Trading Places with Tom Bowley

The Dow Jones Has Its Biggest Gain of 2017, Closes Above 24000

Market Recap for Thursday, November 30, 2017

It was another broad-based rally on Wall Street with traders ditching bonds and rushing into equities.  The Dow Jones rallied 331.67 points to easily close above 24,000 for the first time in its history.  The records just keep piling up.  It was only 10 months ago that the Dow Jones managed to clear the psychological 20,000 level.  Since that time, we've seen the Dow rumble higher by more than 20%, taking out four 1,000 point milestones along the way.  Nothing seems to slow down this equity train with the Dow's weekly RSI now approaching 84, the most overbought it's been this century.


Industrials (+1.71%) and energy (+1.50%) were the sector leaders on Thursday, but all nine sectors advanced.  During a bull market, there's not much that's more bullish than wide participation as strength in all sectors keeps the technical picture of each sector bullish.  Accordingly, it keeps technical sellers at bay and limits the selling pressure.  Within industrials, railroads ($DJUSRR) and truckers ($DJUSTK) exploded to the upside as the massive rally in transports continues.  Check out this chart:

Railroads move higher in anticipation of more shipments in North America.  Following railroads is one of my favorites as this group only moves up for one reason - a strengthening U.S. economy, or at least the anticipation of one.

If there was one big disappointment on Thursday, it was the action in banks ($DJUSBK) during the final three hours of the trading session.  I discuss this in more detail below in the Sector/Industry Watch section.

Pre-Market Action

The U.S. Senate delayed its tax bill vote on Thursday and that spooked traders early as Dow Jones futures were down significantly in early pre-market action.  The outlook has brightened some in more recent action and the Dow futures have recovered and are flat just 30 minutes before the opening bell.  NASDAQ futures (down 26 points) remain fairly weak, however, as the recent selling in technology stocks remains in focus.

The delay in the tax bill caused money to shift into more defensive areas with the 10 year treasury yield ($TNX) falling back to 2.37% earlier.  We have seen some recovery back to 2.39%.  Manufacturing and construction data will be released shortly after the market opens so we'll get a better feel of the bond market after those reports.

Overnight, Asian markets were mixed.  But the bigger technical news is in Europe this morning where we saw the German DAX ($DAX) down testing two month support near 12900.  A breakdown there would be short-term worrisome for U.S. equities as the S&P 500 has a history of closely correlating with the German DAX.  The DAX has bounced off its earlier low, though, and was at 12960 at last check.

Current Outlook

I mentioned above that the weekly RSI on the Dow Jones is nearly 84.  The S&P 500 and NASDAQ readings of 81 and 76 aren't far behind.  There is no question that these overbought readings are begging for some relief.  While we might see a bit of consolidation to help unwind them in the coming months, I only see one thing that could derail this rally in the very near-term and it's interest rates.  We just saw a major breakout in financials based on a bullish development (symmetrical triangle breakout) in the 10 year treasury yield ($TNX).  Retail stocks (XRT) also have come to life with both the bond and stock market anticipating significant economic strength ahead.  Should the TNX begin to downtrend, we could argue that the bulls are overly optimistic towards our economic growth ahead and that disappointment, and subsequent drop in the TNX, would likely result in the failure of financials and industrials.  Currently, bull market rotation is counting on these two sectors to pick up the slack for technology as it unwinds its negative divergence.  Also, slower than anticipated economic growth would negatively impact transportation stocks ($TRAN) and retail stocks, both of which have soared this week as the TNX broke out of its symmetrical triangle pattern.

Bottom line?  Watch the treasury market for clues about the direction of our economy.  Disappointment and rapidly declining yields would be the biggest negative for the stock market.  If the TNX continues to rise into the FOMC meeting in 10 days, I'd look for a corresponding rise in financials to sustain the current bull market advance.

Sector/Industry Watch

Masking the strength yesterday was the failure of banks to sustain their recent surge to the upside.  They had significant gains in place midday yesterday as treasury yields approached an 8+ month high, then fell apart when buyers stepped up in the bond market in the afternoon.  Check out this intraday chart:

That afternoon selling resulted in a reversing black candle printing on the DJUSBK and that suggests we'll see weakness in the near-term.  It'll certainly be something to watch today.

The selling of banks might appear to be an overreaction, but keep in mind that our major indices are extremely overbought as I discussed above.  I fully expect technology to struggle on a relative basis and if the TNX tops near-term, we could see profit taking from areas that have been on fire of late.  All of that combined could result in a very brief and potentially scary selling episode.  I'm not predicting that type of selling, just cautioning that it's not out of the question given the state of the market.  I remain very bullish equities, I just realize we're extremely overbought.

Historical Tendencies

The first day of the calendar month (all months, not just December) is the most bullish day for stocks (except for the Russell 2000 where we tend to see more strength late in the calendar month).  Here are the annualized returns on the 1st day of the month for the following:

S&P 500:  +45.72% (Second best day?  2nd day of month:  +38.04%)
NASDAQ:  +58.64% (Second best day?  31st day of month:  +47.68%)
Russell 2000:  +44.86%

On the Russell 2000, the first day of the month is actually the 6th best day of the month.  Here are the top 5:

31st:  +75.45%
29th:  +63.12%
16th:  +61.02%
26th:  +49.66%
18th:  +45.07%

Key Earnings Reports

None

Key Economic Reports

November PMI manufacturing index to be released at 9:45am EST:  54.5 (estimate)

November ISM manufacturing index to be released at 10:00am EST:  58.4 (estimate)

October construction spending to be released at 10:00am EST:  +0.5% (estimate)

Happy trading!

Tom

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