Market Recap for Wednesday, November 2, 2016
Traders waited nervously for the FOMC announcement at 2pm EST yesterday and given the recent S&P 500 breakdown beneath 2120 and the elevated volatility index ($VIX), they had reason to do so. I felt the market environment was such that we could see extreme volatility after that 2pm announcement. But it never really materialized. Volume was on the heavier than normal side, but the wild swings I expected just didn't happen. Here's a look at the intraday action on the S&P 500:
Just after 2pm, there was perhaps an 11 point swing back and forth from 2105 to 2094, then back to 2105. I thought we might see swings to perhaps 2120 to the upside and possibly much lower to the downside. Instead, the recent boring trading range action the past few months seemed to take over. One bearish development, however, is that the breakdown felt on Tuesday beneath 2120 was confirmed with a lower low yesterday. The chart above does show a positive divergence on this short-term intraday chart so a move to test price resistance and its declining 50 period SMA to "reset" the 30 minute MACD is very possible. The challenge will be to clear 2120 on a closing basis.
The FOMC announcement came and went without too much surprise. There was no change to interest rates, although two committee members did vote to raise rates. The FOMC concluded that our economy continues to strengthen and the bond market reacted with the 10 year treasury yield ($TNX) holding key yield support. The TNX looks to move higher to perhaps 2.00% and that signals that the Fed is more likely to raise rates after the election.
All nine sectors finished lower on Wednesday with utilities (XLU, -1.26%) and energy (XLE, -1.11%) bearing the brunt of the selling. Despite the overall market weakness, railroads ($DJUSRR) did manage to post a gain for the session, holding onto its short-term price support as highlighted below:
The strength in railroads helped lead transportation stocks ($TRAN) to gains and the TRAN remains in very bullish pattern. I'm featuring the TRAN in the Sector/Industry Watch section below.
Pre-Market Action
Facebook (FB) underwhelmed market participants with its report last night and the Fed announced yet another period of standing pat on interest rates. Losses yesterday were contained with the Fed announcement, but we'll find out how well the market performs given the FB forward guidance.
Overnight, Asian markets were mixed and we're seeing a similar reaction in Europe so if you're looking for a lead from other global markets, it most likely isn't happening. Instead, we need to focus on the fact that the Dow Jones, S&P 500 and Russell 2000 have all broken down and unless we see the technical damage repaired, the bears will remain in control in the very near-term.
Today represents the heaviest day of earnings reports, although most of the companies are considered second or third tier companies. Starbucks (SBUX) reports after the closing bell and that's the one that many traders will be focused on.
Current Outlook
Facebook (FB) reported its latest quarterly results after the closing bell on Wednesday and while the internet giant easily beat both revenue and EPS estimates, they indicated that their torrid pace of growth will slow dramatically next year and the stock is facing what you might expect in pre-market this morning - a deluge of sellers. FB is down 6 bucks, or nearly 5%, with a little more than an hour to go to the opening bell. The problem this could cause isn't so much about FB as it is with the NASDAQ. The NASDAQ closed on support yesterday and now faces one of its largest components having perhaps its worst day of 2016. Take a look at the impact this lowered guidance could mean to the tech-laden NASDAQ:
It certainly appears to me that the next stop for the NASDAQ will be just below 5000, which represents another 2% decline. Price support and trendline support are both converging near the 5000 level so loss of this support would be doubly bearish.
Sector/Industry Watch
Transportation stocks ($TRAN) lagged the benchmark S&P 500 throughout much of the summer, but the group isn't far from an absolute breakout and it's recent relative strength is quite apparent since early August. Take a look at the current technical picture:
The telling story on this chart is the sudden relative reversal that took place in early August after a relative double bottom formed. Railroads, airlines ($DJUSAR) and truckers ($DJUSTK) all are currently in what I consider to be bullish patterns and that's contributed mightily to the relative strength in transportation as a whole.
Historical Tendencies
The Russell 2000 also performs well in November, but really it's just the beginning for small caps as December is a massively bullish month for this index. The Russell 2000 has produced annualized gains of 13.08% during November since 1987, but the real strength for small caps comes in December where we've seen annualized returns of 38.49% over the last 29 years. Those December returns are more than double any other calendar month of the year.
Key Earnings Reports
(actual vs. estimate):
APA: (.11) est - haven't seen actual that's comparable
BDX: 2.12 vs 2.09
BLL: .96 vs .92
CHTR: .62
CI: 1.94 vs 1.91
LVLT: .39 vs .44
MGA: 1.29 vs 1.20
SPGI: 1.43 vs 1.35
(reports after close, estimate provided):
ATVI: .39
CBS: .98
ED: 1.49
EOG: (.31)
KHC: .76
LBTYA: (.01)
LVS: .59
MNST: 1.12
MTD: 3.65
SBUX: .55
SWKS: 1.33
SYMC: 1.15
Key Economic Reports
Initial jobless claims released at 8:30am EST: 265,000 (actual) vs. 255,000 (estimate)
Q3 productivity released at 8:30am EST: +3.1% (actual) vs. +2.2% (estimate)
September factory orders to be released at 10:00am EST: +0.2% (estimate)
October ISM non-manufacturing index to be released at 10:00am EST: 56.1 (estimate)
Happy trading!
Tom
