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Selectivity is Key at These Levels

Editor’s note: Beat the Bell editor Serge Berger will be filling in for Sam Collins until May 26.

Stocks closed last week on a muted note. The market largely remained choppy despite the S&P 500 squeaking to a new all-time closing high. My calls around the Street on Friday revealed thinly staffed trading desks with many still waiting around for a better directional move in stocks.

We enter this week with the major U.S. indices near all-time highs, and bonds staged an initial bullish reversal last week.

This week’s highlights on the economic data front are the FOMC minutes on Wednesday, followed by the Philadelphia Fed Business Outlook Survey, existing home sales and Kansas City Fed Manufacturing Index on Thursday. Finally, on Friday, we get the latest reading of the Consumer Price Index. So, we have plenty of economic data on the radar this week to make markets move.

Dow Jones Industrial Average Chart
Click to Enlarge

The Dow Jones Industrial Average pushed to new all-time highs and left behind a third weekly bullish reversal as shown by the long tails. Until these long tails are negated, the path of least resistance remains higher toward the next upside target of 18,500.

Tbond Chart
Click to Enlarge

Looking at the 10-year U.S. Treasury note June futures contract we see that last week’s price action again held/rejected the previous week’s lows, as well as the 200-day simple moving average. This indicates that a near-to-intermediate-term low in bonds may have been accomplished. Through a purely technical lens, the iShares Barclays 20+ Yr Treas. Bond (ETF) (NYSEARCA:TLT) now looks poised to bounce toward the $125-$126 area from a multiweek perspective.

ITB Chart
Click to Enlarge

As a result of the increase in bond prices and decline in yields last week, we also saw a bounce in homebuilding stocks. The iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB) found support at the 12-month horizontal reference line and also scored a marginal break above its 100-day simple moving average.

Housing stocks could rally further as bond yields remain low for longer than initially anticipated. While the bears point to the slumping price of lumber I would counter that we’ve seen a meaningful jump in hiring in the sector.

While I am not a raging bull on housing stocks, I expect them to trade marginally higher headed into summer.

XLY vs SPY Chart
Click to Enlarge

As a result of the sliding U.S. dollar over the past couple of months, consumer discretionary stocks, which looked good in the first part of 2015, have flashed notable relative weakness. This is clear in the ratio chart of the Consumer Discretionary SPDR (ETF) (NYSEARCA:XLY) versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

From a technical perspective, the relative breakout in XLY to new highs earlier this year now looks to have been a fake-out move. We could see more weakness in consumer discretionary stocks in coming months. I would also note that retailers looked weak last week.

Conclusion

While some of the broader equity indices scored new highs, selectivity is becoming increasingly important. There are trades to be had tactically on the long side, but I will also be looking at the short side of the Russell 2000.

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.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/daily-market-outlook-selectivity-is-key-at-these-levels/.

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