EB Daily Market Report - Wednesday, June 17, 2020
Executive Market Summary
- Futures were fractionally higher, parting ways from the past 5 sessions where we've seen gaps of 1% or more
- We've traded in a fairly narrow range today as we approach options expiration Friday
- May housing starts and building permits improved considerably from April, but fell short of expectations
- The 10 year treasury yield ($TNX) has fallen slightly to 0.74% as a result
- Technology (XLK) and health care (XLV) are among our leading sectors, though we're mixed currently with 5 sectors rising, while 6 are lower
- Energy (XLE) is down more than 2% as crude oil ($WTIC) slips 1.2%
- Among industry groups, toys ($DJUSTY), home improvement retailers ($DJUSHI), specialty retailers ($DJUSRS), and insurance brokers ($DJUSIB) are leading
- Oracle (ORCL) is down nearly 5% after posting better-than-expected earnings; it did, however, miss the mark on revenues
- Apple (AAPL) sets new all-time high, helping to lead technology shares higher
Market Outlook
The three big short-term issues for the stock market right now are options expiration on Friday, a historically bearish period that's quickly approaching, and a large number of negative divergences that I'm seeing on individual stock charts and industry group charts. As an example of the latter, check out the toys index ($DJUSTY):
Toys have been a strong area of the market since the pandemic began. I'm expecting very strong earnings next month in this industry group. However, I'd be remiss to ignore the multiple recent price highs with corresponding PPO lows. While this guarantees us nothing, it simply warns us of possible slowing momentum. Turning lower into options expiration Friday and the 19th-25th calendar days of the month would not be at all surprising.
When we approach options expiration Friday and there's a lot of net in-the-money call premium, we should at least be aware that market makers could reverse the uptrend at any time. Is this guaranteed? Of course not! I'm just talking about increased risk. I wouldn't short these stocks, but I might consider hedging in some fashion or lightening the number of shares I owned. That's all, it's just about managing risk, nothing more.
As for the 19th to the 25th during all calendar months, there's a proven tendency for the market to weaken. Does it happen every time? Of course not! Again, we're simply talking about tendencies and managing risk. In June, the weak period actually runs from the 18th (starts tomorrow) through the 26th, where the S&P 500 has produced annualized returns of -26.31% since 1950. I am preparing by trading fewer shares when I do trade on the long side. If I miss out on some upside, so be it. I think it's prudent to be a little cautious right now.
Sector/Industry Focus
Another very strong industry group since February has been internet stocks ($DJUSNS). But like the DJUSTY above, internets seem to be showing slowing momentum as well. Here's the latest daily chart:
Once again, I'm not trying to guarantee that internet stocks move lower from here. I am not a fan of shorting. I simply am seeing enough warning signs in key leading groups that suggests it might make sense to take fewer risks right now.
ChartLists
Because of signs of slowing momentum, I thought I'd take a more cautious view of our ChartLists and point out a couple stocks that show negative divergences. In other words, given the current environment, no matter how much I like these companies, I'd likely want to ring the cash register.
First, I ran a scan of 52 week highs against our Strong AD ChartList, but with one caveat. I added that today's close (current price) is now below the "1 day ago close". This will produce stocks that hit a new 52 week high, but has turned lower. It "could" be a topping signal. Here is the scan syntax:
Here were the results:
ADSK was featured in last night's Max Pain webinar as it's run quite a bit over the past month and there are a number of in-the-money calls currently. I wouldn't be surprised to see short-term weakness as a result. Perhaps today's failure to sustain its earlier 52 week high is a warning sign.
ZM seems to be printing a reversing candle today, but its PPO remains quite strong. EVER and VICR both have reversed off earlier highs with a negative divergence in play. As an example, let's look at EVER:
From a trading perspective, it probably makes sense to lighten up on a stock like EVER. Yes, it could go higher, but there are warning signs present now that weren't present 2-3 weeks ago. Options are not heavily traded with respect to EVER, but what open interest there is, it's below current price. That could add a bit more downward pressure in the near-term as well.
Earnings Reports
Here are the key earnings reports for today and tomorrow, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks (or active trade alerts) that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning:
Wednesday, June 17:
HTHT, CPRI, ABM
Thursday, June 18:
KR, CCEP, CCL, CMC, FLR, KFY, MEI
Economic Reports
May housing starts: 974,000 (actual) vs. 1,100,000 (estimate)
May building permits: 1,220,000 (actual) vs. 1,250,000 (estimate)
Happy trading!
Tom