat EPS estimates by two pennies, 1.60 vs 1.58. I've discussed the home improvement stocks quite a bit in today's article as this group appears poised to continue its rally. The earnings beat in HD won't hurt and hopefully will continue to recent strength in the space.
Dow Jones futures are higher by 14 points as crude oil ($WTIC) is bouncing right on cue after Monday's bullish reversal. Energy should provide leadership today and possibly for several days to come.
Globally, perhaps the most significant technical development is Germany's attempt at a breakout to an all-time high near the 10800 level (approximately 100 points away at this time). The S&P 500 and German DAX tend to move together as their tight correlation would suggest. A close on the DAX above 10800 would likely lead to a similar breakout on the S&P 500 so keep an eye on Germany.
Current Outlook
As money rotates towards aggressive stocks, I try to find areas of the market that could benefit from such rotation but haven't yet been rewarded. It's easy to chase the banks ($DJUSBK), but a lot of risk resides there because they've already run so much with little or no pullback. November and December are typically quite kind to home improvement stocks ($DJUSHI) as they have posted excellent historical results this time of year (see Historical Tendencies section below). Technically, we've begun to see hints of price recovery as reflected below:
The recent downtrend line was broken late last week after a positive divergence had printed. That was a sign that momentum was slowing to the downside and the recent break above the 50 day SMA confirms it. I'd now look for the rising 20 day EMA to provide solid support for this group. If it doesn't, then I'd grow more cautious.
Sector/Industry Watch
Gold (GLD) and silver (SLV) are taking the brunt of the pain from a soaring U.S. dollar. The dollar's chart is very bullish and, in my view, is likely to see a major breakout in the near-term. That's bad news if you own gold and silver because these metals typically move in the opposite direction of the dollar. Here's the latest view on both:
It's difficult betting against a trend and I think it's pretty clear which way the longer-term trend has been heading. The dollar's rise is likely to continue and that will drive both gold and silver prices lower. The short-term uptrends of both gold and silver seem to be ending and a return to the longer-term downtrends is much more likely. Personally, I'd steer clear of both metals until technical conditions change.
Historical Tendencies
The time of the year is kind to home improvement stocks as you can see from the seasonality chart below:
The DJUSHI has moved higher during the month of November 83% of the time over the past 13 years and produced an average return of 3.4%. That historical strength is followed up with more seasonal strength in December and continues all the way through April. So it would appear the technical signs of strength are confirmed by historical patterns as well.
Key Earnings Reports
(actual vs. estimate):
DKS: .48 vs .42
HD: 1.60 vs 1.58
JD: (.10) vs (.06)
SCCO: .26 vs .29
TEVA: 1.28 vs 1.27
TJX: .87 (estimate, haven't seen actual)
(reports after close, estimate provided):
A: .52
Key Economic Reports
October retail sales released at 8:30am EST: +0.8% (actual) vs. +0.6% (estimate)
October retail sales excluding autos released at 8:30am EST: +0.8% (actual) vs. +0.5% (estimate)
November empire state manufacturing survey released at 8:30am EST: 1.5 (actual) vs. -2.3 (estimate)
September business inventories to be released at 10:00am EST: +0.2% (estimate)
Happy trading!
Tom
