EB Daily Market Report - Tuesday, September 1, 2020

Executive Market Summary

• Futures were again quite strong, particularly on the NASDAQ
• Zoom Video Communications (ZM) crushed estimates and raised guidance, leading to big gains in stocks that have performed well during the pandemic
• Materials (XLB, +1.08%) and technology (XLK, +1.07%) lead U.S. equities higher
• Utilities (XLU, -1.32%) and health care (XLV, -1.23%) are the weak links today
• Walmart (WMT, +5.79%) is the leading stock in both the Dow Jones and S&P 500
• Computer hardware ($DJUSCR), nonferrous metals ($DJUSNF), and specialty retailers ($DJUSRS) are among the best performing industry groups
• The 10 year treasury yield ($TNX) is flat today, but earlier weakness in the U.S. Dollar (UUP) likely aided the materials sector

Market Outlook

Transportation stocks ($TRAN) finally reached their key price resistance and likely helps to explain why this group has underperformed the benchmark S&P 500 the past 2-3 weeks. I fully expect we'll see a breakout to all-time highs in 2020, although there is definitely a question of when given that we're currently in the defensive month of September:

This is the 4th time in the past 2 1/2 years that we've seen the TRAN move into the 11,400-11,600 area without the ability to move higher. Again, I believe it'll happen this year, but failure to do so now will likely to lead to at least consolidation during September.

Sector/Industry Focus

In a runaway secular bull market advance, everyone constantly calls for the end of it, saying that it's overbought and surely cannot continue advancing. While a short-term pause can occur at any time, "selling everything and waiting for that inevitable selling episode" can be devastating because sometimes it doesn't occur and investors are forced to buy back in at much higher levels. It's one of the reasons why "buy and hold" investors should simply stay in during a bull market. It'll wear you out emotionally otherwise. Traders simply need to realize that buying higher happens often. There's nothing wrong with it, but you need to remain vigilant about taking profits and keeping stops in place. Plenty of rotation takes place, so even if you get out early in a rapidly-rising stock, there'll be other opportunities.

Take a look at the specialty retailers ($DJUSRS), which is among one of the best performing industry groups today. They seem to go up nearly every day and every week. They're clearly overbought, but the following chart is a solid illustration of why you don't want to exit a group simply because it's reached an overbought level (like 70 on RSI):

In bull markets, I don't use RSI 30 as oversold and RSI 70 as overbought. Instead, I raise that range from 40-80. During a true bull market, we rarely see the RSI fall back below 40. Usually, key short-term bottoms form when RSIs move into that 40-50 zone. In fact, over the past 5 years, the DJUSRS's weekly RSI hit 30 only one time - during the 100-year pandemic. It doesn't happen often.

The black vertical dotted lines show the DJUSRS hitting RSI 70 and you can see that solid additional gains were lost if sales took place as soon as RSI 70 was reached. Overbought can remain overbought for a period of time.

ChartLists

I ran a scan this morning of high volume stocks (already traded 50%+ of average daily volume in first 45 minutes this morning) against the recently updated Strong Future Earnings ChartList (SFECL) and here were two candidates returned that are breaking out (or have just broken out):

ATOM:

I used to have a strategy buying breakouts and if they lost their breakout level, I'd sell. As I grew more experienced, I realized that many times a stock will fail to hold the breakout and return to test its rising 20 day EMA, and then rally again. Another possibility here is that ATOM holds its intraday low from Monday and rallies back into breakout territory by today's close. From an educational perspective, it'll be fun to see how ATOM performs from.

(Disclosure: I bought ATOM today)

PD:

Like ATOM, the technical indications here are strong and the breakout currently is real. But here's one word of caution. PD reports its quarterly results tomorrow. It'll likely be a very important report, however, as PD is on the verge of a potential breakout vs. its software ($DJUSSW) peers and vs. the S&P 500. Still, the risk is real holding any stock into earnings.

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.

Tuesday, September 1:

HRB, HOME

Wednesday, September 2:

BF/B, CPRT, CRWD, GSX, MDB, GWRE, SMAR, FIVE, SAIC, PVH, CLDR, PD, M, AMBA, ZUO, GES, SPWH

Economic Reports

August PMI manufacturing index: 53.1 (actual) vs. 53.6 (estimate)

August ISM manufacturing index: 56.0 (actual) vs. 54.5 (estimate)

July construction spending: +0.1% (actual) vs. +1.0% (estimate)

Happy trading!

Tom