Trading Places with Tom Bowley

Energy Soars But Its Relative Strength Might Surprise You

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Market Recap for Monday, January 22, 2018

There was a lot of good things happening on Monday.  First of all, one of the worst days historically has been the Monday after options expiration Friday.  That historical weakness never materialized yesterday as all of our major indices trended up throughout the entire session with the NASDAQ and Russell 2000 closing above 7400 and 1600, respectively, for the first time in their histories.  Strength was felt in nearly every corner of the market, but most notably in energy (XLE, +2.16%), consumer discretionary (XLY, +1.11%) and technology (XLK, +0.97%).


Wynn Resorts (WYNN) spiked 8.68% after reporting solid quarterly results and that resulted in a surge in the gambling index ($DJUSCA), the best performing industry group in the discretionary area.  Also notable in the discretionary sector was the breakout to all-time highs in the broadcasting & entertainment space ($DJUSBC).  Check out the chart:

I'm looking for continued strength in the DJUSBC in 2018.  The technical outlook for this group remains quite bullish.

Internet stocks ($DJUSNS) led technology with a breakout of its own:

The DJUSNS is a very aggressive area within the technology sector and, as such, it's always a bullish development to see leadership here.

Pre-Market Action

JP Morgan Chase (JPM) announced a $20 billion investment program over five years following the implementation of the new tax law.  Wages for 22,000 employees will be raised an average of 10% under the plan with as many as 4,000 new employees hired.

Asian markets rallied strongly overnight and smaller gains permeate Europe this morning.  Dow Jones futures are fractionally higher.

Last night, Netflix (NFLX) reported top and bottom lines that were mostly in line with expectations.  However, subscriber numbers were well above expectations and the stock is spiking in pre-market trade.

Current Outlook

Energy (XLE) led all sectors on Monday, posting a gain of more than 2% on the session.  Since late-November, the XLE has risen from just beneath 67 to Monday's close above 78.  While it certainly seems that the XLE has performed extremely well on a relative basis, the following chart highlights its very slight relative strength vs. the benchmark S&P 500 over the past few months:

The takeaway here for me is that energy has certainly strengthened in the near-term, but its longer-term relative outlook into 2018 and beyond can still be questioned.  I'm bullish energy currently based on the absolute price performance on the XLE and its recent relative strength, but I'm keeping this longer-term relative downtrend in mind.

Sector/Industry Watch

Media agencies ($DJUSAV) had another very strong day on Monday, setting up what I believe is a major upcoming test of price resistance:

A move back to the 585-590 level would be bullish for a number of reasons.  In fact, the recent breakout of downtrend was a bullish sign.  The DJUSAV is now trading above its rising 20 day EMA, another bullish development.  But ultimately, that 585 area could represent a very significant neckline in a bottoming reverse head & shoulders pattern.  Not shown above is the fact that the DJUSAV has been trading above its now-rising 20 week EMA for three weeks.  That is a very significant and bullish turn for this consumer discretionary group.  I am looking for continuing relative outperformance here in 2018 - at least until the chart tells me otherwise.

Historical Tendencies

The Dow Jones U.S. Broadcasting & Entertainment Index ($DJUSBC) closed at an all-time high on Monday and is now approaching a seasonally strong period from February through April, where it averages gaining 0.6%, 1.5% and 2.5%, respectively, over the past two decades.

Key Earnings Reports

(actual vs. estimate):

EDU:  .09 vs .16

FITB:  .52 vs .47

HBAN:  .26 vs .26

JNJ:  1.74 vs 1.72

KMB:  1.57 vs 1.54

PG:  1.19 vs 1.15

PLD:  vs .66

STT:  1.61 vs 1.71

TRV:  2.28 vs 1.64

VZ:  .86 vs .88

WAT:  2.51 vs 2.44

(reports after close, estimate provided):

CNI:  .98

COF:  1.85

TXN:  1.09

UAL:  1.34

Key Economic Reports

January Richmond Fed manufacturing index to be released at 10:00am EST:  18 (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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