Trading Places with Tom Bowley

Dow Transports Gain 1000 Points During Last 8 Days' Melt Up

Market Recap for Monday, December 4, 2017

Recent bullish themes continued on Monday.  Outperformance by the Dow Jones (+0.24%) and S&P 500 (-0.11%) overshadowed ugly relative performance from technology (XLK, -1.61%) and the NASDAQ (-1.05%).  Even the riskier Russell 2000 index ($RUT, -0.30%) easily outperformed the NASDAQ.  The good news is that this quick correction in technology stocks is relieving prior overbought conditions and helping to remedy the momentum issues that were in place.  Check out the XLK:


This selling was long overdue.  It doesn't feel good when it happens, but an RSI trip back to 40 typically represents a much stronger reward to risk entry into a healthy group (from a long-term perspective).  I think we're nearing a short-term bottom in the XLK in the 61-62 area.  We could be setting up for a nice Santa Claus rally in the group.

Financials (XLF, +1.52%) and industrials (XLI, +0.84%) have been the strongest sectors while money has rotated away from technology.  The banks ($DJUSBK) have gained more than 8% over the past week to lead financials.  Railroads ($DJUSRR) have surged nearly 11% over the past week to lead a remarkable rally in transportation stocks ($TRAN).  Finally, consumer discretionary stocks (XLY, +1.16%) have also seen a parabolic-type rise of late, led by a huge advance in retail stocks (XRT, +2.30%).  Volume is confirming the strength in retail so expect it to continue, with normal profit taking along the way.

Pre-Market Action

U.S. futures are bifurcated as Dow Jones futures look to move higher, up 57 points with a half hour left to the opening bell.  NASDAQ stocks, however, look to continue their recent relative weakness as this tech-laden index is higher by only 3 points.  Technology (XLK) has been a big drag after printing that nasty negative divergence on its daily chart. 

There was a big earnings surprise this morning and it wasn't a good one.  Toll Brothers (TOL) missed its quarterly estimates on both revenues and earnings and TOL is down 

Current Outlook

Higher transportation stocks ($TRAN) typically means only one thing.  Traders believe that economic prospects are bright.  Railroads ($DJUSRR) and truckers ($DJUSTK) are both highly dependent on an increase in goods/resources being shipped.  They move higher in price if the market believes their shipments will increase.  That's why the recent action in both areas favors this bull market continuing for awhile (with profit taking along the way, of course).  Are there short-term issues?  Yes, overbought conditions.  Both the DJUSRR and DJUSTK show weekly RSI above 70 so they could use a rest.  A pullback to test their rising 20 week EMAs could result in selling of nearly 10% in both.  I don't expect that type of selling, but the long-term charts would remain bullish in my view even if we saw that type of pullback.  Here's a weekly chart of the truckers:

Note that the black arrows mark previously overbought weekly RSI readings.  The red arrows highlight subsequent price pullbacks, a couple very shallow while others were a bit deeper.  The key takeaway here is that the trucking area is extremely bullish, but the risks of entering long positions carry much more risk at current prices.  A pullback would provide a much better reward to risk entry, although I would not be awaiting the 10% correction mentioned earlier.  Instead 700-725 would be an interesting level to consider truckers.

Sector/Industry Watch

Copper prices ($COPPER) are up roughly 25% off the May low, but have been drifting lower and consolidating the past several weeks.  This indecision has left the daily MACD resting at centerline support and an argument could be made that prices are in a bullish symmetrical triangle pattern.  Check it out:

Given the current bull market, I'd expect to see this triangle pattern break to the upside, continuing the previous uptrend.

Historical Tendencies

Transports ($TRAN) have been on fire and much of it can be attributed to railroads ($DJUSRR).  We are in the midst of a very favorable seasonal period on the DJUSRR that runs mostly from October through May.  Over the past 20 years, the DJUSRR has averaged gaining 1.5% during the month of December and you can see below that it tends to be followed up with more strength into the next year, building to a crescendo in April:

History suggests that we look for more strength into 2018.

Key Earnings Reports

(actual vs. estimate):

AZO:  9.96 vs 9.80

BMO:  1.54 vs 1.58

HDS:  .80 vs .75

TOL:  1.17 vs 1.19

(reports after close, estimate provided):

VEEV:  .22

Key Economic Reports

November PMI services index to be released at 9:45am EST:  54.7 (estimate)

November ISM services index to be released at 10:00am EST:  59.0 (estimate)

Happy trading!

Tom

 

 

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