Markets registered yet a somewhat soft session to begin the week as the Dow was lower by .2%, the S&P 500 fell .4% and the Nasdaq by .6%. It was the Russell 2000 that has been displaying a bit more volatility and it fell .8% today, falling beneath the round 1500 number. My focus will continue to be how this benchmark and its bull flag formation plays out. If this can record a breakout then I believe we can see a powerful surge into year end which could spill over into all the indexes. The Russell 2000 does have a couple things going for it, number one being the strength in the financials, whose group investors have really taken a liking to. One has to keep in mind the heaviest weighting in the Russell 200 is the financials so if this group can keep up its recent euphoria it will have an impact. Number two is the notion that tax reform could be a possibility which would certainly here small companies here in the US, and the stocks in the Russell 2000 derive the vast majority of their revenue domestically.
Looking at individual sectors Monday there were no powerful winners with the best performer being the safe utilities, which rose a scant .1%. The very conservative stales group was second best falling .1%, and the financials fell nearly by the same amount. Lagging were the energy, industrials and cyclicals. The weakness in industrials was a rare event as the XLI is on a current 6 week winning streak, which has rose gradually just less than 7%. It has acted well POST breakout from a 69.68 cup base trigger on 9/18 and volume trends have been bullish. The XLE on the other hand looks like it is breaking below a 4 week tight pattern as the last 4 weeks have all CLOSED within just .71 of each other. The 200 day SMA which many technicians look to its slope for a simple indicator if the trend is bullish or bearish is still pointing lower and the ETF is now start to look heavy, although it could pull back into the break above a long term downtrend that began the week ending 12/16/16 which would align with a successful retest of its rising 50 day SMA.
The homebuilders have been acting strong which is very often a good indicator of economic strength. The XHB recently climbed back above the round 40 number which had been trouble getting above last dating back to February ’07. It formed a bull flag formation during a ten session winning streak between 9/21-10/4 and busted above on 10/19, although Monday did record a bearish shooting star candle. Peering deeper into the space to some of the periphery plays makes sense and below is the chart of ESNT and how it appeared in our Thursday 9/28 Game Plan. This name too had to deal with the round 40 number as well, but it has now recorded four consecutive weekly CLOSES above the figure and the last 2 weeks alone advanced by a combined 10.7%. It has acted well POST breakout from a double bottom with handle trigger of 40 taken out on 9/27 and is now 4% off most recent all time highs giving investors who missed the initial opportunity a chance to participate.