EB Daily Market Report - Friday, August 27, 2021

Executive Market Summary

• Futures were higher this morning and all of our major indices gapped higher
• The S&P 500 and NASDAQ set new record all-time highs, but the Dow Jones still remains approximately 0.5% below its all-time high
• The U.S. Dollar (UUP, -0.42%) has weakened today, nearing a two-week low, which has enabled both energy (XLE, +2.79%) and materials (XLB, +1.50%) to lead all sectors
• Defensive sectors remain weakest of all as utilities (XLU, -0.09%) and health care (XLV, -0.05%) are the only two sectors not participating today
• DOW and BA are leading the Dow Jones to the upside, rising 3.18% and 2.39%, respectively
• The 10-year treasury yield ($TNX), rising 4 of the past 5 days, is down 2 basis points today
• Trucking ($DJUSTK, +2.13%) is threatening to break out to an all-time high; its prior high close was 1409.07 on May 10th, currently it's at 1415.43
• Transportation stocks ($TRAN, +1.40%) overall are acting much more bullishly as we head towards their favorite time of the year (September through November)

Market Outlook

I'm not sure why the media looks to Fed events in a negative light so often. Usually, the Fed is well received by Wall Street. They have a long history of helping to support equity prices. Whether you agree with what they do or not is completely up to you, but there haven't been too many Fed-induced selloffs since the pandemic. I'd continue to view Fed events as bullish for the stock market until we see signs to the contrary. The Fed doesn't want to do anything that would be construed as disruptive to future economic growth. They want full employment and price stability. That's their "dual mandate". They've even defined what their target is in each case. For price stability, they continue to target a 2% inflation rate. For maximum sustained employment, their unemployment rate target is 4.1%. Fed Chief Powell even mentioned earlier that tapering too soon could have unwanted economic consequences, including falling short of that 4.1% unemployment rate target.

My bottom line is this and you've probably heard it many, many times.

DO NOT FIGHT THE FED.

Sector/Industry Focus

I wrote an article a week or so ago at StockCharts and I essentially said to get out of materials (XLB) and energy (XLE). The timing of the article couldn't have been much worse as both the XLE and XLB have had big weeks. But I'm sticking to my guns here. My belief is that a rising dollar will make it very difficult for either of the XLE or XLB to keep pace with the S&P 500. Nothing really has changed in this regard. As I've pointed out in the past, the U.S. Dollar ($USD) tends to follow the difference in 10-year treasury yields between the U.S. and Germany ($UST10Y-$DET10Y). That "spread" rose significantly through early April, but then pulled back for 3-4 months. I believe it's turning higher again. Here's the current chart:

Conditions change and we have to change with them. However, I'm not seeing anything on this chart that suggests a downtrend is underway. I'm looking instead at what appears to be an inverse head & shoulders continuation pattern - meaning that the prior uptrend through April will resume if the neckline is cleared. In the meantime, I'd need to consider re-evaluating this chart and my call for a rising dollar if the inverse head support down near 1.58 is lost. For now, I'm sticking with my bullish dollar call and my bearish calls on both the XLE and XLB on a relative basis.

ChartLists/Strategies

Every day I take a quick look at the Short Squeeze ChartList (SSCL), hoping to find a stock that's just beginning to make a move higher on expanding volume. After it's gone up significantly over a 2-3 day period, the risks grow immensely. That doesn't mean the stock won't go higher, it simply means that chasing a big advance can result in big losses. Remember, Short Squeeze stocks are going up on a short-term market inefficiency. So you literally want to get your money and get out. Holding overnight can be extremely rewarding, but you'll take on much more risk by holding overnight. I don't know that there's a right or wrong answer about when to hold a short squeeze stock overnight. You just need to understand the risks are elevated.

Here's today's SSCL winners (those that have gained at least 4% on the session):

SPRT was featured at the beginning of August in our EB August Short Report when it was under 10 bucks. Jumping into it now at 51.13, already up 160% on the session, makes little sense from a risk perspective. SPRT could be 100 tomorrow or it could be 20. Who's willing to take on that kind of risk? Not me. But as I look at the others, there are some possibilities. For instance, here are those bottom two that do interest me:

SENS:

There are a couple things to like here. First, the momentum is strengthening as you can see from the rising PPO above the centerline. Second, SENS is part of the medical equipment group, which has been gaining strength on both an absolute and relative basis for a few months now. Finally, volume has expanded lately, though I'd look for a lot more on a true "squeeze". That would likely coincide a breakout above the most recent two price highs (horizontal lines above current price). If SENS can break through 4.50 and the volume explodes, hold on for the ride!

RIOT:

I also mentioned RIOT in the EB August Short Report when it traded 32 and change. It's moved up to a key area between 39-40 and earlier backed off of it. Volume has gradually been increasing and a move through 40 could really begin to trigger heavy short covering. I would definitely keep this one on your radar.

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.

Friday, August 27:

UI, BIG, HIBB

Monday, August 30:

ZM, LI, CTLT, STNE, NDSN, CLDR

Economic Reports

July personal income: +1.1% (actual) vs. +0.3% (estimate)

July personal spending: +0.3% (actual) vs. +0.5% (estimate)

August consumer sentiment: 70.3 (actual) vs. 70.9 (estimate)

Happy trading!

Tom