Trading Places with Tom Bowley

Wall Street Ends Week With Gains, Home Construction Leads

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Market Recap for Friday, June 8, 2018

In a rare development, consumer staples (XLP, +1.23%) led Wall Street higher on Friday.  Over the past three months, the XLP has fallen 5.78% and no other sector is close to consumer staples' ineptitude.  The XLP has been the shunned part of consumer stocks as consumer discretionary (XLY, +0.21%) has gained 5.38% over the past three months.  That's a massive 11% difference over a fairly short time frame and it's resulted in a XLY:XLP ratio that has exploded higher:


This XLY:XLP ratio is one reason to be extremely bullish as we work our way through 2018.  If we were heading into a bear market, money would rotate more towards defensive stocks like consumer staples and the above ratio would be declining.  That's not happening and likely suggests we're heading higher on our major indices.  The correlation indicator above shows that there's a strong positive correlation between this ratio and the direction of the S&P 500.  Keep a close eye on it always.

While the XLY:XLP ratio has been soaring, home construction stocks ($DJUSHB) have had little to do with it.  I've provided a DJUSHB chart below to highlight the weakness of this group in 2018.  However, it's worth noting that home construction stocks exploded higher on Friday, with a gain of 3.29% and could be on the verge of a down channel breakout.

It was not an across-the-board type of advance on Friday, however.  Energy (XLE, -0.19%) and technology (XLK, -0.17%) both failed to participate and most advancing sectors showed only minor gains.  Still, higher is higher and the bulls closed the week claiming victory.

Pre-Market Action

The 10 year treasury yield ($TNX) is up 3 basis points this morning and that'll likely aid financial stocks, at least early in today's session.  Gold ($GOLD) and crude oil ($WTIC) continue to hover around $1300 per ounce and $65 per barrel, respectively.

Asian markets were mostly higher overnight, while European stocks cling to small gains.  Dow Jones futures are higher by 17 points, but NASDAQ futures are pointing to a slightly lower open as the historic US-North Korea meeting approaches.

Current Outlook

It's usually a good signal to see home construction stocks ($DJUSHB) performing well.  It was the second best performing industry group of 2017 during Wall Street's explosive run higher and it enabled consumer discretionary stocks (XLY) to sprint higher in late 2017 and break out relative to the S&P 500 after two years of mostly relative consolidation:

First, I know that the daily chart on the DJUSHB is horrific in 2018.  This has been one of the worst groups on the planet because of the threat of rising interest rates.  It needed a correction and relief after a huge rally heading into 2018 and it's received exactly that.  But I like that we've seen a near 50% Fibonacci retracement off the huge rally.  It's also quite bullish that the XLY continues moving higher vs. the benchmark S&P 500.  That tells us that money is rotating into consumer discretionary stocks.  The DJUSHB could be poised to benefit from those rotating dollars.  There's been a fairly solid downtrend channel in play on the DJUSHB in 2018.  A definitive breakout of that channel would be the next bullish signal for the industry.

Sector/Industry Watch

The Dow Jones U.S. Trucking Index ($DJUSTK) recently (five weeks ago) gapped lower and appeared to break down.  Instead, we saw a major reversal and this group has not looked back.  Now it's on the verge of a major breakout:

The DJUSTK is now at key resistance, but this is a very strong uptrend.  I look for a rising PPO and solid support at the rising 20 day EMA to illustrate a strong uptrend.  Both are in play here.  Consolidation and another 20 day EMA test cannot be ruled out, but I look for further strength from truckers and that bodes well for this bull market rally.

Monday Setups

The medical supplies industry ($DJUSMS) closed at a four month high on Friday and appears poised for further gains.  Merit Medical Systems (MMSI) has been a relative leader for months, but recently pulled back on both an absolute and relative basis and that could set the stock up for nice gains ahead, especially given technical strength in its industry.  Here's the current technical view:

MMSI has pulled back to a level where the reward to risk favors a long position.  The RSI has fallen from the 80s down to 42.  We've just seen a 50 day SMA test and MMSI's PPO is nearing a centerline test.  All of this favors MMSI from a long perspective.

For more weekly setups, you can CLICK HERE.

Historical Tendencies

Here's a breakdown of S&P 500 performance during June (since 1950):

June 1-15:  +6.90%
June 16-30:  -7.34%

Key Earnings Reports

None

Key Economic Reports

None

Happy trading!

Tom

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 StockCharts.com'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. Learn More
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