Trading Places with Tom Bowley

Narrow Advance Led By Dow Jones Components 3M And Caterpillar

Market Recap for Tuesday, October 24, 2017

The Dow Jones powered to another record high close on Tuesday, finishing the session higher by 167.80 points.  Gains on the other major indices were much more modest as the Dow Jones pushed to record levels behind the strength of two components, 3M (MMM, +5.91%) and Caterpillar (CAT, +4.98%), as both companies reported better than expected earnings.  Despite this strength in key Dow component stocks, the benchmark S&P 500 struggled to hold onto its opening gains.  The S&P 500 ETF (SPY) opened slightly higher at 256.60, but closed slightly below its opening level, at 256.56.


The 10 year treasury yield ($TNX) advanced to 2.41% to challenge very significant yield resistance at that level.  That enabled financials (XLF, +0.71%) and industrials (XLI, +0.57%) to lead the action once again.  Banks ($DJUSBK) printed new 2017 highs on Tuesday and with the TNX soaring this morning, look for more leadership from banks and other financials like life insurance ($DJUSIL), investment services ($DJUSSB) and asset managers ($DJUSAG).  Here's the recent breakout and strength within the banking space:

I would look for price support at 445 to now become the key level to watch on any future pullbacks.

Pre-Market Action

Every key earnings report that I was watching this morning reflected better than expected earnings.  Yet, Dow Jones futures are currently lower by 13 points.  Given the meteoric rise in U.S. equity prices recently, solid earnings are priced into many stocks so don't be surprised if some companies beat revenue and EPS estimates, only to fall in price.  In my view, many of these declines will represent great buying opportunities in the next couple weeks.

We are seeing a very significant breakout on the 10 year treasury yield ($TNX) this morning, with the TNX at 2.46% at last check.  That suggests we're heading to test intermediate-term yield resistance just above 2.60%.  This move higher in the TNX also increased the odds of a Fed rate hike next week in response to economic reports that are signaling economic strength.

Current Outlook

The S&P 500 has seen a tremendous rally over the past month in anticipation of strong earnings and now we're seeing those strong earnings realized.  But many times it's a "buy on rumor, sell on news" type of market.  We know this is a bearish historical week and the S&P 500 was very overbought entering it.  Therefore, we should at least entertain the possibility of some profit taking this week.  If so, consider the following chart as a potential move to the downside:

I'm not expecting a major selloff, but a 1% decline back near 2545-2550 wouldn't be much, except that it would help to unwind the very overbought conditions that we've seen on the daily charts of our major indices.

Sector/Industry Watch

Recreational products ($DJUSRP) soared on Tuesday, but this group has become extremely overbought.  A pullback would be very useful technically to unwind the overbought conditions and possibly set up long entries into this group.  Take a look:

It's not usually a good idea to chase stocks and the DJUSRP closed up 4.55% yesterday.  It now has an RSI reading of 85, which is an extreme reading.  Look for an upcoming test of 20 day EMA support as a much better reward to risk entry.

Historical Tendencies

Since 1950 on the S&P 500, November ranks as the 2nd best calendar month of the year with an annualized return of 18.19%, trailing only December's 19.51% annualized return.

Key Earnings Reports

(actual vs. estimate):

ANTM:  2.65 vs 2.41

BA:  2.72 vs 2.65

BAX:  .64 vs .59

FCX:  .34 vs .29

GD:  2.52 vs 2.43

KO:  .50 vs .49

NOC:  3.68 vs 2.92

NSC:  1.75 vs 1.64

S:  (.01) vs (.02)

SIRI:  .06 vs .04

TMO:  2.31 vs 2.24

V:  .90 vs .85

WBA:  1.31 vs 1.22

(reports after close, estimate provided):

AFL:  1.62

AMGN:  3.09

CTXS:  1.04

LVS:  .67

NXPI:  1.69

PSA:  2.60

SU:  .26

VRTX:  .37

XLNX:  .62

Key Economic Reports

September durable goods released at 8:30am EST:  +2.2% (actual) vs. +1.0% (estimate)

September durable goods ex-transports released at 8:30am EST:  +0.7% (actual) vs. +0.5% (estimate)

August FHFA house price index to be released at 9:00am EST:  +0.4% (estimate)

September new home sales to be released at 10:00am EST:  555,000 (estimate)

Happy trading!

Tom

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