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Market Recap for Thursday, September 6, 2018
The market was bifurcated on Thursday as the Dow Jones flexed its relative muscles once again. This index of conglomerates managed to eke out a small gain of 21 points yesterday, while its aggressive NASDAQ counterpart was shellacked for a second consecutive day, dropping nearly 1% as technology (XLK, -0.73%) remained weak. The NASDAQ and technology have been leaders throughout 2018, so we should give them the benefit of the doubt during periods of profit taking. Still, technical failures are dominating the tech sector for now. Yesterday, it was the semiconductors ($DJUSSC, -2.38%) taking a turn at bearish leadership:
I've highlighted the back and forth choppiness of semis over the past 10 weeks or so, but the failure of this group the past two days came with an exclamation point (heavy volume). Also, hopes of an uptrend beginning were dashed with the drop back beneath the rising 20 day EMA (red circles highlight the high volume failure). Internet stocks ($DJUSNS, -1.82%) continued their freefall, having broken down from a topping head & shoulders pattern earlier this week. I'd continue to look for further rotation away from technology, potentially setting up a tremendous opportunity later this month or early in the 4th quarter.
Meanwhile, market participants are clearly favoring the more defensive areas of the market. Utilities (XLU, +0.57%) and consumer staples (XLP, +0.28%) were among the winners on Thursday. Industrials (XLI, +0.31%) also held up well and continue to trade in much more bullish fashion:
The XLI closed yesterday at its highest level in more than six months and recently held rising 20 day EMA support, a bullish development. There is overhead resistance from the late-February reaction high, but I'd look for that to be cleared in time.
Asia was mixed overnight, while European markets are mostly lower. Nonfarm payrolls came in slightly above expectations this morning. The unemployment rate remained at 3.9%, slightly above the analysts' consensus view of a drop to 3.8%. Average hourly earnings rose 0.4%, slightly above expectations, which could spark some talk about wage inflation. The numbers overall, in my opinion, were quite solid and support S&P 500 prices....in time.
This morning, Dow Jones futures are lower by 86 points with approximately 30 minutes left to the opening bell.
I try my best to keep it real and objectively assess the likelihood of the S&P 500 sustaining its near 10 year bull market run. There is no doubt that I slant to the bullish side because the stock market has moved higher throughout the majority of my lifetime. Time spent in bear market territory is historically very short-lived. I simply believe we're in a secular bull market, having cleared very important decade-long resistance back in 2012:
After moving mostly sideways for 12 years beginning in 1968, the S&P 500 finally cleared that long-term resistance and exploded higher. If you missed the first four or five years of that bull market explosion, no problem. It continued for another 15 years or so. The S&P 500 gained TENFOLD over two decades. Then came the two bear markets in the 2000s and 12 more years of sideways consolidation and torture. We are now in a similar position to the mid-1980s, with a 5 year breakout and bull market explosion at hand. Is it over? I think not. But, and this is very important, short-term bear markets can develop within secular bull markets. So we will struggle during periods and it'll seem like the end of the world. Instead, it'll be a tremendous opportunity.
I've circled the monthly RSIs where we remained in overbought 70+ territory for YEARS. Don't let the recent bull market run scare you. Stay the course and reap the profits.
Over the past three months, pharmaceutical companies ($DJUSPR) have been among the best performing industries, gaining more than 13%. The large cap stocks leading from a SCTR perspective have been Eli Lilly & Co (LLY) and Merck & Co (MRK), which sport SCTRs of 97.3 and 93.2, respectively. A notable laggard has been Johnson & Johnson (JNJ), carrying only a SCTR of 66.3. Recently, however, JNJ has begun to outperform its peers and looks much more solid technically:
Honestly, while JNJ's chart certainly is improving, there are plenty of mixed signals as to whether JNJ should be your pharma choice for your portfolio. Check out the relative down channel above. This tells us that JNJ has been consistently underperforming its peers in the pharma space. Stocks like LLY and MRK have wildly outperformed JNJ. That could change, but if it does, it will show up in this relative chart. The red arrow marks a very important relative resistance level. Moving above this level would indicate a change in this relative trend. Currently, we have a series of lower relative highs and lower relative lows since the end of 2017. So while the current price action in JNJ is solid, there's not yet enough evidence to suggest that JNJ is the pharma stock of choice. For now, I'd prefer LLY, MRK or even Pfizer, Inc. (PFE).
Baidu, Inc. (BIDU) is approaching key price support and owns a solid track record in September, gaining an average of 4.1% during the month over the past 14 years. Here's the current technical outlook:
BIDU hasn't been a leader by any stretch of the imagination, but despite very heavy volume gaps to the downside, 2018 price support in the 208-212 has managed to hold. While I see no technical reason for BIDU to explode here, I also respect that price support level....until it breaks. Those looking for stocks that have historical September outperformance and trading near price support need look no further than BIDU.
Key Earnings Reports
Key Economic Reports
August nonfarm payrolls released at 8:30am EST: 201,000 (actual) vs. 195,000 (estimate)
August private payrolls released at 8:30am EST: 204,000 (actual) vs. 190,000 (estimate)
August unemployment rate released at 8:30am EST: 3.9% (actual) vs. 3.8% (estimate)
August average hourly earnings released at 8:30am EST: +0.4% (actual) vs. +0.3% (estimate)