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Stock Market Outlook for April 19, 2017

Risk-aversion fuels a breakout in the consumer staples sector.

 

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:

  • No stocks identified for today

 

 

The Markets

Stocks ended slightly lower on Tuesday as shares of Goldman Sachs and Johnson & Johnson, two Dow components, fell sharply following earnings; financial and health care stocks acted as the laggards on the day.  The S&P 500 Index shed almost three-tenths of one percent, remaining below short-term resistance at the 20-day moving average, which continues to trend lower.  A break of short-term support at 2322 would likely coincide with a swift move lower as weaker hands are shaken loose from the so called “Trump rally.”  Calculated downside potential is back towards short-term support around 2252.

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Tuesday’s session was notably risk-off as investors position portfolios amidst many of the geopolitical uncertainties that continue to evolve.  The 10-year treasury bond ETF (IEF) gained almost six-tenths of one percent, intersecting with its declining 200-day moving average.  The projected upside from the trading range breakout is towards $109, which, if fulfilled, would close a gap charted following the US election result last November.  Declining trendline resistance is implied just above $108.

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And back within the equity market, defensive sectors continue to propel forward.  The S&P 500 Consumer Staples Index broke above short-term resistance at 570, pushing back towards the all-time highs charted last July.  Interest rate sensitive sectors, including Utilities and REITs, are also at the highs of the year.  Each has outperformed the broader market over the past couple of months, a sign of risk aversion as investors become weary of cyclical assets.  Seasonally, REITs conclude a 2-month period of strength at the beginning of May.

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MSCI US REIT Index Seasonality

^RMZ Relative to the S&P 500
^RMZ Relative to the S&P 500

Monthly Seasonal MSCI US REIT Index

On the economic front, a report on industrial production for the month of March showed mixed results.  The headline print indicated that production increased by 0.5%, beating the consensus estimate calling for a 0.4% rise.  The manufacturing component, however, declined, falling by 0.4% and missing estimates calling for an increase of 0.1%.  Stripping out the seasonal adjustments, industrial production actually increased by 1.5%, well above the 0.6% average increase for the month of March.  Still, the year-to-date change continues to lag the seasonal average as analysts question when the upbeat manufacturing surveys will translate into actual results.  The manufacturing component realized an gain of 1.4% in the month, falling just short of the 1.5% average increase over the past 50 years.  Through the end of March, manufacturing is trending 0.7% below average, an improvement versus last year, but nothing reminiscent of the multi-year highs in ISM and regional manufacturing indices.  One of the categories that supported the aggregate result was a very rare gain in residential utility production, which increased by 2.2%.  This is the largest March increase in the 50 years studied and only the second time that a gain for the month was recorded.  Utility production typically declines between January and May as the weather becomes warmer coming out of the winter months, limiting demand for electricity.  Utility production is still down more than average year-to-date as the one colder than average month failed to make up for the warmer weather in January and February.  Not surprisingly, the production of crude oil is one of the few components to show an above average increase through the first quarter as domestic production of the commodity continues to come back online.  Production of crude oil is indicated to have increased by 4.2% in the first quarter, the second largest increase in during this timeframe in the past 50 years.  Overall, the activity through the first three months of the year remains rather disappointing, trending below average despite the “America first” agenda of president Trump and the anticipation that has followed some of the business friendly policies that are expected to be implemented.  Production typically hits its peak for the year in the second quarter, rising into the start of summer.

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As for housing starts, a 6.8% decline in March saw the seasonally adjusted annual rate fall to 1.215 million, missing estimates calling for a pace of 1.262 million.  Stripping out the seasonal adjustments, starts actually increased by 11.2%, a third of the average increase for March of 33.3%, based on data going back 50 years.  The lacklustre result caused a significant shift in the year-to-date change, from an above average position to a below average pace.  Oddly, though, the weakness across the regions was not in the northeast, which was impacted by cold and snowy weather.  The west showed a rare contraction in the month, perhaps more impacted by the below average trend in building permits that had been apparent ahead of the report.  Housing units completed thus far remains unaffected, trending above average through the end of March.  Overall, the weakness in the number of housing units authorized, but not started, presents concerns pertaining to future starts, perhaps resulting in the first below average calendar year-change since 2010.  Seasonally, homebuilding stocks tend to decline between now and the start of June.

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Home Building Industry Seasonal Chart
S5HOME Index Relative to the S&P 500S5HOME Index Relative to the Sector

S5HOME Index Monthly Averages

Sentiment on Tuesday, as gauged by the put-call ratio, ended overly bullish at 0.65.  This is the lowest level of the year, triggering alarm bells pertaining to complacency in what has become a fragile equity market.  Typically, bullish sentiment extremes, such as this, have preceded periods of equity market weakness as the pendulum swings bearish.

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Sectors and Industries entering their period of seasonal strength:

NASDAQ Biotechnology Seasonal Chart

^NBI Relative to the S&P 500
^NBI Relative to the S&P 500

^NBI Monthly Averages

 

 

Seasonal charts of companies reporting earnings today:

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S&P 500 Index

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TSE Composite

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