Travelers: the insurance company and the airlines are pro…

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Travelers, Union Pacific and American Airlines are looking to help stocks rebound on Thursday. Travel passes could signal that the economy is strong despite the market’s weak breadth. The small-cap Russell 2000 breaks a one-year support level, signaling weakness in the stock market. The Dow Theory suggests there is no reason to panic.



5 minute read

Photo by Getty Images

Key points to remember

  • Stock Index Futures Rally on Positive Results

  • Small cap stocks diverge from large cap stocks, signaling market weakness

  • Investors have reason to stay positive about stocks

JJ Kinahan, Chief Market Strategist, TD Ameritrade

(Thursday Market Open) Stock index futures point to a higher open as investors try to bounce back from two days of selling and a very weak start to 2022. The problem may be that the rally in this morning resembles Wednesday where stocks rose ahead of the open but were unable to hold the gains. Maybe Thursday will be different due to some positive results announcements; the S&P500 (SPX) appears to be testing a short-term support level, and the VIX (Cboe Market Volatility Index) was trading lower before the bell.

Financiers could get a much-needed boost as flagship insurer Travelers (TRV) had an excellent quarter announcing earnings and revenue above expectations. TRV rose 4.63% in premarket trading as the company was able to meet rising disaster-related claims with higher returns on its investments.

Transportation companies are moving in different directions this morning as a few earnings announcements spark opposing reactions. railway company Union Pacific (UNP) reported earnings and revenue above expectations. The company reported its most profitable year ever, prompting a 0.63% pre-market rally.

American airlines (AAL) is trading up 1.10% ahead of the open after beating the upper and lower earnings numbers. However, United Airlines (UAL) is trading down 1.4% despite a smaller than expected loss. Airlines have one thing in common: they are optimistic about spring and summer. Companies expect a drop in Omicron cases and an increased willingness to live with the risks associated with the pandemic.

Overnight, China’s central bank cut its key rate in a bid to support its weakened economy. The country’s housing and real estate markets have struggled over the past year, and President Xi Jinping is seeking to break precedence with the Chinese Communist Party and seek a third term.

The US economy still appears to be growing despite Omicron’s setbacks, as the Philadelphia Fed’s manufacturing index was much higher than expected. However, initial and continuing jobless claims were also higher than expected.

After opening, the Existing Home Sales report will be released. Wednesday saw an increase in building permits and housing starts, but many investors worried that much of the housing growth would come from multi-family units. the S&P Homebuilders Select Industry Index fell nearly 2% on the news, extending its five-day losing streak. The index is down about 12% since the start of the year.

Retired

Major stock indexes closed lower on Wednesday, with the strong tech component Nasdaq Compound (COMP:GIDS) fell the most at 1.15%. the Dow Jones Industrial Average ($DJI) and the S&P500 (SPX) fell at about the same level, at almost 1%. Investors showed a lack of conviction after starting the day strong in response to the 10-year Treasury yield (TNX) down 2%. But the shares faded later in the day and ended in losses.

Traders appeared to be taking profits on value stocks because the S&P 500 Pure Value Index fell 1.70%. The value index has fallen more than 3% in the past two days after a 15% rally that dates back to late November 2021.

Investors went on the defensive on Wednesday, with consumer staples and utilities leading the day and the only two sectors to close in positive territory. Procter & Gamble (PG) helped commodities by hitting analysts’ earnings estimates directly on the nose, according to FactSet. PG rose 3.36% on news.

Consumer discretionary and financials were among the worst sectors on Tuesday. Financial services continue to struggle with poor results in earnings reporting. JPMorgan Chase (JPM) fell 1.55%, and American bank (USB) fell 7.75% after missing important metrics.

Go AWOL

Some analysts use the S&P500 (SPX) and the Russell 2000 (RUT) as an indicator of market breadth and strength. The large-cap stocks in the SPX are known as the generals, while the small-cap stocks in the RUT are the soldiers. When the soldiers stop following the generals, the battle can be lost. Tuesday, the battle did not look so good because the soldiers are absent.

The RUT has been trading within a well-defined range for almost a year, and on Monday it broke through the lower band. During the second half of 2021, the SPX continued to climb and left the RUT behind. Now, the breakdown of support for the RUT may be seen by some investors as a major sign of weakness in the stock market. That said, and the fact that the SPX is only 5.5% off its all-time high and with the RUT down 15% from its all-time high and still in “correction” territory, it doesn’t probably isn’t time to press the panic button.

CHART OF THE DAY: THE INDICES ARE ESTABLISHED. The S&P 500 (SPX – top left) is currently sitting on support, but may be feeling downward pressure from other indices. The Dow Jones Industrial Average ($DJI—top right) broke support on Tuesday and sold off again on Wednesday. The next major level of support is at 34,000. The Nasdaq Composite (COMP:GIDS—bottom left) is approaching support at 14,200. The Russell 2000 (RUT—bottom right) has broken its one-year support Tuesday and may struggle to establish the next level of support, which could be as low as 1,750, which were the 2018 and 2020 highs. Data sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Dow theory: the Dow Jones Transportation Index ($DJT) is still trading above its recent support level. This is important, according to the late Charles Dow, an American journalist who co-founded Dow Jones & Company and created the Dow Jones Industrial Average ($DJI) and other important indices, as a strong transportation industry is a sign of economic strength.

According to people who follow Mr. Dow’s writings in the late 1800s, a bear market is not confirmed until the index of industries and the index of transportation are down together. A downtrend occurs when an index creates lower highs and lower lows on an annual chart. Neither index is currently down. Dow theorists see transportation as a sign that materials, parts, and products are still in demand and therefore the economy continues to grow. Currently, businesses aren’t struggling so much for a lack of demand as they are struggling to get the supply to meet the demand.

Back again: On Wednesday, British Prime Minister Boris Johnson announced his intention to end the pandemic Plan B COVID-19 measures in England and return to the less strict Plan A. Plan A does not advise people to work from home, and from next Thursday the UK government will no longer require masks. Doctors advising Mr Johnson believe Omicron’s surge has peaked and is trending down, according to the BBC.

According to Our World in Data, the UK has seen cases drop dramatically in recent weeks. Germany has also seen a substantial drop in cases. The United States and France are also seeing some decline in cases.

As more countries lift restrictions and return to normal, the economy is expected to strengthen again. Factories and businesses can return to full capacity, supply lines can open up, and consumers can move around to take advantage of the service industry and put less pressure on products.

good trade,

not a word

@TDAJJKinahan

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