Market Recap for Friday, June 2, 2017
Technology (XLK, +0.92%) led U.S. equities higher on Friday and that's been the case for several months now. The XLK has been the best performing sector with a current SCTR (StockCharts Technical Rank) reading of 92 further validating that. Two familiar industry groups - software ($DJUSSW) and semiconductors ($DJUSSC) - led the charge higher with gains of 1.44% and 1.28%, respectively. While a sizable pullback is long overdue, it's been a year since the DJUSSC closed a week beneath its rapidly rising 20 week EMA. Check this out:
Since that golden cross (short-term 20 week EMA crossing over longer-term 50 week SMA), the DJUSSC has not looked back. It's been overbought or near overbought for the last 10 months or so, with only a couple of 20 week EMA tests along the way. Be very careful on any weekly close beneath that 20 week EMA. Until then, however, consider the DJUSSC to be among the very best industry groups to trade.
Energy (XLE, -1.15%) remains the laggard as it dropped again on Friday and carries only a 3.5 SCTR ranking with financials (XLF, -0.38%) the only other sector with a SCTR ranking below 50 (19.8 currently).
Pre-Market Action
Dow Jones futures are down slightly (19 points) as we approach the open of a brand new trading week. Gold ($GOLD) is continuing its steady march higher, up another 0.25% in early trade this morning. Gold has been benefiting from a weak U.S. dollar (USD) and that likely will continue as long as the 10 year treasury yield ($TNX) remains in its current downtrend.
Current Outlook
Despite an improving relative strength ratio of consumer discretionary stocks vs. the benchmark S&P 500 (XLY:$SPX), none of this strength has anything to do with retail stocks (XRT). The XRT:XLY ratio shows that retail is an extremely weak component among consumer discretionary and, if you're going to trade within the industry, retail is not the place to look - at least not yet. Take a look:
This is a very clear visual of what's taken place the past two years. Consumer discretionary (XLY) has continued to lead vs. the S&P 500, but retail has had no part in it whatsoever. While I suggest sticking with the XLY in terms of relative performance, retail is not the area to consider to benefit from such relative strength.
Sector/Industry Watch
The rise in software stocks ($DJUSSW) looks to be parabolic, with its recent rise turning higher and higher and accompanied by little profit taking along the way. Momentum on its weekly chart remains quite strong, but the DJUSSW is very overbought as you can see below:
The 2017 rise in software has been nearly 25% and the black circles above highlight how overbought this industry group has remained. Weekly RSI readings at 79 are not seen often - and this reading comes on the heels of the DJUSSW having been overbought since early February. Bottom line is this group needs a pause and some short-term relief. Normally, we see selling in the summer months in most equities so I'd expect to see some relief this summer.
Monday Setups
Polyone Corp (POL) posted very solid revenue and EPS numbers when their latest quarterly earnings report was released in late April. It moved significantly higher on very solid volume before pulling back recently in a triangle pattern. The downtrend in this triangle broke on Friday and POL looks poised for further gains:
The red dotted line marks key trendline resistance over the past five weeks while the green horizontal line shows that gap support near 37.00 has also served as price support on pullbacks. I'd view 37.00-40.75 as the current trading range so any moves back in the 37.00-38.00 area represent solid reward to risk entry points.
Historical Tendencies
June through September is historically the weakest period of the year for U.S. equities - dating back to 1950 on the S&P 500. It's not too surprising that the best performing industry group - the Dow Jones U.S. Water Index ($DJUSWU) - during these four summer months resides in the defensive utilities sector (XLU). The XLU is currently the second best ranked sector based on SCTR scores and the DJUSWU is forming the right side of a bullish cup:
I'm expecting to see the DJUSWU complete its cup over the balance of the summer months so long as recent price support near 1700 holds.
Key Earnings Reports
(actual vs. estimate):
PRGO: 1.05 vs .98
Key Economic Reports
Q1 productivity released at 8:30am EST: +0.0% (actual) vs. -0.2% (estimate)
May PMI services index to be released at 9:45am EST: 54.0 (estimate)
April factory orders to be released at 10:00am EST: -0.2% (estimate)
May ISM non-manufacturing index to be released at 10:00am EST: 57.0 (estimate)
Happy trading!
Tom
