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Stock Market Outlook for May 19, 2017

Brazilian Bovespa falls almost 9% during what is typically the weakest month of the year.

 

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 rebounded on Thursday following the sharp selloff recorded in the session prior.  The S&P 500 Index added around four-tenths of one percent, testing broken moving average support at the 50-day.  Investors were seen crowding back into Technology stocks, fuelling outperformance in the Nasdaq Composite.  The tech heavy benchmark bounced from around gap support that was charted following the breakout of the recent trading range that spanned 5800 and 5900.  Similar to other benchmarks in the US, a negative momentum divergence with respect to MACD suggests waning buying pressures as stocks enter their unfavourable period of the year between May and October.

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Turning to the gauges of risk in the market, the Russell 2000 Index and Dow Jones Transportation Average, while higher during Thursday’s session, did little to claw back the almost 3% drawdown recorded during Wednesday’s selloff.  A trend of underpeformance relative to the S&P 500 Index remains apparent, a sign of risk aversion.  A similar trend of underperformance is apparent in the S&P 500 Equally Weighted Index versus the capitalization weighted benchmark, a function of fewer stocks driving prices higher, an indication of waning breadth.  Typically, during periods of broad market strength, such as last November following the US election, the equally weighted benchmark will outperform the capitalization weighted index as the rising tide lifts all boats.  With a declining relative trend, negative momentum divergences, and potentially a double top pattern on the equal weigh benchmark, the implications for the broader equity market are fairly poor, suggesting a retracement in the weeks ahead is becoming increasingly probable.  A break of support around 3616 suggests a calculated move lower to just below 3500, which, if realized, would intersect with the rising 200-day moving average, now at 3524.

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RUSSELL 2000 Index Seasonal Chart

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While risk benchmarks made a rebound attempt during Thursday’s session, the Emerging Market ETF (EEM) wasn’t as fortunate, falling 1.66% on the day.  This follows a plunge in stocks in Brazil, which are suffering from an emerging political scandal.  The Brazilian Bovespa was lower by almost 9%, while the Brazil ETF (EWZ) trading on the New York Stock Exchange was lower by over 16%.  The move in the Brazilian Bovespa comes during the weakest month of the year form the benchmark from a frequency perspective.  Over the past 20 years the benchmark has averaged a loss of 1.4% and has closed negative in 70% of the time in the month of May; the month of June isn’t much better with 55% of period showing a loss, averaging a return of –0.1%.  The target of the double-top pattern on the chart of the Brazilian index points to long-term support around 56,500, or another 8% below present levels.

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BOVESPA Seasonal Chart

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

^BVSP Monthly Averages

On the economic front, the regional reports on manufacturing conditions for May continue, this time with the Philadelphia business district weighing in.  The headline print indicated that the General Business Conditions Index rose to 38.8 from 22.0 prior.  Expectations were for a print of 19.6.  Stripping out the seasonal adjustments, the index actually increased by 8.5 to 40.3, well above the average read for this time of year of 17.0.  This is a rare positive divergence with the historical trend, which typically peaks in the month of March.  The manufacturing gauge also contradicts other indicators coming out of this segment of the economy, such as the recent Empire Fed Survey, which posted a negative result in its May report.  The Philadelphia Fed survey is typically considered the better look at manufacturing conditions in the US.  Seasonally, manufacturing activity tends to soften entering into the summer, hitting a low point in the month of July as factories shutdown operations for a brief period of time.  While strong, the report continues to emphasize the disconnect between hard and soft data, where a recent report on Industrial Production showed an exceptionally weak result below the seasonally adjusted headline results.  In this economy, manufacturing of durable orders is trending above average, but non-durable goods, which tend to be influenced by commodity prices, continue to lag the historical change.  April’s report on durable goods orders will be released next Friday.

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Touching briefly on the weekly report on jobless claims, the year to date change in the initial claimant count continues to hold the average line, down by 41.1% on the year.  The result remains conducive for further strength in monthly payroll reports, which have been trending above average through the first four months of the year.  Seasonally, claims typically hit a low at the beginning of June, bottoming ahead of the previously mention summer factory shutdown period.

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Sentiment on Thursday, as gauged by the put-call ratio, ended bearish at 1.13.

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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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