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Trading Places with Tom Bowley

In One Word, This Market Is.....

Tom Bowley | May 13, 2016 at 09:00 AM

Market Recap for Thursday, May 12, 2016

Defensive. That's the best way to describe it. With consumer stocks, traders are choosing staples.

If it's a question of transportation vs. utilities, it's really not a question. Utilities rule. Small caps

or the S&P 500? Again, don't ask. It's very important to sustain a rally by turning aggressive

and that simply isn't the mood of traders right now. Look at yesterday's sector leaderboard.

Utilities (XLU, +0.59%) and consumer staples (XLP, +0.54%) led the bifurcated market to the

upside. What else is new? Check out the recent preference for staples within the consumer

stocks:

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http://stockcharts.com/h-sc/ui?s=XLY%3AXLP&p=W&yr=5&mn=0&dy=0&i=p52204080211&a=458842277&r=1463141091224





While the S&P 500 is still relatively close to its recent and all-time high, the XLY:XLP ratio has

declined significantly. This suggests that traders are very defensive and not a sign of higher U.S.

equity prices in the days and weeks ahead.

Healthcare providers ($DJUSHP, -1.77%) tumbled yesterday to lead the healthcare sector (XLV,

-0.59%) to outsized losses. The DJUSHP is featured below in the Sector/Industry Watch section.

Pre-Market Action

Well, is the glass half full or half empty? That's what those trading retail stocks are asking

themselves this morning. JC Penney (JCP) was the latest company in the retail space to report

less than inspiring results and the stock is down 9.23% in pre-market trading. But the April

retail sales (less autos) report came in this morning much better than expected at +0.8% vs. the

+0.5% anticipated. Given that retail stocks in general have been battered of late, it would be

reasonable to assume we'll see a bit of a bounce off this solid fundamental news.

U.S. futures are not pointing to much strength, however, as the Dow Jones looks to open down

slightly this morning.

Current Outlook

Transportation stocks relative to utilities remain weak and that's a sign that traders remain

highly skeptical of future economic strength. After breaking out above 13, the $TRAN:$UTIL

ratio stalled and then fell below that important 13 relative support level. The overall downtrend

remains in play and that's another sign of rotation toward defense. Check out the long-term

relative performance:





http://stockcharts.com/h-sc/ui?s=%24TRAN%3A%24UTIL&p=W&yr=15&mn=0&dy=0&i=p00982184032&a=458846785&r=1463143209951





Both relative support and the relative trendline broke over the past six months and hints of

further economic weakness ahead. While it probably is best to remain on the long side for the

most part, stops should remain in play in the event that future economic weakness drives U.S.

equity prices lower.

Sector/Industry Watch

Healthcare providers ($DJUSHP) were very weak on Thursday and lost key short-term price

support. Here's the latest technical picture on the group:

http://stockcharts.com/h-sc/ui?s=%24DJUSHP&p=D&yr=0&mn=4&dy=0&i=p48374170724&a=458843170&r=1463141862702





The breakout above 1245 was bullish, but in the past two days the DJUSHP lost 50 points and its

breakout level. The latest reaction low support level is quickly approaching at 1210. Failure to

hold that support would set the group up for additional downside. Note that the RSI is now at

40, a key support level during uptrends and the lowest RSI reading for the DJUSHP since the

early February bottom.

Historical Tendencies

The "go away in May" theory is based on the fact that beginning in May the S&P 500 tends to

struggle to push to higher prices. Here are the average monthly returns by calendar month from

May through September:

May: +2.44%

June: -0.03%

July: +11.75%

August: -1.06%

September: -6.17%

Considering that the S&P 500 averages roughly a 9% return over the past 66 years, the average

returns over the next several months suggest that we be more defensive. That is certainly one of

the reasons we've seen money shifting toward defense lately.

Key Earnings Reports

(actual vs. estimate):

HMC: .40 vs .49

JCP: (.32) vs (.40)

Key Economic Reports

April retail sales released at 8:30am EST: +1.3% (actual) vs. +0.9% (estimate)

April retail sales ex-auto released at 8:30am EST: +0.8% (actual) vs. +0.5% (estimate)

April PPI released at 8:30am EST: +0.2% (actual) vs. +0.3% (estimate)

April Core PPI released at 8:30am EST: +0.1% (actual) vs. +0.1% (estimate)

March business inventories to be released at 10:00am EST: +0.2% (estimate)

May consumer sentiment to be released at 10:00am EST: 89.7 (estimate)





Happy trading!

Tom

About the author: Tom Bowley 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 signiꥼcantly since he joined the company as a full-time

Senior Technical Analyst in March of 2015. Learn More

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