The market is doing fairly well today as health insurers start to recover and industrial stocks take off. I mentioned that health care seemed oversold in yesterday's Chart Advisor newsletter, so I don't think a short-term rebound is a surprise. However, the rally in industrial stocks is big news for bulls.
One of the primary drivers of the move in industrial stocks is the earnings report from Honeywell International Inc. (HON), which beat on the top and bottom lines. The outlook for future production and profitability was also above expectations, which pushed the stock up 4% at one point today. I took note of the very encouraging comments Honeywell's management had for the company's aerospace business, which bodes well for reports from The Boeing Company (BA) and United Technologies Corporation (UTX) next week.
As you can see in the following chart, Honeywell had formed a long-term inverse head and shoulders pattern that was retested and confirmed on April 10 through April 11. The stock is reaching the initial price target, but the momentum from today's report could send the shares quite a bit higher. If the rally among industrial stocks continues, we should expect to see yields rise as well in the short term, which would be a relief for bank investors.
Unfortunately for the S&P 500, lagging health care and energy stocks have kept the index range bound within the rising wedge I have highlighted previously. This isn't necessarily a bearish signal, but investors are still waiting for confirmation from small caps that the bull market is still intact. Energy and health care stocks are over-represented in small-cap indexes, so that confirmation remains elusive.
As you can see in the following chart, although large caps in the S&P 500 have performed well, small caps are still range bound and didn't make any progress before the long weekend that began after the close today. A similar problem with long-term Treasury yields has continued to vex investors. I would have expected both small caps and interest rates to spike a little higher with all the good news from industrials, but they remained flat or negative.
Risk Indicators – Watch the Dollar, Not Mueller
Besides the confirmation issue with small caps and long-term yields, the other market risk indexes remain calm. You might find that hard to believe considering some of the hyperbolic headlines today about the Mueller report. However, as with worries about "Medicare-for-All," I think the financial press is getting ahead of itself.
It is true that investors dislike uncertainty, so the Mueller report is something traders will be thinking about this weekend. However, if you take a step back and think about periods of political uncertainty in the past, this kind of fight rarely has an impact on the market. What tends to upset traders is uncertainty around fiscal, monetary or trade policy, which has nothing to do with the Mueller report.
Although there are obvious differences, the Starr report released in September of 1998 accusing President Clinton of perjury, obstruction of justice and witness tampering coincided with the start of a new 56% rally in the S&P 500 that only ended after the next administration had been inaugurated. So, while the Mueller report will probably be fodder for late-night comedians and congressional investigators, it seems unlikely to lead to any serious repercussions for the market.
However, if there are issues in the market, I suspect we will see it in the value of the dollar. Already, investors have been pushing the greenback higher through its own inverse head and shoulders pattern after economic news from the U.S. and Europe highlighted the increasing economic divergence between the two areas today. As you can see in the following chart of the Invesco DB Dollar ETF (UUP), the dollar is above resistance, and a continued rally would hurt earnings.
Bottom Line – Holiday Trading Is Normally Light
The market is closed on Friday for the Easter holiday. Long weekends sometimes coincide with some profit taking and hedging, which may explain why today's market breadth was so narrow. I expect that Monday will also look a lot like today because most of the European markets will remain closed for the Easter Monday holiday.
If I am correct about short-term volatility, I would still recommend maintaining an optimistic outlook – at least in the short term – based on today's surprisingly good performance in industrial stocks. If that trend continues, another extension to the upside in the major stock indexes is likely.
Enjoy this article? Get more by signing up for the Chart Advisor newsletter.