Stock Market Outlook for February 14, 2017
S&P 500 Index and the Volatility Index close firmly higher, a rare event by historical standards.
**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:
And the “Trump trade” continues with major equity benchmarks in the US charting a fresh set of all-time highs. The market momentum seems to know no bounds with with the S&P 500 Index and Nasdaq Composite closing above the upper limit to rising trend channels highlighted in yesterday’s report. Next point of reference to the upside on the large-cap index comes in around 2400, not only a point of psychological resistance, but also a target of a reverse head-and-shoulders pattern that was derived over the past year and a half. Long-term support at the 200-day moving average is almost 7% below present levels, a stretched condition that makes it extremely difficult to put new cash to work at this elevated level; volume remains subdued as a result. The last half of February tends to be weaker than the first, perhaps providing a bit of a near-term headwind, but with cyclical leadership intact and major moving averages pointing higher, the path of least resistance is higher.
Monday’s broad market move was led by financials, which continue to respond to the prospect of reduced regulations and higher interest rates. The S&P 500 Financial Sector Index closed above its short-term consolidation range, bouncing firmly in recent days at its 50-day moving average. Momentum indicators are once again curling higher as price moves higher within its period of seasonal strength. Investors would be wise to watch the recent consolidation in treasury yields, which could threaten the upside momentum in financial stocks during the last two months of the seasonal trade. The yields on the 10 and 30-year treasury bond continue to hold within a descending triangle pattern; a break of the lower limit could see a retracement of the bulk of the post-election move. Yields have bounced mildly higher in the past few sessions, certainly not reminiscent of the move in stocks, which have exceeded their consolidation ranges. Seasonally, yields typically move higher through April, supporting financial stocks in the process.
A rather rare event was realized during Monday’s session. As stocks rallied to all-time highs, the Volatility index also moved higher, advancing by almost 5% at the highs of the session. The volatility gauge closed the session around 2% higher on the day. Only 9 other sessions in the past 10 years have seen an equivalent move. While the event isn’t necessarily bearish, it has coincided with some notable turning points in equity markets, as highlighted on the chart below. The move suggests caution, if nothing else.
Sentiment on Monday, as gauged by the put-call ratio, ended overly bullish at 0.66. In Monday’s report we highlighted the lack of contrarian buy or sell signals with respect to this sentiment gauge, which would provide reason to act in opposition of the consensus trade. Monday’s bullish reading, the lowest level since mid-December, suggests complacency has re-emerged, a scenario that makes markets vulnerable to a shock event, should one be realized. Prices may be higher and the positive trend in the broad market suggests no signs of concluding, but the risk-reward at present levels certainly favours the risk side of the equation.
Seasonal charts of companies reporting earnings today:
S&P 500 Index