Stock Market Outlook for March 4, 2013
Upcoming US Events for Today:
- New York ISM for February will be released at 9:45am.
Upcoming International Events for Today:
- Euro-Zone PPI for January will be released at 5:00am EST. The market expects a year-over-year increase of 1.9% versus an increase of 2.1% previous.
- China HSBC Services PMI for February will be released at 8:45pm EST.
Recap of Friday’s Economic Events:
|CNY Manufacturing PMI||50.1||50.5||50.4|
|CNY HSBC Manufacturing PMI||50.4||50.6||52.3|
|EUR German Retail Sales (YoY)||2.40%||-1.70%||-3.70%|
|EUR German Retail Sales (MoM)||3.10%||0.90%||-2.10%|
|CHF SVME-Purchasing Managers Index||50.8||52.1||52.5|
|EUR Italian Purchasing Manager Index Manufacturing||45.8||47.6||47.8|
|EUR French Purchasing Manager Index Manufacturing||43.9||43.6||43.6|
|EUR German Purchasing Manager Index Manufacturing||50.3||50.1||50.1|
|EUR Italian Unemployment Rate s.a.||11.20%||11.20%||10.70%|
|EUR Italian Unemployment Rate s.a.||11.70%||11.30%||11.30%|
|EUR Euro-Zone Purchasing Manager Index Manufacturing||47.9||47.8||47.8|
|GBP Purchasing Manager Index Manufacturing||47.9||51||50.5|
|GBP Net Consumer Credit||0.4B||0.2B||0.9B|
|GBP Net Lending Sec. on Dwellings||0.1B||0.8B||0.9B|
|GBP Mortgage Approvals||54.7K||56.5K||55.6K|
|EUR Euro-Zone Consumer Price Index Estimate (YoY)||1.80%||1.90%||2.00%|
|EUR Euro-Zone Unemployment Rate||11.90%||11.80%||11.80%|
|EUR Italian Annual Gross Domestic Product||-2.40%||-2.20%||0.40%|
|USD Personal Consumption Expenditure Core (YoY)||1.30%||1.30%||1.40%|
|CAD Quarterly Gross Domestic Product Annualized||0.60%||0.60%||0.70%|
|CAD Gross Domestic Product (MoM)||-0.20%||-0.20%||0.30%|
|CAD Gross Domestic Product (YoY)||0.80%||1.00%||1.50%|
|USD Personal Income||-3.60%||-2.40%||2.60%|
|USD Personal Spending||0.20%||0.20%||0.10%|
|USD Personal Consumption Expenditure Deflator (MoM)||0.00%||0.10%||0.00%|
|USD Personal Consumption Expenditure Deflator (YoY)||1.20%||1.20%||1.40%|
|USD Personal Consumption Expenditure Core (MoM)||0.10%||0.20%||0.00%|
|USD Markit US PMI Final||54.3||55.2||55.2|
|USD U. of Michigan Confidence||77.6||76.3||76.3|
|USD ISM Prices Paid||61.5||57||56.5|
|USD Construction Spending (MoM)||-2.10%||0.40%||1.10%|
|USD ISM Manufacturing||54.2||52.5||53.1|
|USD Total Vehicle Sales||15.33M||15.10M||15.23M|
|USD Domestic Vehicle Sales||11.99M||12M||12.08M|
Markets ended marginally higher on Friday, supported by better than expected economic data out of the US. Reports on Manufacturing, Consumer Sentiment, and Automobile Sales all topped estimates. Economic data is showing improvement compared to the prior months, despite the threat of the looming spending cuts resulting from the sequester. These economic beats are starting to show up in the Citigroup US Economic Surprise index, which profiles the weighted historical standard deviations of data “surprises” (i.e. actual economic releases vs. economist’s forecasts). The index recently ticked positive, breaking a declining trend that had remained intact since the end of 2012. The recent positive trend is indicative of more economic beats than misses, suggesting that analysts are too pessimistic of future expectations. As estimates move more inline with the economic reality, stocks typically follow. Seasonally, economic data improves substantially into the Spring as warmer weather is more conducive to manufacturing and construction, acting as a significant tailwind for stocks from March into May.
March is one of the best months of the year for stocks, behind April, which is the best month for stocks. Average gain for the month of March over the past 20 years has been 1.43%, while April has averaged return of 1.97%. 13 of the past 20 March’s (65%) have been positive, while 14 of the past 20 (70%) April’s have returned a profit. The Spring seasonal surge leads into the notorious Sell in May date, which typically happens around May 5th, on average. Will the Spring seasonal run happen again this year? Stocks have pulled back from their highs over recent weeks and overbought conditions have been alleviated. The trend of the major market benchmarks continues to show higher-highs and higher-lows; a positive intermediate trend channel from the November lows remains firmly intact. Recent market weakness remains within the context of typical retracements. Resistance, however, has been defined at the mid-February highs, charted at 1531 for the S&P 500 Index. Reaction to the highs is critical as a lower high around present levels could warrant more of a bearish bias as indication of a trend change may be realized.
One of the factors behind the recent market weakness has been strength in the US Dollar Index, which has recently broke out of an intermediate horizontal range that extended from around 78.50 to 81.50. The currency benchmark is now the most overbought since May of last year, just as the equity markets corrected coming out of its six month positive seasonal trend. Seasonally, the US Dollar index is strong in the first two months of the year, a trend that was much more prominent in February than in January of this year. Dollar strength in January and February typically results in equity market weakness, an event which has certainly been mitigated thus far. Dollar strength typically peaks between the end of February and the end of March, alleviating the negative pressures on equities into the Spring months.
The US Dollar is just one vehicle that investors have remained risk-averse throughout the recent weakness. Other hiding spots have been defensive equity sectors (Consumer Staples, Health Care, and Utilities), which have outperformed the market and cyclical counterparts. This risk aversion is indicative of market weakness as investors rotate out of higher beta sectors that had previously driven the market higher and invest in lower beta equivalents. Defensive sectors don’t typically begin their positive seasonal trend until the summer months, therefore the recent relative trend of defensive outperformance/cyclical underperformance warrants close attention to determine the strength of the remaining months in the six month positive seasonal run for equities.
Seasonal charts of companies reporting earnings today are as follows:
Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.17, the highest level of the year. The 20-day average of the ratio has approached the highest level since last summer at around 1, indicating that equal numbers of put and calls are trading hands. As the 20-day moving average of the ratio reaches 1 and subsequently pulls back below this middle line, the market has typically moved higher. Investors are aggressively hedging equity positions at present, which has the influence to reduce negative market volatility. And if investor pessimism wasn’t clearly obvious in trading decisions, as indicated by the put-call ratio, a well known sentiment survey is showing pessimism as well. The AAII Sentiment survey plunged last week, falling to 28.4% of participants indicating that they are bearish on the market for the next six months. Historically, the average bullish reading is 39%. The Sentiment survey has recently been hovering around the highest levels in a year, reaching above 50% bullishness in January, influencing a number of contrarian sell signals as euphoria and complacency was concluded. Levels around 25%, on the other hand, have typically generated contrarian buy signals as investors lean too far toward the bearish side of the boat. Bottom line is that the defensive posturing, aggressive hedging, and the negative outlook is painting a very pessimistic view of investors, which is more akin to buying opportunities. Positive equity market trends and the Spring period of seasonal strength ahead gives reason to remain optimistic.
S&P 500 Index
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
Horizons Seasonal Rotation ETF (TSX:HAC)
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|2013 Year-to-Date||Since Inception (Nov 19, 2009)|
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