EB Daily Market Report - Wednesday, March 17, 2021

Tom Bowley - March 17, 2021

Executive Market Summary

Futures were mixed again, this time favoring the Dow Jones and value stocks, while the NASDAQ and growth stocks struggle on a relative basis
Housing starts and building permits both came in well below expectations, yet the 10-year treasury yield ($TNX) is up 4 basis points to 1.66%
But it's all about the reaction and home construction ($DJUSHB, +4.27%) is soaring; we have to ask ourselves why when rates are on the rise and economic reports this week have been so weak
IWF:IWD (growth vs. value) is close to 1.59, still well above last week's low of 1.55 as we await the Fed
The FOMC policy statement will be out very shortly (2pm ET) - expect volatility
Industrials (XLI, +0.64%) and financials (XLF, +0.23%) are moving higher, while technology (XLK, -1.31%) is lagging
Crude oil ($WTIC) is down nearly 2% as it's fallen back below $64 per barrel; copper jumps 1.4% to 4.13
Lennar (LEN, +10.48%) is the big winner in the S&P 500 after reporting strong quarterly results

Market Outlook

I've been discussing 60-minute negative divergences quite a bit over the past week as they generally provide us solid short-term cues. When I see these negative divergences, they can "play out" with short-term selling, or eventually simply by moving sideways. The Dow Jones ($DJI) and S&P 600 Small Cap Index ($SML) are currently showing us how both work:

SML:

The pink arrows were provided a few days ago as I was looking for a PPO centerline test and/or a 50 hour SMA test. The pink circles show we have now seen both. At this point, the hourly chart is now telling us absolutely nothing. I would look to the daily chart for directional clues. The weakening short-term momentum has resolved itself and we could see price action go either way based on the current PPO reading near zero.

DJI:

You can see that so far the negative divergence on the Dow Jones has NOT resulted in a PPO centerline test or a 50 hour SMA test. Instead, price action is simply going sideways as the 50 hour SMA rises from underneath. The PPO has been dropping, but not as fast as it would if we actually saw a short-term bout of profit taking. Of course, with the Fed on deck and releasing its policy directive at 2pm ET, perhaps we'll see a bit more selling. We'll soon all find out.

Sector/Industry Focus

Home construction ($DJUSHB) is breaking out, despite weak economic reports, particularly the housing starts and building permits numbers this morning:

This industry is definitely interest-rate-sensitive, so we could see fireworks here depending on the Fed's remarks. So while the breakout looks good right now, where will be come 4pm today? That's a much more important question that we'll need an answer to.

ChartLists/Strategies

My preference on Fed day is to lay low. I've seen enough of these days to realize that volatility after 2pm ET can be extreme. It leads to a lot of emotional trading. Be careful, especially between 2pm and 3pm ET, as the initial reactions unfold on Wall Street to whatever the Fed announces. I'm not expecting any change to interest rates, but their language will be dissected by market participants and assumptions will be made. That could send prices all over the place for a brief period.

The 3pm-4pm hour is a bit more reliable as we see how stocks finish. If the IWF:IWD and QQQ:SPY ratios begin to strengthen into the close, then my guess would be that it's become a bit safer to trade those growth stocks that have been under so much pressure in the past month or so.

Earnings Reports

Here are the key earnings reports for the next two days, 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, March 17:

PDD, CTAS, ZTO, KC, FIVE, WSM, SMTC, PD, SNDL

Thursday, March 18:

NKE, ACN, FDX, DG, WB, LAZR, OLLI, JOBS, CMC, SIG, CSIQ, GIII

Economic Reports

February housing starts: 1,421,000 (actual) vs. 1,570,000 (estimate)

February building permits: 1,682,000 (actual) vs. 1,750,000 (estimate)

FOMC policy statement at 2:00pm ET

Happy trading and Happy St. Patrick's Day!

Tom