EB Daily Market Report - Thursday, October 14, 2021

Chart Madness

In March 2021, I did a StockCharts TV show, "Chart Madness", hosted by David Keller. Dave, Grayson Roze, Greg Schnell, and I filled out our "brackets" for the next 6 months, trying to determine winners from 8 different matchups (16 stocks) through to a Championship stock. We'll be discussing the results and talking a little smack in the process as we look back to see how well we did. (Hint: our chart brackets didn't look much better than our basketball brackets in March Madness - haha!).

Anyhow, it should be a lot of fun. We're recording the show this afternoon (in about 30 minutes) and it will be airing tomorrow morning on StockCharts TV. Check it out if you can. I think you'll enjoy it!

Executive Market Summary

• Futures were strong overnight and we opened with a sizable gap to the upside
• Our major indices are all higher by more than 1%, led by materials (XLB, +1.68%) and technology (XLK, +1.55%)
• All 11 sectors are up as well, suggesting there's wide participation behind this rally, bullish news indeed
• Etherium ($ETHUSD, +7.34%) showing considerable relative strength today among cryptocurrencies
• Commodities are rallying as crude oil ($WTIC, +1.02%) rises back above $81 per barrel
• The 10-year treasury yield ($TNX) is down another 2 basis points to 1.53%, aiding a broad-based U.S. market rally
• Bank of America (BAC, +2.43%) reported strong quarterly results, yet the banking industry ($DJUSBK, +0.59%) trails most other industry groups
• Health care providers ($DJUSHP, +3.76%) are very strong today as Unitedhealth Group (UNH, +5.41%) reported strong results and raised guidance, lifting the entire group

Market Outlook

Performance of transportation stocks ($TRAN) is a barometer of our economic health. I review this group often because of its significance. The Dow Theory is based on the performance of transports as well, so this concept is one that goes back many, many years. I've updated a chart that I published in the DMR perhaps 10 days ago:

We need to keep in mind that transports soared, more than doubling from the March 2020 pandemic low to its high in May 2021. The recent weakness was necessary, in my opinion, to wind down the very overbought conditions. weekly RSI had climbed to the mid-80s back in May. The recent weakness has helped to relieve those overbought conditions, with the weekly RSI recently moving back into the 40s, a solid area during an uptrend for a reversal. I believe that reversal is in process now. Here's a look at that long-term weekly chart, along with the price relative of Dow Transports vs. Dow Utilities ($TRAN:$UTIL - bottom panel):

A downtrend and bottoming process can be brutal, especially when many other parts of the market are performing much better. But I believe a mountain of technical evidence points to leadership from transportation in Q4.

Sector/Industry Focus

Financial administration stocks ($DJUSFA, +2.22%) have been lying dormant for quite some time, but are leading the financial sector today. I'd watch to see if it can break its recent short-term downtrend. If so, it becomes a much better trading area of the market:

This is the group within the financial sector that tends to perform well when growth is in favor. Therefore, watch those ratios that favor growth stocks ($NDX:$SPX, IWF:IWD, $DJUSGS:$DJUSVS). As they trend higher, I'd expect financial administration stocks to do well.

ChartLists/Strategies

Given the theme of financial administration and transportation above, here are a couple trading candidates from our various research ChartLists:

ODFL:

EVTC:

Let's get the key negative out of the way first. The bottom panel shows that financial administration stocks have really been struggling vs. the benchmark S&P 500. Money has been rotating away from the group, making it much more difficult to get outperformance from any of its component stocks. However, EVTC has managed to outperform both its peers and that benchmark during a rough environment. Here in October, the stock hit a new 52-week high. If it's doing that in this environment, imagine what it might do if money rotates back into the group.

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.

Thursday, October 14:

TSM, UNH, BAC, WFC, MS, C, USB, WBA, DPZ, AA, DCT, CMC

Friday, October 15:

SCHW, GS, PLD, PNC, TFC, JBHT, SXT, BMI

Economic Reports

Initial jobless claims: 293,000 (actual) vs. 320,000 (estimate)

September PPI: +0.5% (actual) vs. +0.5% (estimate)

September Core PPI: +0.2% (actual) vs. +0.5% (estimate)

Happy trading!

Tom