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Stock Market Outlook for January 6, 2017

Gyrations in the currency market fuel an unwind of a popular carry trade.

 

Real Time Economic Calendar provided by Investing.com.

 

**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates.   Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.   As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.

Stocks Entering Period of Seasonal Strength Today:

Jack in the Box Inc.  (NASDAQ:JACK) Seasonal Chart

Jack in the Box Inc. (NASDAQ:JACK) Seasonal Chart

Halliburton Company  (NYSE:HAL) Seasonal Chart

Halliburton Company (NYSE:HAL) Seasonal Chart

Surge Energy Inc (TSE:SGY) Seasonal Chart

Surge Energy Inc (TSE:SGY) Seasonal Chart

 

 

The Markets

Stocks closed mixed on Thursday as investors reacted to the drift lower in treasury yields, which impacted stocks in the financial sector.  The S&P 500 Index ended lower by a mere eight basis points, while the 7-10 Year Treasury Bond ETF (IEF) added two-thirds of a percent.  Both the S&P 500 and Dow Jones Industrial Average remain stalled at short-term resistance with a major catalyst ahead by way of the monthly employment report.  The average non-seasonally adjusted change in non-farm payrolls for December is 0.1%, which would imply a non-adjusted addition of 146,000 positions.  Of course, all the gains in payrolls for the last four months are given back in the month of January as seasonal hires are let go following the end of year holidays.  We’ll have the complete breakdown of the report, from a seasonal perspective, on Monday.

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With yields sharply lower, the US Dollar Index followed suit.  The Dollar Index shed 1.15%, moving back towards previous resistance, now support, at 100.  Moves were pronounced across the currency market, in part due to a crackdown by the Peoples Bank of China, which fuelled the largest ever two-day gain versus the US Dollar. Below is an excerpt from the Wall Street Journal:

The Chinese central bank tightened liquidity in Hong Kong on Thursday by instructing the nation’s banks to withhold funds from other banks, a move that drove the yuan in offshore trading to its highest level since early November. The rate that banks charge each other in Hong Kong’s overnight lending market leapt from 17% to 38%, the highest in a year.

The currency shift was also felt in the Japanese Yen, disrupting a popular carry trade that involves borrowing the low yield currency (the Yen) and buying the high yield currency (USD).  The flow of assets typically has positive benefits for the S&P 500 Index.  With the 10-Year Yield in Japan hovering close to 0%, it is easily apparent why the popular strategy has been so successful as yields in the US stretch above 2%.  The yen gapped higher during Thursday’s session, closing above its 20-day moving average with a gain of 1.64%.  Variable resistance would be expected at the 50-day moving average, now around 90 on the Philadelphia Yen Index.  While declines in the yen are typically conducive to gains in the S&P 500 Index, the opposite holds true when the Yen rises, as a result of the carry trade mentioned above.  Seasonally, the yen typically declines through the first quarter, moving opposite to the US Dollar.

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Also making news on Thursday was the pronounced decline in retail stocks, which reacted to weak holiday sales from Macy’s and Kohl’s.  The Retail ETF (XRT) dropped 2.55%, moving down to its 200-day moving average; shares of Macy’s plunged by almost 14%, coming close to testing its 52-week low.  Despite the move, the S&P 500 Retail Index lost only 0.03%, seemingly unfazed by the downtick in the industry.  So what gives?  The Retail ETF (XRT) holds a basket of over 100 retailers in an equal weight allocation, while the S&P 500 retail index is capitalization weighted.  With brick-and-mortar stores down rather substantially on the day, retail leader Amazon was the beneficiary, mitigating the losses in the capitalization weighted industry benchmark.  Both the Retail index and ETF have been underperforming the S&P 500 Index since the conclusion of the period of seasonal strength for the industry at the start of December; the next period of strength begins, on average, at the end of January.

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Retail Industry Seasonal Chart
S5RETL Index Relative to the S&P 500S5RETL Index Relative to the Sector

S5RETL Index Monthly Averages

And finally for today, the EIA petroleum status report for the last week of 2016 caught some analysts off-guard.  The administration reported that oil inventories declined by 7.1 million barrels, while product inventories swelled with 8.3 million barrels of gasoline added and 10.1 million barrels of distillates.  The result had a greater impact on the days of supply of gasoline, which jumped by a full day to 26.2, almost two days above the norm for this time of year.  Typically, the days of supply of the refined product holds within a day of its seasonal norm.  The result follows a drop in production to end the year, mirroring the decline in the product supplied, a gauge of demand; both production and demand seasonally decline into February.  While the initial reaction to the report was negative, the drop in the US Dollar helped to fuel a rebound in the price of both commodities into the close.  The price of oil ended higher by nearly 1%, maintaining support at $52.

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Sentiment on Thursday, as gauged by the put-call ratio, ended bearish at 1.16.

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Seasonal charts of companies reporting earnings today:

 GBXAZZ

 

S&P 500 Index

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TSE Composite

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