Trading Places with Tom Bowley

Fed Rate Hike Slams Financials; Biotechs Picking Up Steam

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Market Recap for Wednesday, December 13, 2017

It was a simple case of "buy the rumor, sell the news".  Financials (XLF, -1.24%) slumped on Wednesday after the Fed decided to raise interest rates another quarter point.  Higher 10 year treasury yields ($TNX) typically result in money rotating towards financial stocks.  Prior to yesterday, however, the XLF had risen 10% in a month.  That's a solid year, never mind a month!  So heading into the FOMC announcement, there surely was the possibility of a selloff and we saw it.  Financials remain very solid technically and would be an excellent reward to risk buy if key price, gap and moving average support was tested.  Check out the chart:


The 27 level would represent another 3% downside or so, but I'd expect that to hold.  The XLF was extremely overbought as you can see from the elevated RSI and stochastic readings.  Don't be too surprised if we see a bit more rotation away from this sector, although I remain very bullish the financials as we head into year end and 2018.

Despite a late day selloff in U.S. equities after the Fed announcement, most major indices did finish in positive territory on Wednesday.  Only the S&P 500 finished lower and it was by a meager 1 point.

Consumer staples (XLP, +0.57%), industrials (XLI, +0.39%) and healthcare (XLV, +0.35%) led the action on Wednesday.

Pre-Market Action

Wow, what a retail sales report this morning!  You can see the numbers below in the Economic Reports section of today's article.  This is a case study and poster child of why technical analysis works.  Retail (XRT) was dead for a couple years, but it literally soared out of nowhere beginning a month ago.  Today, we see the fundamental news to support the last month's run higher.  It's how the market works and why price analysis should be your "go to" in managing your portfolio.

Asian markets suffered mostly minor losses overnight with European markets following suit.  The German DAX ($DAX) was down 87 points at last check, but still remains comfortably above key support near 12900.  A close above 13200 on the DAX would be especially bullish in my view.

Crude oil ($WTIC) is slightly lower this morning, while treasuries endure a bit of selling with the 10 year treasury yield rising two basis points to 2.37%.  It'll be interesting to see if the selling in treasuries accelerates today after the strong retail sales report.

With 30 minutes left to the opening bell, Dow Jones futures are up by 29 points, looking to extend its run of record high closes to five days today.

Current Outlook

Healthcare (XLV) closed at a fresh new high on Wednesday and that will only help to sustain the current bull market conditions.  Biotechs ($DJUSBT) have begun to strengthen and are at a key inflection point as illustrated in the Sector/Industry Watch section below.  But the new closing high on the XLV is shown here:

The MACD is above the centerline and rising, indicative of accelerating bullish price momentum.  While it may appear there's a short-term double top based on intraday price (and I agree), the XLV actually closed at a new high and I view that bullishly.  Could this be the right side of a cup with handle pattern?  Absolutely.  But again, that is a bullish continuation pattern.  In the end, I expect to see higher XLV prices based on this chart and biotechs will likely hold the key in terms of the timing of its breakout above intraday high price resistance.

Sector/Industry Watch

Biotechnology ($DJUSBT) has quietly been strengthening and it's showing in the performance of its own index and in the healthcare ETF (XLV).  The rising 20 week EMA is holding and the DJUSBT is now turning up.  In the short-term, it does have gap resistance to contend with so this will be a group to keep a close eye on today:

There was a clearly defined uptrend channel in play for much of 2017 (black parallel lines).  That broke on very heavy volume when the DJUSBT gapped lower in late October.  We've since recovered, but a bearish case could be made that a reversal at the current price and gap resistance could establish the top side of a down channel (red dotted lines).  RSI has also hit 60 where we typically see prices top during downtrends.  I'm bullish because the longer-term weekly chart is bullish and we're in a bull market.  Therefore, I look for bullish conclusions.  A break above 2025, in my opinion, would suggest the longer-term bull market behavior of biotechs is intact, while a reversing candle and failure to hold the now-rising 20 day EMA would paint a more bearish short-term picture.

Historical Tendencies

I've been discussing the bullish seasonal trends in December, especially with respect to the small cap Russell 2000 index ($RUT).  The RUT boasts an annualized return during December of more than 34% since 1987.  But the real story is the second half of December, which we're rapidly approaching.  I can't tell you what's going to happen over the next 2-3 weeks, but history tells us we're likely to see higher prices.  Here's the annualized return of each calendar day from December 16th through December 31st (on the RUT):

December 16:  +172.84%
December 17:  +45.24%
December 18:  +35.68%
December 19:  -33.51% (only down day in the second half of December)
December 20:  +79.54%
December 21:  +155.98%
December 22:  +76.35%
December 23:  +103.86%
December 24:  +47.67%
December 26:  +125.49%
December 27:  +26.27%
December 28:  +17.31%
December 29:  +77.28%
December 30:  +87.88%
December 31:  +104.23%

Feel free to draw your own conclusions.

Key Earnings Reports

(reports after close, estimate provided):

ADBE:  1.15

COST:  1.35

ORCL:  .68

Key Economic Reports

Initial jobless claims released at 8:30am EST:  225,000 (actual) vs. 239,000 (estimate)

November retail sales released at 8:30am EST:  +0.8% (actual) vs. +0.3% (estimate)

November retail sales less autos released at 8:30am EST:  +1.0% (actual) vs. +0.7% (estimate)

October business inventories to be released at 10:00am EST:  -0.1% (estimate)

Happy trading!

Tom

Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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