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Stock Market Outlook for May 17, 2017

Residential utility production declines 41.6% through the first four months of the year, largest in history.

 

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 closed mixed on Tuesday as the S&P 500 Index remains pinned to resistance at 2400.  The large-cap benchmark shed less than two points to maintain its closing level above the important pivot point.  Meanwhile, the Nasdaq Composite added a third of a percent to close at another all-time high as its streak of outperformance versus the S&P 500 Index continues.  Momentum indicators on the tech heavy benchmark remain overbought, but have yet to show signs of peaking.  Seasonally, the Nasdaq tends to be less exposed to the weak trend that is apparent with the S&P 500 Index between May and October.  A smaller weighting to Materials and Industrials, two of the weakest sectors during the volatile summer period, certainly helps, but so too does the growth characteristics of many of the constituents, which mitigates some of the seasonal fluctuations evident in the mature, cyclical counterparts in other broad market benchmarks.  As a result, the Nasdaq Composite seasonally outperforms the S&P 500 Index between May and October, on average.  Support on the Nasdaq remains apparent around 20 and 50-day moving averages, now at 6058 and 5942, respectively.

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NASDAQ Composite Seasonal Chart

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

^IXIC Monthly Averages

On the economic front, April’s report on industrial production is presenting somewhat of a confusing look at this segment of the economy.  The headline print indicated that industrial production increased by 1.0% in April, much better than the expected gain of 0.4%.  The manufacturing sub-component showed a similar 1.0% rise, also better than the 0.3% forecast.  Stripping out the seasonal adjustments, industrial production actually declined by 1.5%, below the average loss of 1.1% for this fourth month of the year.  Year-to-date, industrial production has fallen by 0.4% through the month of April, maintaining a gap versus the average trend that presently sits at -1.4%.  Parsing through the components, a 28.7% decline in residential utility production is having an outsized influence on the aggregate result as temperatures moderate coming into the warmer spring months.  The average April decline in this category is 18.0%.  With a year-to-date decline of 41.6% through the end of April, residential utility production is showing the largest contraction in the first four months of the year in the over 50 year history of the report, a testament to the changing climate creating warmer winters and decreasing the demand of electricity for heating purposes.  April typically marks the low for the year for electric power generation, which subsequently gains through July as the summer heat fuels demand for powering air conditioners.  Turning to the positive in April’s industrial production report, mining activity was higher by 2.4%, well above the average increase of 0.3%.  The year-to-date change in mining challenges some of the best returns in the past five decades as the production of crude oil in the US continues to increase.  Overall, with seasonal adjustments suggesting strength and the actual data indicating weakness, one cannot help but scratch their heads pertaining to the health of this segment of the economy.  We know that April is one of the most manipulated months from a seasonal perspective due to the roving Easter holiday, but the divergence between the adjusted and actual data seems particularly extreme this year.  The impact of evolving weather trends on this and other reports appears destined to become a dominant theme in the years ahead as we adjust perceptions of what is deemed a traditional winter or summer, resulting in altered consumer spending patterns,whether it be in their utility bills or retail shopping habits.

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As for housing, the lack of permits continues to take its toll on starts.  The seasonally adjusted annual rate of housing starts came in at 1.172 million, down 2.6% from the previously revised 1.203 million.  The consensus estimate was for a 4.4% gain to 1.256 million.  Stripping out the seasonal adjustments, starts actually increased by 9.2% in April, short of the average increase 12.8%, based on data from the past 50 years.  The result puts the year-to-date gain at 23.2%, half of the average increase of 48.2% for the first four months of the year.  A sizable jump in starts in the midwest was unable to overcome weakness in the northeast and south, both of which showed rare declines in April.  But it is the change in permits that continues to present concerns pertaining to future activity.  Permits fell 8.5% in the month, a rare negative divergence  versus the average increase of 5.7%.  Housing units authorized and not started has been contracting for over a year as completions expand.  Eventually, starts will become increasingly constrained by the lack of available lots on which to build, pressuring future activity.  It is important to note that the weakness in starts is not a factor of weak demand as existing home sales and prices continue to show gains above the average trend.  The monthly report on existing home sales will be released next Wednesday.  Seasonally, starts typically peak for the year in the month of June, then decline through the back half of the year as timelines narrow to get foundations in before the winter freeze.

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Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.79.

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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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