EB Daily Market Report - Friday, November 12, 2021
Executive Market Summary
- Futures were up across the board overnight, and we opened higher
- The 10-year treasury yield ($TNX) is flat as growth stocks (IWF, +0.57%) lead value stocks (IWD, -0.03%) today
- Communication services (XLC, +0.82%) and technology (XLK, +0.62%) lead all sectors, while energy (XLE, -0.49%) and financials (XLF, -0.45%) lag
- Internet stocks ($DJUSNS, +1.51%) are in favor, buoying the XLC
- Most commodities are lower, including a 4% drop in natural gas prices ($NATGAS) to 4.94; key support resides at 4.75
- Cryptocurrencies are also under pressure today as etherium ($ETHUSD) and bitcoin ($BTCUSD) are lower by 3.05% and 3.83%, respectively
- 3M Company (MMM, +1.55%) is the leading Dow component stock and volume is very heavy; MMM loves November, gaining ground during November 14 straight years and outperforming the S&P 500 in 12 of those 14 years
Market Outlook
The U.S Dollar Index ($USD) has broken out to a fresh new 52-week high. While it's no guarantee, history tells us to be very careful with the relative performance of energy (XLE) and materials (XLB) when the dollar is trending higher. As a refresher, here's a long-term weekly chart of the $USD with panels below highlighting the relative performance of both energy (XLE:$SPX) and materials (XLB:$SPX). Finally, I've also included correlation coefficients for each sector's relative performance as well. Note the (mostly) inverse correlation:
The price-relative charts should help you visualize the opposite effect that the dollar has on the relative performance of both energy and materials. If you struggle with that, however, the correlation coefficient should help. While it's not 100% inverse correlation, I think it's very persuasive evidence that if you're trading energy and materials, you MUST keep one eye on the direction of the dollar. I believe the dollar will continue to strengthen as other key intermarket relationships I watch are pointing to that continued strength. So while energy and materials get a lot of hype because of post-pandemic demand outstripping supply and surging inflation short-term, I believe the strengthening dollar will help to hold these two in check on a relative basis longer-term. Just my opinion.
Sector/Industry Focus
I pointed out recently that materials (XLB) had broken out on an absolute basis. It's also challenging a 4-5 month relative high that, if cleared, could certainly lead to further short-term strength in a number of industry groups. While aluminum's ($DJUSAL) big 2021 gains grab all the headlines, there are two industry groups - specialty chemicals ($DJUSCX) and commodity chemicals ($DJUSCC) - that have just broken out on an absolute basis that could provide short-term opportunities. Here is the DJUSCX:
The absolute strength and breakout is nice, but we do have to watch key areas of relative resistance. Not all breakouts are created equal. I'm much more nervous about breakouts of indices that are downtrending vs. the S&P 500 longer-term. That's what we have here. My strategy would be to keep a very tight leash (stop) on materials stocks because of what I believe could be challenging conditions on a relative basis - rising dollar and short-term inflation surge as opposed to a much longer-term issue.
ChartLists/Strategies
I ran a scan, searching for stocks in the DJUSCX and DJUSCC (two materials industry groups mentioned above) that also appear in one of our key ChartLists. I used the Strong Earnings ChartList (SECL), Strong Future Earnings ChartList (SFECL), Raised Guidance ChartList (RGCL), and Strong AD ChartList (SADCL). Here are the stocks that were returned:
This was run 20 minutes into the trading day this morning. A few stocks show less than 10,000 shares traded in 20 minutes, which seems a little light. If you trade any of those, I'd look at the daily charts and make sure you're comfortable with the daily volume. I think all of these stocks present trading opportunities, I'd just like to make sure the reward to risk is solid. Many are overbought, so 20-day EMA tests could provide those opportunities. For now, here are 4 that I believe are at or near entry points:
CDXS:
CDXS has been one of the best performing materials stocks, as evidenced by that 98 SCTR score. We saw extremely heavy volume on November 5th and buyers returned at that intraday low at 36.00. The bottom of gap support resides at 34.96, so that range should provide an excellent buying opportunity, should it get there.
AVTR:
AVTR has been weak lately, and on strong volume, so we can't ignore this issue. However, AVTR made a very bold move higher. These types of advances can generate much more volatility and price swings. As long as AVTR holds recent lows as support, I'd be ok trading it.
NTR:
NTR had several recent highs that are connected by a channel line. I then dragged that line down to its recent swing low near 57, which also served as excellent price support. That lower channel line now nearly intersects the key price support area from 65-66. The closer we get to that level, which would represent roughly a 10% pullback from its recent high, the better the reward-to-risk entry.
AVY:
I didn't annotate it, but AVY appears to be printing a handle after a cup formed from early September through last week. Many times, the 20-day EMA will mark the bottom of that handle. Volume trends are strong here, so I'm looking for an eventual breakout that would measure to the 250-255 area.
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, November 12:
AZN, SPB
Monday, November 15:
LCID, TSN, WMG, EDR, AAP, AXON, RXT, BFLY, PLBY
Economic Reports
November consumer sentiment: 66.8 (actual) vs. 72.3 (estimate)
Happy trading!
Tom