Trading Places with Tom Bowley

Sectors Mixed, But That Doesn't Slow Down U.S. Equities

Market Recap for Thursday, October 12, 2017

It was certainly a bifurcated day among sectors.  Four sectors advanced, including industrials (XLI, +0.53%) and utilities (XLU, +0.52%), while five declined.  Financials (XLF, -0.76%) were hardest hit as the 10 year treasury yield ($TNX) has struggled to gain any ground since testing 2.40% yield resistance one week ago.  That helps to explain the relative weakness in financials over the past week as well.


Consumer discretionary (XLY, -0.67%) was also quite weak on Thursday with gambling stocks ($DJUSCA) showing notable weakness:

I was viewing this group quite bullishly with what appeared to be a cup with handle pattern in place.  Yesterday's big loss, however, negates this pattern in my view as the handle shouldn't fall more than 50% of the cup.  Despite the apparently breakdown out of this pattern, I do remain bullish the group but acknowledge that we could now see rectangular consolidation with a test of August's low a definite possibility.

While our major indices did finish lower on the session, those losses were fractional and did very little to damage the bullish technical picture as we work our way through the historically bullish fourth quarter.

Pre-Market Action

If the bulls are looking for a catalyst to drive equity prices higher, they best not look for declining treasury prices.  Inflationary pressures cooled a bit with the CPI reading this morning, but bond and stock traders are also looking to a stronger-than-expected retail sales report and the beginning of some significant corporate earnings reports.  Apparently bond traders like what they see as their bid for treasuries has resulted in a big drop in the TNX this morning to 2.29%, the lowest level on the TNX in about three weeks.

There remains a bid for U.S. equities, however, as Dow Jones futures are higher by 31 points with a little less than 30 minutes to go until the opening bell.

Current Outlook

Traders always look to technology for leadership as companies in this space are considered among the riskiest.  When technology rises, it provides the sense of a "risk on" environment that helps to drive stock prices higher.  Recently, we've seen two key areas of technology - semiconductors ($DJUSSC) and internet ($DJUSNS) - break out to lead the group higher.  Yesterday, the Dow Jones U.S. Software Index ($DJUSSW) saw a breakout of its own:

Momentum is building here as well, evidenced by the straight up move on the MACD off of centerline support.  Yes, the group is overbought, but as we've seen for many months, the market can remain overbought for extended periods of time.  I remain bullish for the fourth quarter.

Sector/Industry Watch

Industrial suppliers ($DJUSDS) hit long-term support in August and have been bouncing ever since.  Yesterday's rally of more than 2% enabled the industrials sector to outperform its peers.  Here's the long-term chart showing that key support and the consolidation that's taken place for five years:

I would expect the DJUSDS to use the rising 20 week EMA as support in the weeks ahead.

Historical Tendencies

Over the past two decades, the Russell 2000 (small caps) have performed best in the fourth quarter and momentum strengthening throughout the quarter.  The RUT has averaged gaining 1.2%, 2.2% and 3.0% in October, November and December, respectively, over this span.

Key Earnings Reports

(actual vs. estimate):

BAC:  .48 vs .46

JBHT:  .91 vs .97

PNC:  2.16 vs 2.13

WFC:  .84 vs 1.04

Key Economic Reports

September CPI released at 8:30am EST:  +0.5% (actual) vs. +0.6% (estimate)

September Core CPI released at 8:30am EST:  +0.1% (actual) vs. +0.2% (estimate)

September retail sales released at 8:30am EST:  +1.8% (actual) vs. +1.6% (estimate)

September retail sales less autos released at 8:30am EST:  +1.0% (actual) vs. +0.8% (estimate)

August business inventories to be released at 10:00am EST:  +0.7% (estimate)

October consumer sentiment to be released at 10:00am EST:  95.4 (estimate)

Happy trading!

Tom

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