Stock Market Outlook for March 5, 2013
Upcoming US Events for Today:
- ISM Non-Manufacturing (Services) Index for February will be released at 10:00am. The market expects 55.0 versus 55.2 previous.
Upcoming International Events for Today:
- German PMI Services for February will be released at 3:55am EST. The market expects 54.5 versus 55.7 previous.
- Euro-Zone PMI Services for February will be released at 4:00am EST. The market expects 47.3 versus 48.6 previous.
- Great Britain PMI Services for February will be released at 4:30am EST. The market expects 51.0 versus 51.5 previous.
- Euro-Zone Retail Sales for January will be released at 5:00am EST. The market expects a year-over-year decline of 3.0% versus a decline of 3.4% previous.
- Australian GDP for the Fourth Quarter will be released at 7:30pm EST. The market expects a quarter-over-quarter increase of 0.6% versus an increase of 0.5% previous.
Recap of Yesterday’s Economic Events:
|CNY Non-manufacturing PMI||54.5||56.2|
|EUR Euro-Zone Sentix Investor Confidence||-10.6||-4.3||-3.9|
|GBP Purchasing Manager Index Construction||46.8||49||48.7|
|EUR Euro-Zone Producer Price Index (MoM)||0.60%||0.50%||-0.20%|
|EUR Euro-Zone Producer Price Index (YoY)||1.90%||1.90%||2.10%|
|USD ISM New York||58.8||56.7|
|AUD AiG Performance of Service Index||48.5||45.4|
Stocks in the US gained on Monday despite the slew of Federal spending cuts that began to take hold on Friday night. A total of $85 Billion in spending cuts will be enacted over the next 7 months in what has become known as the sequester. However, even with the positive equity market returns, investors were anything but “risk-on”, instead investing in defensive sectors, such as utilities, consumer staples, and health care, which were among the top performing sectors on the day. Industrials, Materials, and Energy, the three key cyclical sectors tied to economic growth, lagged, trading in the red for much of the session. Cyclical equities have been showing signs of underperformance relative to the market since the end of January as investors rotate into defensive assets to protect the gains from the substantial bull market run that began back in November. Counteracting this cyclical lag is the performance of the Dow Jones Transportation Average, which yesterday broke to new all-time highs, potentially a leading indicator of things to come for other equity benchmarks.
The market weakness throughout February has turned many investors into bears who have become overly pessimistic of the market, as indicted in yesterday’s report. However, a chart pattern on the S&P 500 index provides reason to be optimistic. Looking at the 10-minute chart over the last few weeks, the large cap index has carved out what appears to be an inverse head-and-shoulders pattern with a neckline obvious around 1525. A break of this level, currently acting as resistance, would target 40 points (2.6%) higher to 1565, pushing the benchmark up against long-term resistance presented by the all-time highs. The bullish setup exists within context of the intermediate rising trend channel that began in November. Supporting the bullish thesis provided by positive short and intermediate-term technical setups, the market is entering into seasonally strong period, which encompasses both March and April.
Major equity benchmarks remain just points away from breaking through to new all-time highs. The Dow Jones Industrial Average is under 71 points away from new all-time highs above 14,198. The S&P 500 is around 50-points away from trading above the all-time high of 1576. Reaction to these all-time highs is probable, but it would be premature to conclude a peak at these levels. Given that both the Dow and the S&P 500 charted a lower-low, on a long-term basis, in 2009, a higher-high is now required in order to dispel the possibility of a negative long-term trend, as profiled by a series of lower-lows and lower-highs.
Both the Dow and the S&P 500 present a horizontal line of resistance to overcome. However, the S&P 100 is already exceeding declining trendline resistance that has constrained the benchmark since 2000. The benchmark, which is composed of stocks of the largest and most established companies within the S&P 500, broke out of a declining trend channel at the start of this year and is now marking a run for the 2007 highs of 734.51. The breakout in equities would correlate well with a correction in bond yields back to their long-term declining trendline as investors seek the yield that fixed income is no longer providing. Activity over the past 13 years has provided a reasonable consolidation range following the substantial returns generated in the late 90’s and a new multi-year bull market climb similar to the technology influenced period may soon be on our doorstep as the 16-year cycle comes close to an end.
Seasonal charts of companies reporting earnings today are as follows:
Sentiment on Monday, as gauged by the put-call ratio, ended bearish at 1.12.
S&P 500 Index
Chart Courtesy of StockCharts.com
Horizons Seasonal Rotation ETF (TSX:HAC)
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