EB Daily Market Report - Wednesday, August 26, 2020

Executive Market Summary

• Futures pointed to a slightly higher open on the S&P 500 and a fairly flat open on the Dow Jones; NASDAQ futures, however, were much stronger
• The NASDAQ 100 ($NDX) is the undisputed leader on the session, gaining more than 1.75%
• Leadership on the NDX comes from Netflix (NFLX, +11.65%), Workday (WDAY, +9.22%), and Adobe Systems (ADBE, +7.70%)
• A strong durable goods report led to early selling in treasuries as the 10 year treasury yield ($TNX) jumped at the open to 0.72%, challenging two month highs
• Communication services (XLC) and technology (XLK) are powering ahead; consumer discretionary (XLY) is also strong
• Weakness is found in the usual suspects - energy (XLE), utilities (XLU), and real estate (XLRE) - all down >1%
• Only 4 of the 11 sectors are higher today, so this is a narrow-based advance
• The dollar (UUP) is lower, spurring materials (XLB) to gains as well
• Salesforce.com (CRM, +26.34%) is surging today after reporting blowout quarterly earnings results

Market Outlook

There's always more than one way to look at a chart. And while one way might depict a very bearish outlook, another might portray something exactly opposite. To illustrate this, let's look at biotechs ($DJUSBT). For me, this has been a frustrating group as I've owned the IBB (ETF that tracks biotechs) for awhile. I haven't given up on the group, but this investment has definitely underperformed. I want to view it using two different timeframes. First, let's look at the daily chart:

That's not a pretty chart. The daily PPO has crossed into negative territory, while price action is trending lower and beneath its declining 20 day EMA. Throw in the relative weakness in the bottom panel and clearly we have problems. But the "Big Picture" tells me a different story and the reason why I'm still in this position:

The weekly PPO on the DJUSBT reached its highest level in the past 5 years. In other words, momentum was never stronger. During pullbacks, I look to 20 period EMAs to provide support, and we're just now testing that level. This is similar to where this group stood during Q4 2017 (blue circle), testing the rising 20 week EMA after establishing a very overbought PPO. I'm expecting the DJUSBT to make one more big run to the upside, although one concern I have is the upcoming election. I'm not sure any sector is more at risk during a presidential election campaign than health care. Therefore, I'll be watching the low established during the middle of Q2 2020 near the 2250 level. If that's violated, I'll move on from this group, at least temporarily. The first bullish signal that I'd look for would be a daily close back above the declining 20 day EMA. That is a necessary first step to begin to right this ship.

Sector/Industry Focus

For the second straight day, communication services (XLC) is leading the stock market higher and there's one primary reason for this strength - internet stocks ($DJUSNS). While we can point to a number of internet stocks for this internal strength, I'll start with two - Netflix (NFLX) and Facebook (FB). Both are breaking out on significant volume and both - from a long-term perspective - are what I'd consider to be leaders in this space:

Relative strength is beginning to bounce exactly where it needed to and before breaking down beneath the June relative low. The two black arrows mark a double bottom and today NFLX is clearing the high between those two equal bottoms. That is generally a bullish development.

There aren't many charts right now any stronger than FB. Every panel is pointing up from left to right and that's an illustration of both absolute and relative strength.

ChartLists

Given the bullish 20 week EMA test on the biotechs, I wanted to focus on the biotechs on our various ChartLists to see which might be solid investments/trades in the days and weeks ahead - assuming that the overall group bounces off 20 week EMA support. Here's a short list of a few of my favorites:

REGN:

(Disclosure: I own REGN)

REGN is the only biotech that made it into our portfolios and it did so mostly because of its continuing solid relative strength vs. its biotech peers. It's also a large cap that was improving prior to the pandemic and actually added relative strength throughout it. It's near key relative support and I'd actually be very careful if price support in the 580-590 range doesn't hold. If the DJUSBT begins to strengthen, I'd look for money to quickly rotate back into REGN.

SGEN:

SGEN has been trending lower, but check out its AD line. I'd argue that SGEN is being accumulated on this decline. If I'm correct, and biotechs rally, SGEN could easily return back to its recent high at 185 or so, a 20% rise from its current price.

CRL:

I think it's obvious that biotechs have been very weak, both on an absolute basis and on a relative basis. Yet CRL is consolidating near its all-time high. I'm not sure there's been many biotechs that have performed on the same level as CRL and there's likely a reason for this relative strength.

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 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, August 26:

RY, SPLK, BILI, NTAP, ESTC, WSM, PLAN, EV, DKS, BOX

Thursday, August 27:

TD, VMW, DG, DELL, WDAY, VEEV, HPQ, OKTA, DLTR, MRVL, PAGS, BURL, ULTA, BILL, OLLI, GPS, COTY, FLWS, ANF

Economic Reports

July durable goods: +11.2% (actual) vs. +4.3% (estimate)

July durable goods ex-transports: +2.4% (actual) vs. +2.0% (estimate)

Happy trading!

Tom