Market Recap for Wednesday, April 13, 2017
It was another day of not-so-great action in the U.S. stock market on Wednesday as our major indices finished lower as this lengthy period of frustrating consolidation continues. A problem is definitely brewing, though, as the Volatility Index ($VIX) pushes higher and higher. The stock market tends to struggle with any bad news when the VIX is rising. It makes sense because the high volatility is generally associated with a declining stock market. Conversely, when the VIX is low, we tend to see the market ignore bad news - as it did last Friday with a very weak jobs report.
Defense beat offense again on Wednesday with utilities (XLU, +0.74%) bouncing again bullishly off its rising 20 day EMA. There is a negative divergence here so further consolidation is likely. Check out the chart:
More and more caution is advised near-term with so much defensive action taking place amid rising fear.
Pre-Market Action
The 10 year treasury yield ($TNX) has dropped big time this morning to 2.24% this morning, a clear breakdown of recent price support. Like last Friday, after the disappointing jobs report, we really need to see a rise in the TNX. Banks reported very strong results this morning, but it'll be interesting to see how traders respond to a declining TNX (which hurts future bank profits) and very strong bank earnings reports.
Dow Jones futures are down slightly as we approach the opening bell.
Current Outlook
Rising volatility ($VIX) and a lower 10 year treasury yield ($TNX) have me on edge. Money has been rotating away from offense into defense in almost every area of the market in the near-term. The longer-term still shows an uptrend in place, but the past few months have been different. First, let's look at the S&P 500, VIX and TNX:
Here's the difficulty with the stock market. A quick spike in the VIX can mark a significant bottom in a longer-term bull market - just as it did in early November. But it's very important that you notice how quickly that VIX fell back into "bull market territory" below 16. During the past bear markets, the VIX never dropped below the 16-17 support level. Therefore, it'll be important to see what happens after our next significant price decline in our major indices. Does the VIX quickly fall back? Or do we continue to hold VIX support at 16-17 on market bounces?
Sector/Industry Watch
Over the past month, the Dow Jones U.S. Gold Mining Index ($DJUSPM) has been the best performing industry group, rising nearly 9%. Historically, the DJUSPM performs well during April and May with average monthly returns during those two months of 1.6% and 1.7%, respectively, over the past 18 years. Technically, the group is still challenged, but there's room to the upside to challenge a key price resistance level at what could turn out to be a neckline in a potential bottoming reverse head & shoulders pattern. Have a look:
There's work to do here, but that range from 80.00-82.50 is clearly going to be the most challenging. Note the MACD has turned positive, however, suggesting that the bulls are regaining price momentum. A price breakout with heavy volume would confirm the likelihood of continuing relative strength in this defensive area of the market.
Historical Tendencies
Over the past two decades, the Russell 2000 (small caps) has averaged outperforming the benchmark S&P 500 by 0.2% in May and 1.2% in June, but first the small caps must deal with relative underperformance in April. Over the last 20 years, performance during April has been stronger on the S&P 500 13 times.
Key Earnings Reports
(actual vs. estimate):
C: 1.36 vs 1.24
JPM: 1.65 vs 1.51
PNC: 1.96 vs 1.84
TSM: .54 vs .53
WFC: 1.00 vs .97
Key Economic Reports
Initial jobless claims released at 8:30am EST: 234,000 (actual) vs. 243,000 (estimate)
March PPI released at 8:30am EST: -0.1% (actual) vs. +0.0% (estimate)
March Core PPI released at 8:30am EST: +0.0% (actual) vs. +0.2% (estimate)
April consumer sentiment to be released at 10:00am EST: 97.0 (estimate)
Happy trading!
Tom
