Blue-Chip Buying Opportunity Ahead?

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While the S&P 500 traded flat Tuesday and the Nasdaq hit a new 2016 high, the Dow Jones Industrial Average fell slightly after some blue-chip earnings reports did not live up to expectations.

Disappointing same-store sales by McDonald’s Corporation (NYSE:MCD) led to a 4.5% drop in the stock. Verizon Communications Inc. (NYSE:VZ) lost 1.9% on declining revenue. 3M Co (NYSE:MMM) beat EPS estimates but cut its full-year sales forecast, causing the stock to fall 1.1%.

However, after the close on Tuesday, some Dow 30 members surprised to the upside. United Technologies Corporation (NYSE:UTX) exceeded earnings and revenue expectations. E I Du Pont De Nemours And Co (NYSE:DD) also surpassed analysts’ estimates. But the big news for tech stocks was that Apple Inc. (NASDAQ:AAPL) beat on both the top and bottom line, and shares jumped in after-hours trading.

According to FactSet, as of June 30, the expectation was for corporate profits to fall 5.3% in Q2. Thus far, with 159 companies reporting, earnings are on track to contract 4.5%.

Investors will likely focus on the results of the Federal Reserve’s policy meeting today for indications of a rate hike, but they are not anticipating one prior to December.

Crude oil fell to a three-month low as a result of an oversupply of gasoline. And a weaker U.S. dollar has caused a rise in copper and gold prices.

At Tuesday’s close, the Dow Jones Industrial Average fell 19 points to 18,474, the S&P 500 gained a point at 2,169, the Nasdaq rose 12 points to 5,110, and the Russell 2000 was up 7 points at 1,217.

The NYSE Composite’s primary exchange traded 824 million shares with total volume of 3.4 billion. The Nasdaq crossed 2 billion shares. On both major exchanges, advancers outpaced decliners by 1.6-to-1. Blocks on the NYSE increased to 8,757 from 7,944 on Monday.

IWM Chart
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chart-key-NEW

This iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) would be a perfect break from a tight flag formation except for two things: the lack of volume and the low net advance above the prior high.

Tuesday’s high of $120.97 is just a fraction above last week’s resistance at $120.40 (closing high) to $120.65 (high). The chart of the SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) is very similar.

Conclusion

Buyers have, in true bullish rotation, returned to the small and mid caps after running the big caps to a point where profit-taking is standard procedure. Near term, the S&P 500 is extended, so look for some buying opportunities if it pulls back.

Expect to see block buying increase in sectors like biotech, pharma stocks, retailers and building stocks. Apple’s after-market run will probably result in a pop in small caps and potentially the tech sector. See my Trade of the Day for a top tech pick.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/daily-market-outlook-investors-turn-back-small-mid-caps/.

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