EB Daily Market Report - Thursday, June 2, 2022
Executive Market Summary
- Futures were higher overnight - until a disappointing ADP employment report was released
- Our major indices saw early weakness, but they've bounced back off of those earlier lows and the NASDAQ is higher
- Small caps ($SML, +0.78%) and mid caps ($MID, +0.89%) are also showing strength - solid news
- Growth is leading value (IWF:IWD, +0.92%) and discretionary stocks (XLY, +1.29%) are swamping staples (XLP, -0.54%)
- None of this rotation makes sense given the bearish economic news - and THAT makes the action today all the more bullish
- Materials (XLB, +1.62%) is the best-performing sector, but our 5 aggressive sectors are in spots 2-6, while defensive stocks lag
- We're in a bullish historical period, so we do need to keep this in mind; but it's still bullish action
- The 10-year treasury yield ($TNX) is down 3 basis points to 2.90%; commodities are mixed as crude oil ($WTIC, +0.24%) continues to battle overhead resistance at $115 per barrel
- Two renewable energy stocks ($DWCREE, +5.36%) - SolarEdge (SEDG, +9.99%) and Enphase Energy (ENPH, +8.06%) are the top 2 S&P 500 stocks
Market Outlook
A bottoming process is very difficult to trade. We begin seeing a shift in what's working and what's not. It's really hard not to OVER emphasize hourly moves. I know I'm finding that to be the case today. Remember when ANY news meant stocks like Zoom (ZM), Etsy (ETSY), Shopify (SHOP), and others would drop? Today, with a lower-than-expected ADP employment number, these growth stocks are much higher. The XLY:XLP ratio that I follow so closely is UP even as the Dow Jones drops more than 200 points. I want you to take a close look at two intraday charts - one of consumer discretionary (XLY) and the other consumer staples (XLP):
XLY:
XLP:
Look at the very different reaction in both of these consumer sectors. With a weak ADP jobs report, you'd think money would rotate AWAY from discretionary and INTO staples. Yet the opposite is occurring. Does this mean the bottom is in? No, but it certainly supports the case that a bottom is either in or approaching. Wall Street doesn't move into aggressive areas for no reason - just as Wall Street didn't move into defensive stocks in December 2021 for no reason. This bears watching as we move forward. I'm much more concerned about this relative relationship than I am in whether the S&P 500 sets a new low or not.
Sector/Industry Focus
I see further upside in renewable energy ($DWCREE), which has been strong during this rally. I could see another 15-20% upside based upon the positive divergence on its weekly chart:
Trading anything will likely require some Pepto-Bismol. The volatility still remains extremely high. But I'll be honest, I'm growing more bullish. Today's action is THE most bullish, in my opinion, since the beginning of the year. I don't want this to sound like the stock market will go straight up, though it could melt up. Instead, we MUST continue to watch the rotation. Tune out the NOISE (ie, CNBC). Follow what price action is telling us. There is NO reason for aggressive/growth stocks to go higher today. ZERO reason. Jobs are slowing, which is another sign of possible recession. Growth stocks get KILLED as the economy slows. BUTTTTTTT, it could already be priced in. When I saw the ADP employment report this morning, I shook my head, and said, "HERE WE GO AGAIN!" I figured we were looking at a very bad day. It makes no sense for growth stocks to perform well today, yet they are. Rotation is bullish. If that continues - even if the S&P 500 moves lower - it's a bullish signal.
ChartLists/Strategies
I decided to do something that I haven't done in a long time. I reviewed our Strong Earnings ChartList (SECL) for growth stocks making key breakouts. These are VERY AGGRESSIVE plays, so if they fail, I'd be quick to pull the trigger and exit - in the event we do see the market roll over one more time. However, they could prove to be very profitable if we don't see those reversals:
BMBL:
A close below 29.75 could be problematic and might lead to a rising 20-day EMA test, which would be a MUCH bigger test, in my opinion.
JKS:
JKS is your leader in renewable energy, which I mentioned earlier in this report. A breakout to new highs IN THIS MARKET ENVIRONMENT would be a very bullish signal. The AD line is rising, as is the PPO. Momentum is building, while accumulation is taking place. Great combo. I'd consider entry here on a breakout OR on a pullback to the 57-59 support zone.
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 several 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, June 2:
CRWD, LULU, HRL, COO, OKTA, TTC, CIEN, RH, ASAN, STNE, NAPA, PD, SPTN, DBI
Friday, June 3:
DOOO
Economic Reports
May ADP employment report: 128,000 (actual) vs. 240,000 (estimate)
Initial jobless claims: 200,000 (actual) vs. 210,000 (estimate)
Q1 productivity: -7.3% (actual) vs. -7.5% (estimate)
April factory orders: +0.3% (actual) vs. +0.8% (estimate)
Happy trading!
Tom