Market Recap for Thursday, December 29, 2016
The 10 year treasury yield ($TNX) closed at 2.48% and hit an intraday low of 2.46% to test its rising 20 day EMA for the first time since early November. Not too surprisingly, the Dow Jones U.S. Banks Index ($DJUSBK) did the same thing. Both have questionable MACDs as the first signs of slowing momentum surface. I wouldn't read too much into this, however, as extremely overbought conditions have been persistent for weeks and both the TNX and DJUSBK deserve a period of rest and consolidation.
But while declining yields tend to weaken many financials (XLF, -0.73%), that same scenario typically benefits utility stocks (XLU, +1.35%) and REITs ($DJR, +1.09%) so again it wasn't too surprising to see leadership here on Thursday. A bull market tends to lift all boats and the overall rising yield environment hasn't devastated utilities. Yes, the group has been wildly underperforming the benchmark S&P 500 post-Brexit in late June, but it really hasn't broken down from an absolute perspective. Take a look:
I'm featuring the REITs below in the Sector/Industry Watch section with a similar chart.
Pre-Market Action
Asian markets were mostly higher overnight, especially the Hang Seng Index ($HSI), which now appears to have turned back to the upside after a lengthy decline. The HSI closed back above 22000 for the first time in nearly two weeks and now faces a stiff resistance test at its declining 20 day EMA, currently at 22080.
European markets are mostly higher, albeit fractionally.
Here in the U.S., traders are looking to close out 2016 on a positive note with Dow Jones futures up 46 points with a little more than 30 minutes left to the opening bell. Gold ($GOLD) has a very slight positive divergence in play and, with a close above 1165, could extend its winning streak all the way to test its declining 50 day SMA at 1209. There's also significant price resistance near the 1200 level.
Current Outlook
Where the S&P 500 goes from here will be very interesting. Historical tendencies favor the bulls as we wrap up 2016 today and head into early January 2017 trading next week. Recent consolidation/weakness in the S&P 500 can be at least partially explained by the negative divergence that emerged in mid-December on its hourly chart. Check it out:
The recent selling took out the low from mid-December, but I'm giving the S&P 500 the benefit of the doubt down to 2245 (horizontal line) to allow for the 20 day EMA test that we saw yesterday on the daily chart. Here it is:
The selling on the shorter-term 60 minute chart may have appeared to be breaking down, but it's important to look at bigger timeframes to see if that additional weakness is actually setting up the longer-term chart, which in this case I believe it is. I look for a rally off this 20 day EMA test, but if it fails, then look to 2215 as next support for the S&P 500.
Sector/Industry Watch
As mentioned earlier, the Dow Jones REIT Index ($DJR) benefited on Thursday from interest in treasuries and a TNX that is now testing its rising 20 day EMA for the first time in nearly two months. And while relative strength remains extremely poor, the trend in absolute price action is higher. Check it out:
Put another way, the REITs have been making their shareholders money consistently throughout the current bull market, but on a relative basis (to the benchmark S&P 500), it's not been a great place to park your money. Given what now appears to be a rising interest rate environment in 2017, I expect more of the same from this group - higher prices but relative underperformance.
Historical Tendencies
The Russell 2000 has been wildly outperforming the S&P 500 since early November, and throughout 2016 really. However, January still isn't a great month for the Russell 2000 as it produces annualized returns of just 3.72% in January over the past 29 years and that ranks it as the 7th best calendar month of the year for small caps. Also, January joins July as the only two calendar months where the Russell 2000 has declined more often than it's risen. Since 1987, the Russell 2000 has risen in January 14 times while declining 15 times. Historically speaking, continuation of the current bull market into January is far from a slam dunk.
Key Earnings Reports
None
Key Economic Reports
December Chicago PMI to be released at 9:45am EST: 57.0 (estimate)
Happy trading!
Tom
