Trading Places with Tom Bowley

Equities Explode Higher, Led By Financials, Industrials And Small Caps

Market Recap for Tuesday, November 28, 2017

It was party day on Wall Street.  The bullish environment accelerated into a much faster gear as all nine sectors advanced and the small cap Russell 2000 soared 23 points, or 1.53%, to a fresh new record with its most bullish historical month - December - still awaiting.  It wasn't just small caps though.  The Dow Jones, S&P 500 and NASDAQ gained 1.09%, 0.98% and 0.49%, respectively, as each added yet another record to its ledger.


Technology (XLK, +0.33%) was the laggard and we may need to get used to it being an underperforming sector.  This high-flying group now has a negative divergence similar to what the financials (XLF, +2.60%) and industrials (XLI, +1.52%) faced a month ago.  That slowing momentum caused both the XLF and XLI to underperform as market rotation took its toll on both sectors.  Now the tide apparently has turned.  First, look at how the XLF performed after the negative divergence printed:

After that negative divergence, check out how the XLF underperformed the benchmark S&P 500 (red vertical line shows beginning of relative underperformance).  Now we're seeing the XLF take off again as money rotates back to the group.  So where might we see money rotate from to fuel the potential rise in financials and industrials?  Technology.  Check out the Current Outlook section below for further details.

Pre-Market Action

The second estimate of GDP came in exactly as expected at +3.3%.  That news has sent bonds tumbling with the 10 year treasury yield ($TNX) jumping to 2.37% this morning - very good news for equities.  And equities are responding with Dow Jones futures up 66 points with 30 minutes left to the opening bell.

Current Outlook

Financials and industrials really struggled on a relative basis after signs of slowing price momentum appeared.  After seeing centerline tests to "reset" their respective MACDs, both have showed excellent relative performance.  Their outperformance yesterday was a great big exclamation point!  Technology (XLK) could now be the group left out of a continuing December rally.  Check out the chart:

Seriously, take one look at this chart and tell me that the XLK doesn't deserve a break.  It's overbought.  There are signs of slowing momentum.  A normal 38.2% Fibonacci retracement would suggest a move back down to approximately 62.  A steeper 50% retracement would indicate perhaps a gap fill near 61.  Bull markets are comprised of, and sustained by, market rotation to give all areas of the market a breather.  I'm expecting that we'll see technology take a breather as other areas of the market regain leadership positions.  Consider taking at least partial profits in technology.

Sector/Industry Watch

Transportation ($TRAN) soared yesterday with both railroads ($DJUSRR) and truckers ($DJUSTK) approaching breakouts.  Breakouts in these two areas would be extremely helpful in supporting and sustaining the current bull market rally as they'd signal strength ahead for the U.S. economy.  Check out the charts for both:

Historical Tendencies

I have tracked daily data on the NASDAQ since February 5, 1971.  Since that time, there have been 11,769 trading days with the NASDAQ higher 6,583 days and lower 5,186 days.  Doing simple math, the NASDAQ has risen 55.94% of trading days over the past 47+ years.  Here's the breakdown of up days vs. down days during each of the following calendar periods (with annualized returns for these periods in parenthesis):

November 23rd through December 6th:  61.52% (annualized return:  +48.48%)
December 7th through December 15th:  46.76% (annualized return:  -40.84%)
December 16th through December 31st:  61.92% (annualized return:  +52.02%)

December 21st through December 31st has been the most bullish 11 consecutive days of the year historically.  Days within this calendar period have risen 65.92% of the time and produced annualized returns of +66.17%.  Despite the middle of the month doldrums, December truly is an amazing month for equities.

Key Earnings Reports

(actual vs. estimate):

RY:  1.54 vs 1.49

TIF:  .80 vs .76

(reports after close, estimate provided):

PVH:  2.91

SNPS:  .57

WDAY:  .15

Key Economic Reports

Q3 GDP (2nd estimate) released at 8:30am EST:  +3.3% (actual) vs. +3.3% (estimate)

October pending home sales to be released at 10:00am EST:  +1.0% (estimate)

Happy trading!

Tom

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