EB Daily Market Report - Monday, September 30, 2019
Executive Market Summary
- Dollar (UUP) gains steam, gold (GLD) breaks to two-month low
- Crude oil ($WTIC) down more than 1%
- 10 year treasury yield ($TNX) up 2 basis points to 1.69% as money rotates to equities
- Major U.S. stock indices fractionally higher, though small caps lag and are flat
- Merck & Co (MRK) up 1.92%, leading Dow Jones
- Newell Brands (NWL) leads S&P 500 on upgrade from SunTrust
- Our sole alert - ROKU - higher by 2% and trying to hold key price support (chart below)
- Note: Our Strong Earnings ChartList has been updated and it's been sent out
Market Outlook
A relative ratio that I've used in the past to help determine what type of market we're in is the banks ($DJUSBK) vs. REITs ($DJR). These two industries used to both belong to the financial sector (XLF), but real estate has now been separated. Still, I find the performance of one vs. the other can be beneficial. When the stock market believes our economy is expanding, money typically rotates away from safety, so bonds tend to sell off and send yields higher. Higher yields tend to crimp investors' appetite for dividend-paying REITs. But those same higher yields tend to strengthen net interest margins in banks, growing earnings. Over the past two decades, banks have performed best on a relative basis when the stock market is on a tear to the upside in a secular bull market. Here's a 20 year weekly chart to illustrate:
I don't believe it's a coincidence that the DJUSBK:DJR ratio soared during the best two stretches in S&P 500 performance over the last two decades. When our economy strengthens and profits expand, it's generally going to result from a healthy banking industry that's willing to lend. We're a credit-driven market and society and when credit availability is at its highest, that's when we're likely to see significant economic growth.
Currently, the DJUSBK vs. the DJR is in a downtrend as the S&P 500 has consolidated for nearly two years. If the S&P 500 turns higher and breaks out, look to this ratio as one confirming signal of significantly higher prices ahead.
Sector/Industry Focus
Computer hardware ($DJUSCR) is regaining a leadership role in the market and that's good news for overall market direction. Here's the latest on the DJUSCR in terms of absolute and relative performance:
Now that money is rotating consistently into the group, I fully expect to see Apple (AAPL), one of our Income portfolio stocks, break out heading into its earnings report. I also expect the company to blow past its revenue and EPS estimates.
Monday Setups
First, I featured Target Corp (TGT) in my Trading Places blog article this morning. You can CLICK HERE to review that article.
Here are others that I like for this week (Disclosure: Of the following stocks, I currently own NOC and TER):
DGX:
Health care providers ($DJUSHP) has been a brutal industry, but DGX has been a leader, easily outperforming its peers. I like entry at the 20 day EMA and again closer to the 50 day SMA.
GOOGL:
GOOGL has been a solid leader among internet stocks ($DJUSNS) and it loves the month of October, averaging gains of 10.3% during this month over the past 16 years.
HTH:
HTH has been a leader in property & casualty insurance ($DJUSIP) and the group overall has been fairly solid. Volume trends have been excellent, but HTH reached overbought territory and is currently pulling back to key areas of support. As it does, the reward to risk is improving.
NOC:
I'm a big fan of defense stocks ($DJUSDN) and NOC has clearly been among the leaders in the group. Volume trends are strong so I'd be a buyer on any shallow pullbacks like the one we saw on Friday to test the rising 20 day EMA.
TER:
TER was hurt on Friday as most semiconductor stocks ($DJUSSC) were due to Micron Technology's (MU) disappointing forecast. I think it's creating an opportunity for one of the industry group's true leaders.
Strong Earnings ChartList (SECL has been updated and sent out)
I reviewed our SECL for stocks that are making their ways to new highs and on increasing volume. Breakouts can be one way to play a strong market as you at least know that these stocks have no clear overhead price resistance. Here are the stocks on our ChartList making new 52 week highs this morning and having volume that's already at least 30% of normal daily volume in the first 45 minutes of trading:
Stocks breaking to 52 week highs on 30%+ normal volume at 10:15am EST - 2 of 307 stocks
NKE:
Footwear stocks ($DJUSFT) are on fire and NKE's earnings last week started it. I suspect any pullback on NKE to the lower 90s will represent an excellent entry point.
GSK:
Yes, the pharmas ($DJUSPR) are weak, but GSK has been a tremendous outperformer and today's breakout is simply the latest example. Let's see how it trades the rest of the day, but GSK now has excellent gap support near 42.50.
Current Alerts
We only have active alert, although we'll be looking to potentially add 1-2 more.
ROKU:
ROKU has been torched the past few weeks and while maybe some of it was justified, I think it's been completely overdone. I really would like to see a reversing candle print, especially since we're now in a very important short-term support zone. Failure to hold the support zone reflected would likely lead to further selling and the next level of support being tested in the upper 80s.
Today's Movers
SGEN:
SGEN is up more than 11% and while chasing is typically not a good idea, a breakout on a rapid mover like SGEN would be bullish. The biggest risk is simply the lack of strength by biotech stocks ($DJUSBT). The group has downtrended vs. the S&P 500 all year. Still, volume trends on SGEN are solid and a breakout here will likely lead to further gains.
IMMU:
IMMU is also in that biotech space, but it's been an underachiever and it's down 12% and nearing a major support level just below 12.00. I'd expect a bounce from here, but anyone trading a stock like this should have a very quick timeframe. Make your money and exit.....before the next cockroach surfaces in the kitchen!
Earnings Reports
Here are key earnings reports for this week:
Monday, September 30:
THO
Tuesday, October 1:
MKC, NG, SFIX
Wednesday, October 2:
PAYX, LEN, LW, RPM, AYI, BBBY
Thursday, October 3:
PEP, COST, STZ
Friday, October 4:
None
Economic Reports
September Chicago PMI released at 9:45am EST: 47.1 (actual) vs. 50.4 (estimate)
Happy trading!
Tom