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Stock Market Outlook for May 18, 2017

Break of horizontal support around 2325 on S&P 500 projects downside potential towards 2250.

 

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:

H&R Block, Inc.  (NYSE:HRB) Seasonal Chart

H&R Block, Inc. (NYSE:HRB) Seasonal Chart

 

 

The Markets

Stocks plunged on Wednesday as investors monitored revelations coming out of Washington.  News released on Tuesday evening indicated that President Trump may have interfered with a federal investigation as scrutiny continues to escalate over the president’s ties to Russia.  The headline immediately took a bite out of equity markets overseas, which in turned spilled over to North American markets.  The S&P 500 Index shed 1.82%, triggering a bearish MACD crossover that has highlighted as being imminent in Monday’s report.  The momentum sell signal is being triggered at a lower level than March’s negative cross, presenting a negative divergence with respect to price, a sign of waning buying pressures.  Despite the attempt in recent days to break resistance at 2400, the break of support at major moving averages, such as the 20 and 50 day, proved to be more definitive, presenting what could be a double-top pattern.  A break below horizontal resistance around 2325 calculates downside potential towards 2250, inline with the present level of the 200-day moving average, which has presented support to the longer-term trend over the past year and a half.

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And as stocks suffer, bonds and bond equivalents traded higher, benefitting from this shift towards risk aversion.  The iShares 7-10 year Treasury Bond ETF continues to surge from horizontal and moving average support around the 50-day.  The target of the recent breakout from a multi-month trading range between $102.70 and $105.70 points to gap resistance around $108.70, now just 1.5% above present levels.  Momentum indicators on the bond ETF have been positively diverging from its price ever since the end of last year as the rapid liquidation of the asset class following the US election reached a point of exhaustion.  Declining trendline resistance remains a key hurdle overhead.  Seasonally, bond prices tend to gain between May and October.

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Turning to the weekly look at petroleum inventories in the US, the Energy Information Administration (EIA) is reporting that oil stocks declined last week by 1.8 million barrels.  The year-to-date increase in oil inventories is now a mere one percent above the average change through the middle of May, a significant improvement versus the gain recorded this time last year, which was over 5% above the historic norm.  The first decline in domestic production of oil in 13 weeks helped to draw on stockpiles of the commodity, the supply of which is now at 30.5 days.  The price of oil gained following the report, adding around eight-tenths of one percent.  Price continues to pressure broken trendline support, as well as its 200-day moving average.

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As for gasoline, the refined commodity recorded a 400,000 barrel draw last week, resulting in another drop in the days of supply to 25.9.  The average for this time of year is 24.9 days.  An increase in the level of product supplied, a gauge of demand, and a slight decline in production was conducive to the inventory decline on the week.  Demand for the refined product remains healthy and production for the summer season still has a ways to go to ramp up, which should draw on oil stockpiles in the weeks and months ahead, potentially supporting the price of oil and gas.  Production typically hits a peak for the year at the end of June, ahead of the high demand driving period.  Driving season unofficially begins with the Memorial Day holiday, now just one and a half weeks away.

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Sentiment on Wednesday, as gauged by the put-call ratio, ended bearish at 1.09.  With stocks in a sharp decline, investors raced to buy protection, fuelling a spike in the VIX by over 46%.  The volatility index is now higher by almost 60% since charting a multi-year low just one week ago.  The volatility surge is consistent with a study that was presented previously on this site indicating that more frequent than losses for the S&P 500 Index during the May through October period is the spike in volatility, which tends to be twice as frequent during the unfavourable period for stocks than the favourable period between October and May.

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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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