Equity Clock

Stock Market Outlook for January 27, 2012

Upcoming US Events for Today:

1. Advance GDP for the Fourth Quarter will be released at 8:30am.   The market expects an increase of 3.2% versus 1.8% previous.
2. The Final Consumer Confidence reading for January will be released at 9:55am.   The market expects 74.2 versus 74.0 previous.

Upcoming International Events for Today:

• No Significant Events Scheduled

The Markets

On Thursday, markets gave back gains accumulated on Wednesday, attributed to the Fed’s easy money stance through to 2014.   Investors are starting to show signs of profit taking after equity benchmarks have become the most overbought since last May’s peak and sentiment indicators are indicating excessive bullishness in the market.   Market participant are beginning to question the recent strength amidst the lackluster earnings season, concerns of default in Greece, and the Fed essentially indicating economic struggles for years to come.   To date, just over half (55%) of corporate earnings have beat estimates, which have been ratcheted down in recent months due to economic concerns.   This is well off of the beat rate of around 70% witnessed in recent quarters, signaling that this is the most disappointing earnings season since the economic recovery began in 2009.   Couple that with the extreme overbought conditions that are indicative with a market peak, a correction appears justified.   Still one possible positive catalyst remains: the Fourth Quarter GDP report to be issued on Friday.   Expectations are optimistic and reaction to the number amongst equity markets is pretty much guaranteed.

Turning to the S&P 500, nearly all of the gains achieved on Wednesday have been eliminated, marking somewhat of a reversal.   The level to hold is 1310; a level that if broken would likely bring in more selling pressure.   Downside risks remain to significant moving averages, such as the 50 and 200-day, which continue to be approximately 60-points lower than present levels.   Recent leadership from the financial sector appears to have concluded, underperforming the market for a second day following the Fed’s announcement.  Yet, the 50 and 200-day moving average look set to complete a bullish cross pattern, signifying improving intermediate-term prospects.   At this point a shallow correction is anticipated and the extent of the significance of the peak, which presumably will form below the May and July peaks above 1350, will have to be analyzed to determine if the lower significant high means a longer-term downtrend.

The pending pullback in the short-term may actually be triggered by the Fed’s accommodative monetary stance.   Recent weeks have show bond market participation in the equity market rally as assets flowed from bonds into equities.   With the fed’s commitment to keep rates low, investors have flocked back into bonds to take advantage of the near term rise in prices.   What will be key is if yields can hold above recent lows, at approximately 1.8% on the 10-year, as it would signal that commitment to equities remains and that a new bond market rally has not commenced.   Participation from the bond market will be key in order to keep the buying momentum in equities strong.   Bond markets may trade within a range during what is typically a negative seasonal period for bond prices through the first quarter of the year.

Something else that is key in order to determine the strength in equity markets is the strength in copper.   Investors call it Dr. Copper due to its predicative qualities of market direction.   On Thursday Copper broke through a level of resistance indicated by its 200-day moving average.   The metal has been outperforming equity markets throughout January as seasonal tendencies lift the commodity.   Given the the low interest rate environment, commodities look poised to outperform the market, as is seasonally typical, through to May.   A number of metal commodities are still significantly overbought, signaling that even commodities are prone to a correction at this point before moving higher.

And one last chart before we depart for the weekend.   The Dow Jones Transportation Index was able to buck the losses on Thursday, however, a bearish pattern has become well defined on the chart.   A rising wedge pattern has become clear with activity now reaching a peak.   A break below the lower trendline at 5200 would signify a change in trend to the downside with targets pointing back to where the pattern began at 3950, or a whopping 25% lower than present levels.   It remains premature to determine whether or not the downside risk presented by the pattern will be fulfilled.   This rising wedge pattern is unfortunately consistent across the indices, but none as perfectly defined as the one on the chart of the Dow Jones Transportation Index.

Sentiment on Thursday, as gauged by the put-call ratio, ended relatively neutral at 0.95.

Sectors that Moved the Market

Utilities outperformed the market for the second day, continuing to benefit from the Fed’s low interest rate stance.   Utilities are highly sensitive to interest rates and a decline in the cost of borrowing is a significant benefit to companies in this sector that are highly leveraged.   This present activity acts contrary to the seasonal tendencies at this time of year that pressures the sector lower through to March.   Up until Wednesday, the sector was a significant underperformer this year, a trend that may now be coming to an end.

S&P 500 Index

Chart Courtesy of StockCharts.com

Technical Indicators

Candlestick Analysis

Total Returns

Yesterday: –0.58%  –  Trailing 5 days: 0.30%  –  Trailing 30 days: 4.19%

Averages for current day based on past 20 years of data

• Current Day: 0.01% with 53.33% of sessions gaining
• Next 7 days: 0.82% with 60.00% of sessions gaining (Max return: 1.58% by January 30 on Average)
• Next 30 days: 0.34% with 54.13% of sessions gaining (Max return: 2.93% by February 10 on Average)

TSE Composite

Chart Courtesy of StockCharts.com

Technical Indicators

Candlestick Analysis

Total Returns

Yesterday: –0.60%  –  Trailing 5 days: 1.91%  –  Trailing 30 days: 4.51%

Averages for current day based on past 10 years of data

• Current Day: –0.16% with 33.33% of sessions gaining
• Next 7 days: 0.92% with 55.00% of sessions gaining (Max return: 1.32% by January 31 on Average)
• Next 30 days: 1.10% with 54.58% of sessions gaining (Max return: 3.27% by February 13 on Average)

Horizons AlphaPro Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $12.61 (down 0.47%)
• Closing NAV/Unit: $12.59 (down 0.13%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian 

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.