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Stock Market Outlook for February 5, 2014

Todays_Markets4

Upcoming US Events for Today:

  1. ADP Employment Report for January will be released at 8:15am.   The market expects 170,000 versus 238,000 previous.
  2. ISM Non-Manufacturing Index for January will be released at 10:00am.   The market expects 53.9 versus 53.0 previous.
  3. Weekly Crude Inventories will be released at 10:30am.

 

Upcoming International Events for Today:

  1. German PMI Services for January will be released at 3:55am EST.   The market expects 53.6 versus 55.0 previous.
  2. Euro-Zone PMI Services for January will be released at 3:55am EST.   The market expects 51.9 versus 51.0 previous.
  3. Great Britain PMI Services for January will be released at 4:30am EST.
  4. Euro-Zone Retail Sales for December will be released at 5:00am EST.   The market expects a year-over-year increase of 1.1% versus an increase of 1.6% previous.

 

Recap of Yesterday’s Economic Events:

Event Actual Forecast Previous
AUD Reserve Bank of Australia Rate Decision 2.50% 2.50% 2.50%
GBP Purchasing Manager Index Construction 64.6 61.5 62.1
EUR Euro-Zone Producer Price Index (YoY) -0.80% -0.80% -1.20%
EUR Euro-Zone Producer Price Index (MoM) 0.20% 0.20% -0.10%
USD ISM New York 64.4   63.8
USD Factory Orders -1.50% -1.80% 1.50%
USD IBD/TIPP Economic Optimism 44.9 44.5 45.2
NZD Unemployment Rate 6.00% 6.00% 6.20%
NZD Employment Change (QoQ) 1.10% 0.60% 1.20%
NZD Employment Change (YoY) 3.00% 2.40% 2.40%
AUD AiG Performance of Service Index 49.3   46.1

 

The Markets

Stocks bounced on Tuesday, retracing a fraction of the losses from Monday’s “plunge” session.   The S&P 500 index gained precisely one third of Monday’s decline, suggesting that Tuesday’s session was no more than a bounce.   Recently underperforming sectors of Consumer Discretionary and Energy topped the leaderboard on Tuesday, while recently outperforming sectors of Technology and Utilities lagged the broad market move.   Looking at the daily chart of the S&P 500 index, the 20-day moving average is about to cross below the 50-day moving average , a move that is often considered to be a negative for the short-term trend.   However, the use of this bearish crossover as a “sell” indicator is generally ineffective.   Over recent history, the crossover would have been better used as a “buy” signal, triggering close to the bottom of short-term pullbacks.   Only time will tell if the same will hold true through this occurrence.   More important than the crossover event is the direction of the major averages.   The 20-day moving average is pointing lower, suggesting a negative short-term trend; the 50-day moving average is showing very early signs of curling negative, however, as of yet, nothing more than a neutral intermediate trend can be concluded.   The 200-day moving average continues to point higher, suggesting that the long-term trend remains firmly intact.   Depending on what type of investor you are (short, intermediate, or long-term) the direction of these three moving averages is of critical importance.

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Bonds have been a great trade since the year began, outperforming equity markets throughout January and providing a place to hide amidst equity market weakness.   The long equity – short bond trade that was successful last year is showing signs of unwinding as portfolios are reallocated.   However, significant resistance for bond prices is directly ahead, suggesting that the recent strength in the bond market may be short-lived.   The 7-10 year treasury bond fund (IEF) broke significant support last spring around $104, a breakdown that resulted in significant losses in the fixed income market through the summer months.   This broken support appears poised to be tested as resistance as bond prices retrace a portion of last year’s losses.   The 200-day moving average for the bond fund continues to point lower, suggesting a long-term trend of lower bond prices and higher yields.   Should bond prices cease moving higher within this short-term trend, the rotation out of bonds and back into equities would be expected to continue, potentially leading to the end of recent equity market weakness.   Both bond prices and equity prices still have some room to run before resistance/support levels are hit.   Seasonal tendencies for bond prices are typically negative through the first four months of the year, as trend that has certainly not held true thus far.

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Bonds are not the only asset class that has attracted demand over recent days.   Commodities are also showing bullish activity with the CRB commodity index breaking above short-term resistance around 285.   Outperformance of the commodity index versus equity markets has been evident for the past few weeks as strength in Oil and Gold prices supports the benchmark that had shown significant lag versus equities in 2013.  A trend of higher-highs and higher-lows can now be suggested, which is a shift of trend from the lower-lows and lower-highs that persisted throughout last year.   Momentum indicators are also trending positive as technical indicators rebound from some of the most oversold levels since June of 2012.

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Agriculture commodities are looking particularly appealing.   The price of corn and soybeans have established significant levels of support around current levels and price is has broken above 20 and 50-day moving averages; momentum indicators are also showing signs of trending higher.   The chart of cocoa shows the appearance of a bull flag pattern, which suggests further upside as cocoa trades to the highest levels since 2011.  The positive moves in agriculture commodity prices comes on the day that the US Senate passed a $100 Billion a year farm bill, which, among other things, will provide support to farmers that face unpredictable weather or market conditions.   The Globe and Mail notes that “in place of the direct payments, farmers of major row crops – mostly corn, soybeans, wheat and rice – would now be able to choose between subsidies that pay out when revenue drops or when prices drop.”   Corn, Soybeans, and Cocoa are within periods of seasonal strength that persist into the spring months. 

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Corn Futures (C) Seasonal Chart

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Soybeans Futures (S) Seasonal Chart

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Cocoa Futures (CC) Seasonal Chart

Seasonal charts of companies reporting earnings today:

DIS

TSO

PAA

MRO

GMCR

GIL

FMC

CNW

ALL

AKAM

GSK

TWX

RL

NDAQ

MRK

LVLT

HUM

EL

CCE

ADP

AGN

Sentiment on Tuesday, as gauged by the put-call ratio, ended close to neutral at 0.99.

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S&P 500 Index

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TSE Composite

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Horizons Seasonal Rotation ETF (TSX:HAC)

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2014 Year-to-Date Since Inception (Nov 19, 2009)
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