Trading Places with Tom Bowley

Retail Regaining Strength And In The Middle Of Its Seasonal Sweet Spot

Tom Bowley | 

Market Recap for Tuesday, March 6, 2018

Materials (XLB, +1.10%) and consumer discretionary (XLY, +0.69%) led a modest stock market rally here in the U.S. on Tuesday.  The small cap Russell 2000 gained more than 1% to once again outperform its larger cap counterparts.  The NASDAQ also outperformed, continuing its recent history of outperformance.  Check out how both the NASDAQ and Russell 2000 have been performing relative to the benchmark S&P 500:

While they've both been strong on a relative basis recently, clearly it's the NASDAQ that has shown consistent relative strength.  The Russell 2000's recent relative strength seems to be closely tied to a bounce in the U.S. Dollar Index ($USD).  Therefore, small caps outperformance may require a further rise in the dollar to enjoy additional relative strength.  A falling dollar aids the profits of multinational companies found on the S&P 500.  A rising dollar provides headwinds for that same group of multinational companies.

Intel (INTC) broke out to a new recent high, but is now testing its all-time high from 18 years ago.  Earlier this week, we saw Micron Technology (MU) soar to new highs.  Others like NVIDIA (NVDA) and Applied Materials (AMAT) are on the verge of breakouts as well.  It's helped to lift the very important semiconductor group ($DJUSSC) to fresh new all-time highs.  First, let's take a look at Tuesday's breakout on the group with the above key components shown as well:

We know that the benchmark S&P 500 is nowhere near its recent high, although it has bounced nicely off of its low.  Seeing an aggressive group like the semiconductors acting so bullishly and making new highs is a positive sign for the stock market in general.  Many of its key component stocks have either broken out or are on the verge of doing so a little more than one month before earnings season kicks in.  This is a signal in my view that the market is anticipating another string of very solid earnings reports upcoming.  But as I mentioned above, INTC does still have a major price resistance level dating back to year 2000.  Check this out:

Anyone who bought at the peak in 2000 is now back to breakeven.  :-)

Pre-Market Action

Well, the dark side to high expected volatility is upon us this morning.  Most Asian markets fell overnight between 0.50% and 1.00%.  This morning in Europe, indices are mixed with the German DAX ($DAX) up nearly 0.50%.  Gold ($GOLD) is down and crude oil ($WTIC) is down.  The U.S. market is showing weakness this morning, despite a solid jobs report (ADP employment report).  Dow Jones futures are down 235 points with a little more than 30 minutes left to the opening bell.

Ross Stores (ROST) and Autodesk (ADSK) reported their quarterly results after the bell yesterday and are -5.00% and +11.37%, respectively, in pre-market trading.

Current Outlook

The 60 minute chart can provide us solid technical signals, although I prefer using them when we're in breakout mode.  Choppy action can lead to many false signals, frustrating traders.  The Russell 2000 ($RUT) has been in a nice uptrend off of its early March low and its relative strength vs. the benchmark S&P 500 has been solid.  Keep an eye on that rising 20 hour EMA for short-term clues.  I'll remain short-term bullish the RUT so long as current price remains above the now-rising 20 hour EMA:

The blue directional arrow highlights the accelerating bullish momentum.  That tends to lead to successful 20 period EMA tests, but nothing is a guarantee.  Still, I'm impressed with the RUT's recent strength and it would be bullish if small caps can continue to perform well on a technical basis.

Sector/Industry Watch

Specialty retail is an industry group to consider for trading.  Recent strength has carried this group up to key price resistance and its relative strength during the past several months is quite obvious from this chart:

After printing the right side of a cup on Tuesday, look for a possible handle to form down to the rising 20 day EMA.  Such a pullback would provide an excellent entry point into this group.  I'll cover individual stocks within the DJUSRS during today's MarketWatchers LIVE show that airs from noon to 1:30pm EST.

Historical Tendencies

Specialty retailers ($DJUSRS) post its largest gains historically during March and April, having produced average monthly returns of 3.9% and 2.1%, respectively, in each of those two months.  It's by far the best two consecutive months of the year for this space.  The DJUSRS has risen during March in 17 of the last 19 years.

Key Earnings Reports

(actual vs. estimate):

BF.B:  .44 vs .41

DLTR:  1.89 vs 1.90

(reports after close, estimate provided):

COST:  1.45

THO:  1.82

Key Economic Reports

February ADP employment report released at 8:15am EST:  235,000 (actual) vs. 205,000 (estimate)

Q4 productivity released at 8:30am EST:  -0.1% (actual) vs. -0.1% (estimate)

Beige book released at 2pm EST

Happy trading!


Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015.
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