Market Recap for Wednesday, February 27, 2019
We're seeing how the stock market deals with a bit of adversity with a Volatility Index ($VIX) at 15 vs. when it was in the 20s and 30s. Every time it appears we're going to have a nasty day, buyers return and intraday selling dissipates. For the second straight day of this "downtrend", equities have traded at their lows early in the session only to recover much of their losses by the close. These are signs of accumulation. Therefore, should we see breakouts above those reaction highs in Q4 2018, be prepared for further appreciation:
Those red arrows highlight the current major battleground for the bulls and bears. That nasty December selling began with the S&P 500 just above 2800. We closed yesterday at 2782. The bears will throw the kitchen sink in at this point. If we get a breakout above these reaction highs, I'd view that quite bullishly.
Yesterday, we saw leadership from industrials (XLI, +0.39%), financials (XLF, +0.38%) and energy (XLE, +0.38%). The former two clearly benefited by the move higher in the TNX. Rising rates tend to result in a direct improvement in net interest margin for banks ($DJUSBK, +0.62%). Energy, meanwhile, jumped as crude oil prices ($WTIC, +2.59%) had a strong day. Both the XLE and WTIC are trading in a much more favorable pattern now:
Crude oil is clearly in an uptrend now and the XLE is rising and holding its 20 day EMA on short-term profit taking episodes. The absolute chart is not the problem. Check out the bottom of that chart. The XLE is underperforming the S&P 500 and it's been doing so for 8 years now. The problem with energy (and materials) is the U.S. Dollar Index ($USD) bottomed in 2011 and has been rising on its longer-term chart ever since. That's a headwind for both energy and materials. Accordingly, I would continue to underweight these two sectors until we see a definitive breakdown in the USD's long-term uptrend.
Media agencies ($DJUSAM, -0.93%) sold off for a third consecutive day, just after hitting overhead price resistance in the 605-610 area earlier this week. That put pressure on the communication services sector (XLC, -0.50%), which lagged on the session.
Pre-Market Action
Crude oil ($WTIC) is flat today, cooling off after a solid Wednesday performance. The 10 year treasury yield ($TNX) moved just beneath its 20 day EMA earlier this morning, dropping 2 basis points to 2.67%, but has rallied in the past few minutes to hit 2.70%.
Asian markets were lower overnight and that weakness carried over to Europe, where most key indices there are also lower. Here in the U.S., Dow Jones futures are pointing to a slightly lower open with 30 minutes left to the opening bell.
The initial Q4 GDP came in higher than expected at 2.6%. Analysts were looking for 2.2%. This "initial" reading comes a month late due to the government shutdown.
Current Outlook
While new money obviously sends equity prices higher, a stronger or potentially strengthening economy can also send equity prices higher as money rotates away from the more defensive bond market. We can see this rotation not only from a drop in treasury prices, but also from a rise in treasury yields. The 10 year treasury yield ($TNX) has been struggling for the past 3 1/2 months every time it challenges overhead resistance at its 20 day EMA. Yesterday, the TNX spiked more than 5 basis points to end the day at 2.69%, just above its 20 day EMA, currently at 2.68%:
By my count, yesterday marked the 8th attempt in the past 5 weeks to clear that pesky 20 day EMA, with failures the last 7 times. Will yesterday's try be more successful? I don't know, but I do know that the bigger picture still favors a TNX move to the upside. Check out the longer-term weekly chart:
I see a very significant range on the TNX between 2.60% and 2.80% (20 week EMA). A break to the downside, in my opinion, could be very challenging for equity bulls, while a break to the upside would likely accompany higher equity prices.
Sector/Industry Watch
The Dow Jones U.S. Medical Equipment Index ($DJUSAM, +0.55%) performed well on Wednesday, but has some work to do to clear overhead price resistance established with the early October high near 1750. The good news is that the DJUSAM has been a very solid relative performer so I believe it's just a matter of time before we see this breakout:
The group is already seeing more than its fair share of money rotating into healthcare and that's enabled the group to continue to perform well vs. the benchmark S&P 500. An absolute breakout would certainly aid stocks like Intuitive Surgical (ISRG), which is featured as a very strong seasonal performer in the Historical Tendencies section below.
Historical Tendencies
March begins an impressive five month seasonal period (March through July) for Intuitive Surgical (ISRG), where it's averaged gaining 32.5% over the past 20 years:
These next five months produce roughly 80% of ISRG's historical gains.
Key Earnings Reports
(actual vs. estimate):
(all estimates, awaiting actual numbers)
ABB: .40
BUD: 1.15
CM: 2.37
JD: (.04)
KDP: .30
TD: 1.31
(reports after close, estimate provided):
ADSK: .42
DELL: 1.89
EIX: 1.00
MAR: 1.40
SPLK: .76
VMW: 1.87
WDAY: .32
Key Economic Reports
Q4 GDP (initial reading) released at 8:30am EST: +2.6% (actual) vs. +2.2% (estimate)
Initial jobless claims released at 8:30am EST: 225,000 (actual) vs. 225,000 (estimate)
February Chicago PMI to be released at 9:45am EST: 56.1 (estimate)
Happy trading!
Tom
