Market Recap for Tuesday, June 5, 2018
It's the perfect storm. Technology (XLK, +0.35%) sets another all-time high record close to lead the NASDAQ to the same. Strengthening economic conditions are creating a higher interest rate environment. That means money rotates from bonds to stocks. The dollar ($USD) is rising so the more aggressive small cap stocks are leading both on an absolute and relative basis. What's going to stop this freight train? Nothing at the moment. The small cap (Russell 2000) love is showing few signs of growing weary as this relative chart illustrates:
Small cap outperformance is a major theme for 2018 and you need to watch 95 resistance on the U.S. Dollar Index. If that level is cleared, the outperformance we've been seeing in that small cap arena is very likely to continue. I've highlighted how the dollar strength has completely changed how you should view current trading strategies in the Sector/Industry Watch section below. Check it out!
Materials (XLB, +0.76%) and consumer discretionary (XLY, +0.58%) joined technology among the sector leaders on Tuesday. Retailers were particularly strong with apparel retailers ($DJUSRA, +1.92%) trailing only recreational products ($DJUSRP, +2.18%) among consumer discretionary industry groups.
Treasury yields are on the rise again, this morning moving up 4 basis points to 2.96%. That should provide a lift for financials today, possibly industrials as well. Gold ($GOLD) continues to hover near $1300 per ounce, but looks to me like a drop is in its near-term future. Crude oil ($WTIC) printed a nice reversal on Tuesday and could be poised to advance from its current $65 per barrel level.
Asian and European equity markets were mostly higher overnight and this morning, respectively. Dow Jones futures are higher by 130 points with 45 minutes left to the opening bell as the bulls attempt to keep the current rally alive.
Consumer spending is a significant component of our economy, estimated at roughly 2/3 of our GDP. Therefore, it's always a good idea to check out the health of retailers. One of the best indicators of retail strength is the XRT, a widely diversified ETF that tracks nearly every corner of retail. The XRT has surged in the past few trading sessions off recent 20 day EMA tests and appears poised for higher prices ahead:
There's a potential bullish continuation pattern in play here - cup with handle - as the right side of the cup nears price resistance at 49. A pullback from that level to test a rising 20 day EMA would be the handle. A breakout above 49 in such a scenario would measure to 55-56 in time. It's noteworthy that the XRT has broken out relative to the S&P 500 and is gaining momentum.
Small caps are a major player in this latest bull market rally. One area of small caps that's gaining traction on a relative basis is industrials (PSCI). Check out the absolute and relative strength of the PSCI:
Later today, on my MarketWatchers LIVE show that begins at 12:00pm EST, I'll discuss how you can start with a theme like the one above and drill down to find individual stock trades to ride the wave of small cap momentum. Be sure to check it out on StockCharts TV!
June 6th (today's close) marks the end of the current bullish historical period for the S&P 500 dating back to 1950. The 7th through the 17th of June is mostly neutral, having produced annualized returns of +1.74% over the past 68 years.
Key Earnings Reports
(actual vs. estimate):
BF.B: .23 vs .22
(reports after close, estimate provided):
Key Economic Reports
Q1 productivity released at 8:30am EST: +0.4% (actual) vs. +0.7% (estimate)