Market Recap for Wednesday, July 5, 2017
Crude oil prices ($WTIC) tumbled on Wednesday and that put an abrupt end to the recent strength in energy shares (XLE, -2.03%). It's also one reason why I need to see the XLE downtrend end before I'd grow more bullish the sector on a relative basis. Take a look:
There are two issues above. First, the XLE needs to clear absolute trendline resistance and recent price resistance that connect at 67.00. Secondly, we need to see the XLE begin to outperform the S&P 500 and break that nasty relative downtrend line that's been in place since December. Renewable energy ($DWCREE) has been solid in 2017, but all other industry groups have lagged the benchmark S&P 500 very badly. Until that changes, avoid energy.
Technology (XLK, +0.99%) rebounded to lead the NASDAQ to gains on Wednesday. This time, it was the Dow Jones and S&P 500 that finished in negative territory as the bifurcation continues. Money is rotating between indices, sectors and industry groups based on trader's psyche and the perceived direction of treasury yields. With yields now apparently back on the rise, I'm expecting to see market behavior similar to November and December 2016. I don't expect to see a major push higher like we saw then. Rather, I simply expect to see relative strength return to financials and industrials.
Pre-Market Action
Crude oil prices are rebounding this morning, higher by 1.5% after being pummeled to the tune of 4.12% on Wednesday. There's much work left to do for crude oil and energy shares to break their relative price trends. The 10 year treasury yield ($TNX) is flat this morning as the selloff in treasuries pauses - even if just temporarily.
Dow Jones futures are down 58 points with roughly 45 minutes left to the opening bell, while technology shares are set up for more selling at the open. NASDAQ futures are down nearly 1% as we approach the opening bell.
Current Outlook
Internet stocks ($DJUSNS) had been a leader since early December before running into difficulties in June. The group is currently testing gap/price support as follows:
The 1330-1360 range should provide solid support on further summer weakness. Note that the RSI had recently dipped to the 40 level after being extremely overbought with readings near 90 in early May.
Sector/Industry Watch
The Dow Jones U.S. Water Index ($DJUSWU) has struggled the past few weeks, but hit a short-term level of price support. It's also one of the best performing industry groups historically from June through September. Over the past 18 years, the DJUSWU has averaged gaining nearly 6% during this four month stretch. Money tends to rotate towards defensive sectors in the summer and the DJUSWU resides in the defensive utilities sector. Here's a visual of the current technical outlook:
The DJUSWU is in a very well-defined up channel and I'd expect to see more strength over the balance of the summer. The RSI has also fallen from its overbought reading above 70 to its current 40 reading - a much more palatable level to consider entry during an uptrend.
Historical Tendencies
July starts a four month bearish stretch for small caps. The Russell 2000 has posted negative annualized returns for July, August, September and October since 1987.
Key Earnings Reports
None
Key Economic Reports
June ADP employment report released at 8:15am EST: 158,000 (actual) vs. 180,000 (estimate)
Initial jobless claims released at 8:30am EST: 248,000 (actual) vs. 244,000 (estimate)
June PMI services index to be released at 9:45am EST: 53.0 (estimate)
June ISM non-manufacturing index to be released at 10:00am EST: 56.5 (estimate)
Happy trading!
Tom
