Market Recap for Wednesday, May 31, 2017
Utilities (XLU, +0.50%) and healthcare (XLV, +0.40%) led a defensive-oriented market on Wednesday with the latter nearing a significant bullish ascending triangle breakout. Materials (XLB, +0.30%) and consumer staples (XLP, +0.28%) also performed well. The aggressive sectors were mixed with consumer discretionary (XLY, +0.26%) and industrials (XLI, +0.19%) finishing in positive territory, while financials (XLF, -0.85%) was easily the worst performing sector.
Biotechs ($DJUSBT) have been the worst performing industry group in healthcare over the past week, month, three month, six month and year periods. Despite this weakness, however, the XLV remains poised to make a very bullish breakout as follows:
This pattern measures to 79.50-80.00 upon breakout. Accordingly, it should be watched closely.
Financials are a significant underperformer as key areas like banks ($DJUSBK) and life insurance ($DJUSIL) are struggling to hold onto major neckline and price support amid a treasury market that can't decide if it agrees with Fed rhetoric of an improving economic picture ahead. The next two weeks will be very interesting as we approach the next FOMC meeting that will decide whether we'll see another interest rate hike. The treasury market currently is saying NO.
Pre-Market Action
The ADP employment report showed a surge in jobs with the actual number of 253,000 far outpacing the estimate of 170,000. The 10 year treasury yield ($TNX) has moved higher this morning by 3 basis points to 2.23%. I would've expected a more robust response to such a strong number, but traders may be thinking back to recent months where we've seen huge disparities between the ADP report and the government nonfarm payrolls report, which will be released on Friday. Still, any jump in the TNX will likely provide financials a boost so look for leadership today from that sector, barring further economic setbacks later this morning from manufacturing data.
Dow Jones futures are slightly higher this morning, up 12 points at last check as we approach a new trading day - just 30 minutes away.
Current Outlook
The direction of the 10 year treasury yield ($TNX) will likely have a big impact regarding the direction of U.S. equity prices. If bond traders begin to believe that a rate hike is imminent, I'd expect to see the TNX trend higher over the next two weeks and that should lift financials back into a leadership role. But further stagnation in the TNX near or below the 2.20% level would be a short-term negative for equities in general, and financials in particular.
Sector/Industry Watch
Automobiles ($DJUSAU) had been under selling pressure since topping in February. However, strength on Wednesday enabled the group to break a 3-4 month downtrend line and sets the group up for further strength ahead. Tesla (TSLA) has been the leader and currently boasts one of the highest SCTRs (StockCharts Technical Rank) among its peers. Check out the chart:
The SCTR hit 75 earlier this year on TSLA and, with the exception of a couple blips in late February and early March, has remained in that upper quartile despite an industry group that was downtrending. Now that the DJUSAU has broken its declining tops trendline, I expect TSLA to lead the entire industry higher.
Historical Tendencies
The NASDAQ has been the clear leader among major U.S. indices in 2017, but June historically has been just an average month for this tech-laden index. Its annualized return of 8.83% since 1971 ranks June as the 8th best calendar month of the year and it starts a very rough summer period from June through September.
Key Earnings Reports
(actual vs. estimate):
DG: 1.03 vs .99
MBLY: .14 vs .18
(reports after close, estimate provided):
AVGO: 3.02
COO: 2.25
LULU: .28
VMW: .65
WDAY: (.34)
Key Economic Reports
ADP employment report released at 8:15am EST: 253,000 (actual) vs. 170,000 (estimate)
Initial jobless claims released at 8:30am EST: 248,000 (actual) vs. 239,000 (estimate)
May PMI manufacturing index to be released at 9:45am EST: 53.0 (estimate)
May ISM manufacturing index to be released at 10:00am EST: 54.6 (estimate)
April construction spending to be released at 10:00am EST: +0.5% (estimate)
Happy trading!
Tom
