EB Daily Market Report - Wednesday, June 26, 2024

Tom Bowley - June 26, 2024

Executive Market Summary

Futures were down overnight and our major indices opened lower
May new home sales came in much weaker than expected, but the April number was revised 10% higher
Home construction ($DJUSHB, -0.21%) were down slightly, but are clinging to key price support near 2400
Semiconductors ($DJUSSC, -1.04%) initially kept their recent strength going in the morning, then faltered over the balance of the session
Consumer discretionary (XLY, +1.58%) is the only sector in positive territory, leaning on the strength of Amazon.com (AMZN, +4.27%) and Tesla (TSLA, +5.23%) as both are breaking out; AMZN and TSLA are the XLY's top 2 holdings and represent over 37% of the entire ETF
Durable household products ($DJUSHD, +5.48%), however, is the XLY's top industry group today, with Whirlpool (WHR, +15.60%) soaring after a Reuters report indicated that a German company might be interested in acquiring WHR
Cryptos and most commodities are mostly lower today; natural gas ($NATGAS) is tumbling 5%
The 10-year treasury yield ($TNX) has spiked 8 basis points to 4.32%
FedEx (FDX, +14.89%) leads all S&P 500 companies after reporting a beat on earnings and despite a miss on revenues
Semiconductors will be in the spotlight after hours as Micron Technology (MU, +0.58%) reports its latest quarterly results

Market Outlook

Let's check out the short-term (speed boat) sentiment reading to see where we stand from a retail options trader perspective. Below is the 5-day SMA of the equity-only put call ratio ($CPCE):

I believe the high readings (fear) do a better job of marking bottoms than low readings (greed) do in marking tops. Still, we're clearly closer to an extreme greed level and if we see call buyers pick up the pace in the next few days, we could easily see the 5-day SMA of the CPCE move down towards the .54-.56 range that helps to mark short-term tops. For now, I'd still call this sentiment indicator neutral.

Sector/Industry Focus

We're seeing a big breakout in Amazon.com (AMZN) today and a potential breakout in Tesla (TSLA) as well. These are the two largest holdings in the consumer discretionary ETF (XLY). As a result, we're looking at the possibility that a major uptrend could be underway in the XLY:XLP ratio:

First, let's look at the XLY itself:

I see a lot of positives here. While the semiconductors ($DJUSSC) have been strong since October of last year, carrying technology (XLK) higher, we've seen many areas of discretionary struggle. Even the stalwarts like AMZN and TSLA have struggled. A breakout in these two stocks would change literally EVERYTHING for the XLY.

My key sustainability ratio in evaluating the strength of an S&P 500 secular bull market advance is the XLY:XLP ratio. While I haven't seen a breakdown in this ratio, it has definitely not performed well in 2024 as the XLY has been relatively flat for 2024, while the XLP (consumer staples) has been rising. Check this out:

This ratio typically rises to accompany a rising S&P 500. It did so coming out of the 2020 pandemic low. It also did so in 2023. It fell while the S&P 500 was tumbling during the 2022 cyclical bear market. In 2024, though, it's given us a warning sign of sorts as this ratio was moving lower, while the S&P 500 was moving higher, setting new record highs. Something had to give. Well it appears, with the strength today in AMZN and TSLA, that this ratio is now trending above both its 20-day EMA and 50-day SMA, forging a bullish golden cross with the 20-day EMA now crossing above the 50-day SMA. Solid short-term development, for sure.

ChartLists/Strategies

Small caps have yet to regain a strong footing, trading mostly sideways throughout 2024, bouncing back and forth between strong and weak. Trading individual small cap companies has been treacherous, so let me add that disclaimer before I discuss a small cap stock that I like a lot.

Magnite, Inc. (MGNI) is a software stock that shows an improving AD line to accompany strength over the past 6 weeks or so:

Full Disclosure: I own shares in MGNI. Again, the risk is extreme, because many small cap breakouts have failed in the recent past. Volume trends here are bullish and the 7% pullback off the recent price high is helpful, but this still doesn't guarantee a rebound and new highs ahead.

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 notable 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 that you own or are considering owning.

Wednesday, June 26:

MU, PAYX, GIS, JEF, LEVI, AVAV, FUL, CNXC, BB

Thursday, June 27:

NKE, MKC, WBA, AYI, SMPL

Economic Reports

May new home sales: 619,000 (actual) vs. 650,000 (estimate)

Happy trading!

Tom