EB Daily Market Report - Wednesday, July 8, 2020

Executive Market Summary

• Futures were higher this morning, although they were much strong on the NASDAQ (shocker)
• Gold ($GOLD) cleared $1800 per ounce on Tuesday and is up 0.68% today; other commodities are higher in sympathy
• Crude oil ($WTIC) has climbed 1.11% to above $41 per barrel, its highest level since March 6th
• The 10 year treasury yield ($TNX) remains relatively flat, rising less than 2 basis points to 0.66%
• China's Shanghai Composite ($SSEC) continued its scorching move higher overnight, rising another 1.74%
• European stocks are mostly lower today with the German DAX ($DAX) down nearly 1%
• Technology (XLK) has resumed its familiar leadership role, while materials (XLB) struggle
• Renewable energy ($DWCREE, +6.25%), home construction ($DJUSHB, +3.55%), and specialty finance ($DJUSSP, +2.65%) are the leading industry groups; airlines ($DJUSAR, -2.35%) remain weak

Market Outlook

It's hard to believe, but we're just a bit more than a week away from another options expiration Friday. We've seen a big move higher the past several weeks, especially on the NASDAQ 100, so keeping an eye on options will be important. I wouldn't worry too much about options for perhaps another week as the real issues begin to surface as move within a couple days of expiration - and in the week after options expire. Still, it never hurts to see what retail traders have been doing with options. In order to gauge that, we should look at the CBOE options equity put/call ratio ($CPCE). By looking at a daily chart, it's fairly obvious to me that options traders are growing wildly bullish:

Again, I'd be more nervous if I was looking at this next week, but we should all at least be aware that retail traders are buying tons of equity calls, which at some point, is likely to put a short-term lid on prices. An extremely low CPCE reading can be seen on June 8th and that marked a short-term top. If traders continue buying calls, we could be in for a similar fate.

Sector/Industry Focus

I'm watching a number of homebuilders breaking out today (or on the verge of breaking out) - MTH, LEN, LGIH, DHI, MDC, CCS. During my 2020 2nd Half Market Outlook webinar on Monday, I mentioned a couple of industry groups that were looking better, but weren't yet one of the top relative performing industry groups. Home construction ($DJUSHB) was one of those. Well, today's action is helping to move this industry into the top tier of industry groups:

An absolute breakout above 975 and continuing relative strength would suggest that we begin to consider homebuilding stocks much more closely in our trading strategy. Given the backdrop of an improving economic picture and historically-low interest rates, this is what I would expect as well.

ChartLists

We don't always have to chase the strongest stocks higher. On our website, we have Pullback Scans that I like to run. Today, I ran our RSI 40-50 Test scan against our Strong Earnings ChartList and it returned 74 stocks. So there are plenty of companies that have reported strong results that aren't trading in the stratosphere. I further filtered these 74 stocks by adding one additional criteria. I wanted the SCTR to be above 70. That shortened the list to the following 14 stocks (and in highest-to-lowest SCTR order):

Above 90: TBIO

80-90: IRTC, DG, UTHR, ATRC, KR

70-80: SITE, WGO, AXTI, TW, IIVI, CNX, NPTN, KHC

I looked at all 14 charts and felt these 3 were of particular interest:

TBIO:

First of all, PLEASE keep in mind that small biotech stocks are among the absolute riskiest to trade. One piece of bad news and you could see a significant gap lower. But if willing to take that risk, TBIO seems to have hit a solid uptrend line and is also approaching a key gap support level closer to 16. I like the biotechs, but a safer way to play the group is with a larger biotech company like AMGN, REGN, SGEN, VRTX, etc. An even safer way is to trade the IBB, a biotech ETF where the four stocks listed are four of the seven top weighted stocks in the IBB. They account for just over 25% of the entire ETF.

ATRC:

ATRC seems to be ready for another leg higher. It's been consolidating in a slight downtrend and on lighter volume for the past 6-7 weeks. Buying from the current level down to 40 with a closing stop just beneath 40 would seem to be a solid reward to risk trade with an initial target closer to 51.

WGO:

WGO seemed to be losing upward momentum as it printed that negative divergence on its most recent high in late-June. Recent weakness, however, has carried the stock back close to its 50 day SMA, which is what I look for after a negative divergence prints. The 50 day SMA currently resides at 58.39 and a very significant price support is around 53. I don't know if WGO moves that far to the downside, but accumulating the stock as it moves lower would seem to be a solid strategy. Ultimately, I'd expect to see WGO making its way back toward 72.

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, July 8:

MSM, SMPL, BBBY, AIR

Thursday, July 9:

WBA, HELE, WDFC

Economic Reports

None

Happy trading!

Tom