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Stock Market Outlook for January 3, 2018

A look back at the year that was and what is ahead.

 

Real Time Economic Calendar provided by Investing.com.

 

*** 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:

Sturm Ruger & Co., Inc. (NYSE:RGR) Seasonal Chart

Sturm Ruger & Co., Inc. (NYSE:RGR) Seasonal Chart

 

 

The Markets

A solid start to 2018 saw stocks post respectable gains on the first day of trade.  The S&P 500 Index added around eight-tenths of one percent, led by the energy, materials, and consumer discretionary sectors as investors attempt to find value in this market.  The S&P 500 Energy sector index was higher by 1.78% in the first trading session of the year as investors place their bets on last year’s market laggard given the growth potential of the global economy in the year ahead.  The sector, which enters its period of seasonal strength in January, is higher by around 6% in just the past two weeks, quickly becoming overbought in the process.  Support is readily apparent at the 20 and 50-day moving averages around 520 and 510, respectively.  With the price of oil holding around 52-week highs and the oil market slowly returning to a state of balance, the stocks are playing catch-up, attempting to lead the commodity itself.  More work has to be done to confirm the change in the trend of underperformance of the stocks versus the commodity, providing indication of investor confidence in further gains for the commodity sensitive sector during the year ahead.  The average period of strength for the broad energy sector ranges from January 21st to May 9th.

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Energy Sector Seasonal Chart

ENERGY Relative to the S&P 500
ENERGY Relative to the S&P 500

ENERGY Monthly Averages

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Before we look ahead to January and the year in front of us, let’s take a quick look back at the results for December and for all of 2017.  An abrupt dip to close out the last trading session of 2017 somewhat diminished the results of the last month of the year.  The S&P 500 Index returned 0.98%, around two-thirds of the 1.5% average gain for December, based on data from the past 50 years.  For the most part, cyclical sectors dominated throughout the period, led by energy and consumer stocks.  Technology was the lone cyclical sector to post a loss during this typically weaker month for the growth segment of the equity market.  Utilities, which have historically been the best performer in the last month of the year, shed over six percent as yields jumped higher.  Aside from energy, all sectors are trading above their 20 and 50-month moving averages, defining strength over the longer-term trend and keeping investor bias firmly focussed on the buy the dip mentality.  The energy sector is now approaching its 50-month average, a level that has acted as a point of resistance in the past.

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Looking back over the entire year, the S&P 500 Index showed a stellar result, gaining 19.42%, excluding dividends.  The result far surpasses the 7.4% average gain for the calendar year, based on the past 20 years of data.  The Dow Jones Industrial Average and Nasdaq Composite similarly produced returns that were well above average, up 25.08% and 28.24%, respectively.  Strength through the summer months helped to support the above average return, a testament to the strength in economic activity and anticipation of tax reform.  Typically, during post election years, returns tend to be merely average as investors react to the newly elected leader.  The results, from a presidential election cycle perspective, shift below average in mid-term election years, particularly in the run-up to the elections given the uncertainty of who will obtain control of congress.  With recent democrat election wins in the last couple of months and the approval rating of Trump remaining very low, uncertainty pertaining to this year’s November elections are likely to be heightened, leading to questions as to whether the Trump administration can follow through on its agenda.  This could be a dominant factor in equity performance this summer, particularly if stocks maintain their lofty valuation levels through the remainder of the best six months for stocks, which concludes in May.  The average return for the Dow Jones Industrial Average during mid-term election years over the past 21 periods is just over 4%.

imageimageimageDow Jones Industrial Average Post-Election Year Seasonal ChartDow Jones Industrial Average Mid-term Election Year Seasonal Chart

Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period.  The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods.  These months are easily the weakest of the best six month trend for stocks.  The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success..  Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987.  Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period.

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Parsing through the sector performance, materials, industrials, consumer staples, and financials have all lagged the market performance in the first month of the year, declining by over one percent, on average, during the 31-day span.  Technology and health care are the lone gainers, returning an average of 1.5% and 0.8%, respectively.  As highlighted above, the month marks the average start to the period of strength for the energy sector, which starts to turn a corner at a time when the demand for oil is typically the lowest.  Below the sector level, the airline, chemical, oil exploration & production, oil services, railroad, and retail industries all enter a seasonal stride in January that carry the stocks higher into the spring.  Commodities tend to perform well, despite the seasonal uptick in the US Dollar Index through the first quarter of the year.  Economic activity in the first half of the year tends to benefit from the pickup in manufacturing and production activity following the early winter slowdown, influencing resource companies, along with their inputs.  We’ll present further data in the days ahead that suggests that 2018 could be a strong year for commodity prices. The CRB commodity index broke above resistance around 193 last week, maintaining an intermediate trend of higher-highs and higher-lows.  A longer-term bottoming pattern would be confirmed with a breakout above 196.  The commodity benchmark is already being supported by its 200-day moving average, conducive to enticing longer-term buyers back to this depressed asset class.

Technology Sector Seasonal Chart

TECHNOLOGY Relative to the S&P 500
TECHNOLOGY Relative to the S&P 500

TECHNOLOGY Monthly Averages

Healthcare Sector Seasonal Chart

HEALTHCARE Relative to the S&P 500
HEALTHCARE Relative to the S&P 500

HEALTHCARE Monthly Averages

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Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.88.

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Sectors and Industries entering their period of seasonal strength:

SSE Composite Index Seasonal Chart

000001.SS Relative to the S&P 500
000001.SS Relative to the S&P 500

000001.SS Monthly Averages

 

 

Seasonal charts of companies reporting earnings today:

Commercial Metals Company (CMC) Seasonal Chart Landec Corporation (LNDC) Seasonal Chart Neogen Corporation (NEOG) Seasonal Chart Resources Connection, Inc. (RECN) Seasonal Chart Rite Aid Corporation (RAD) Seasonal Chart Unifirst Corporation (UNF) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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