Market Recap for Monday, December 12, 2016
The Dow Jones advanced for the 21st time in the last 25 trading days on Monday, capturing yet another record high close on Monday. While it was led by mostly defensive areas like utilities, REITs and pharmaceuticals, offensive areas didn't exactly break down. It was more like a pause in areas where I prefer to see leadership. Bifurcation was apparent as utilities (XLU, +1.04%), healthcare (XLV, +0.48%) and consumer staples (XLP, +0.40%) gained during the session while financials (XLF, -0.97%) and consumer discretionary (XLY, -0.83%) trailed. The good news, however, is that there seems to be demand for multiple areas of market just about every single session so the overall indices remain technically strong.
Utilities, in particular, seem to be in a precarious technical position as we head into the Fed's 2 day meeting that begins today and ends with the FOMC policy decision at 2pm EST on Wednesday. The longer-term weekly chart shows momentum building to the downside with the 10 year treasury yield ($TNX) bumping up against big resistance at 2.50%. Take a look:
The long-term uptrend remains intact, but so does the short-term down channel. Weekly momentum has turned negative and the 20 week EMA is closing in on a death cross beneath the 50 week SMA. All of this comes as the market awaits the latest from the Fed. Higher interest rates represent a significant head wind for utilities as their dividend yields don't look as attractive when treasury yields are rising. It will be interesting to see how this sector reacts tomorrow afternoon after the FOMC announcement.
Pre-Market Action
Global markets are on the move....again. Overnight, Asian markets were up fractionally and European markets are following suit this morning with the German DAX now a comfortable 4% above its most recent breakout at 10800. Most European markets are higher by 0.50%-0.75% this morning.
Treasury prices are rising this morning ahead of the two day FOMC meeting and that's driving treasury yields lower. The 10 year treasury yield ($TNX) is down 3.5 basis points to 2.44% at last check. Gold ($GOLD) has been steadily declining over the past month (down approximately 10% in that span), but now is beginning to show slowing momentum on its daily chart in the form of a positive divergence. We could see a bounce soon in gold, although the longer-term weekly chart is showing accelerating downward momentum. So a bounce is all I'd look for - perhaps 4-5%.
Crude oil ($WTIC) is higher again this morning, capitalizing on its breakout on Monday. It's a fractional gain just above the $53 per barrel level, but this move is signaling higher crude oil prices ahead and that should be bullish for energy stocks. Look for continuing relative leadership here.
Dow Jones futures suggest yet another all-time record is in store. Currently, Dow futures are up by a healthy 64 points just 30 minutes before the open.
Current Outlook
The Dow Jones U.S. Banks Index ($DJUSBK) has been among the best performing industry groups since early November. Rising treasury yields provide an impetus for banks as their net interest margins expand during a rising interest rate environment. That relationship has never been clearer than during this recent bullish move. Check out the relationship:
Clearly, banks will be impacted by the Fed's decision. I believe we'll see a 25 basis point hike with an eye toward more hikes in 2017. That should mean that banks move higher - and eventually I believe they will. I'm looking for a TNX at 3.00% in 2017 and that should provide tail winds to carry banks higher. However, a lot is already built in to bank prices and if you look closely at the chart above, you'll see that the TNX rose the past couple trading sessions without a related push higher in banks. So has the market already priced into banks the more hawkish Fed policy. We'll likely know by seeing how the banks react to tomorrow's announcement. Failure to break out could mean a period of consolidation ahead for banks, which wouldn't be a bad thing technically for the group. I'd look for buyers on any 20 day EMA test on the DJUSBK. That 20 day EMA, not reflected on the hourly chart above, is at 382 or approximately 5% lower than Monday's close.
Sector/Industry Watch
The Dow Jones U.S. Gambling Index ($DJUSCA) has not participated in the past month's run up in equity prices, gaining just 1.55% during that span. Is it a sign of a major trend change or is it just healthy profit taking and rotation? I believe it's the latter - at least for now. The following is a weekly chart that shows the longer-term uptrend is still alive and kicking:
On the most recent price high in early November, the weekly MACD had printed a new high, indicative of strengthening momentum. The problem, however, was that gambling stocks were quite overbought just as the overall market began running to the upside. So it was money coming out of this overbought industry group that was helping to fuel other areas. That's rotation. I'd be careful with this group if we see a weekly close below that rising 20 week EMA, but until then I'd view this as a strong reward to risk opportunity for entry into the space.
Historical Tendencies
Here's a breakdown of S&P 500 annualized returns since 1950 during the month of December:
December 1-6: +24.34% (market moves higher 54.45% of trading days within this period)
December 7-15: -13.64% (market moves higher 48.57% of trading days within this period)
December 16-31: +38.81% (market moves higher 58.62% of trading days within this period)
These numbers highlight the directional tendency of stocks during the bullish calendar month of December. They do not intend to provide guarantees. Nonetheless, once we move past the 15th of the money, historical bullishness generally prevails.
Key Earnings Reports
(reports after close, estimate provided):
HEI: .60
NDSN: 1.24
Key Economic Reports
FOMC committee begins its 2 day December meeting with its policy directive announced at 2pm EST on Wednesday
Happy trading!
Tom
