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Stock Market Outlook for January 30, 2018

Margin debt up by 21.6% in 2017, still short of levels that would be considered euphoric.

 

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:

DowDuPont Inc. (NYSE:DWDP) Seasonal Chart

DowDuPont Inc. (NYSE:DWDP) Seasonal Chart

Zumiez Inc. (NASD:ZUMZ) Seasonal Chart

Zumiez Inc. (NASD:ZUMZ) Seasonal Chart

Rowan Companies, Inc.  (NYSE:RDC) Seasonal Chart

Rowan Companies, Inc. (NYSE:RDC) Seasonal Chart

Superior Energy Services, Inc. (NYSE:SPN) Seasonal Chart

Superior Energy Services, Inc. (NYSE:SPN) Seasonal Chart

Hilltop Holdings Inc. (NYSE:HTH) Seasonal Chart

Hilltop Holdings Inc. (NYSE:HTH) Seasonal Chart

Tyson Foods, Inc.  (NYSE:TSN) Seasonal Chart

Tyson Foods, Inc. (NYSE:TSN) Seasonal Chart

MercadoLibre Inc. (NASD:MELI) Seasonal Chart

MercadoLibre Inc. (NASD:MELI) Seasonal Chart

 

 

The Markets

Stocks fell back on Monday as a selloff in commodity and interest rate sensitive sectors ahead of the FOMC meeting took some steam out of broad market gauges.  The S&P 500 Index slipped by almost seven-tenths of one percent, testing previous short-term resistance around 2850 at the lows of the session.  Short-term rising trend channel support on the hourly chart has once again been broken, but the path remains that of higher-highs and higher-lows.  Support at 20 and 50-day moving averages is now 2.6% and 5.5% below present levels.

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North of the border, the TSX Composite has not fared as well, breaking below its 50-day moving average during Monday’s session.  Negative momentum divergences with respect to MACD and RSI suggest buying exhaustion.  Horizontal support at previous resistance around 15,700 presents a logical downside test as the benchmark seeks to hold onto the breakout gains recorded closer to the end of last year.  The underperformance of Canadian equities through the end of 2017 and into the start of 2018 is contrary to seasonal norms, which typically sees strength in the benchmark relative to US counterparts.  This outperformance typically peaks around the time of the tax contribution deadline at the end of February, reverting to a period of underperformance through March and April.  Strength in the Canadian dollar and the disparity between economic conditions in the US and Canada have weighed on the performance of Canada’s primary equity gauge.  Seasonally, the Canadian dollar tends find an important low around this time of year, rising into the spring.

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S&P/TSX Composite index Seasonal Chart

$TSX Relative to the S&P 500
$TSX Relative to the S&P 500

$TSX Monthly Averages

Canadian Dollar Forex (CAD) Seasonality

Monthly Seasonal Canadian Dollar Forex (CAD)

Economic news was light on Monday, but we did get insight into how aggressive investors were in borrowing to cover the purchase of securities in the month of December.  Margin debt increased by 2.5% in the final month of 2017, 2.3% above average for the month of December.  For the year, margin debt was higher by 21.6%, which is over three times the increase recorded in the year prior.  The average calendar year change is 12.0%.  The climb in margin debt was rather steady in 2017, tracking fairly close to the gains recorded in the broader market.  When this gauge of leverage increases multiple times above the average change or above the pace of change in equity prices, euphoria is implied, typically resulting in abrupt market declines as investors deleverage portfolios.  We are not at that point yet, although the month of January certainly showed some euphoric moves that are indicative of investor complacency.  Credit balances in margin accounts, meanwhile, declined by 1.4%, a divergence compared to the 3.8% average increase for the last month of the year.  For the year, credit balances were lower by 2.4%, or almost 17% below average as investors refrained from taking on short allocations in a rising tape.  Markets have come a long way from the sceptical bias that dominated 2016 when margin debt ran firmly below average and credit balances well above, creating an ideal scenario for a melt-up to new highs given that the worst case scenarios failed to materialize.  Now, after 2017, we are looking at the opposite scenario where the market may be vulnerable if upbeat scenarios that analysts are forecasting fail to materialize.  It would be speculative to say what the outcome may be, but clearly, from a risk-reward perspective, we are further towards the risk side of the equation than what was present one year ago.

NYSE Margin debt Seasonal Chart

Monthly NYSE Margin debt Data

NYSE Margin debt Seasonal Chart

NYSE Credit balances in margin accounts Seasonal Chart

Staying on the topic of leverage, loan growth in 2017 was amongst the lowest in years.  Consumer loans were higher by 5.3% last year, 1.8% below the average calendar year change.  Amongst the categories that consumers pulled out loans for, real estate and auto loans were particularly weak, trending well below average as activity surrounding these big ticket items waned.  But the standout chart in the batch may be with regards to commercial and industrial loans, which saw loan growth of a mere 1.2%, the lowest performance outside of a recession in at least 50 years.  Loan growth in this category typically ebbs and flows along with the broader economy. Interpreting what this activity is saying in isolation, you could argue that it suggests something detrimental ahead.  Obviously, other reports indicate otherwise.  The data just may suggest that loan growth has been largely exhausted as businesses took advantage of historically low rates in the years prior.  Given that we are now in a rising rate environment, loan activity will have a significant headwind to fight in the years ahead.  Recently enacted tax legislation could act as a positive influence for loan growth for 2018, but historically this type of fiscal policy has not been a significant factor.

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Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.74.

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Sectors and Industries entering their period of seasonal strength:

Airlines Industry Seasonal Chart
S5AIRLX Index Relative to the S&P 500S5AIRLX Index Relative to the Sector

S5AIRLX Index Monthly Averages

Chemicals Industry Seasonal Chart
S5CHEM Index Relative to the S&P 500S5CHEM Index Relative to the Sector

S5CHEM Index Monthly Averages

 

 

Seasonal charts of companies reporting earnings today:

Advanced Micro Devices, Inc. (AMD) Seasonal Chart Aetna Inc. (AET) Seasonal Chart AK Steel Holding Corporation (AKS) Seasonal Chart Align Technology, Inc. (ALGN) Seasonal Chart Ally Financial Inc. (ALLY) Seasonal Chart Autoliv, Inc. (ALV) Seasonal Chart Boston Properties, Inc. (BXP) Seasonal Chart Brinker International, Inc. (EAT) Seasonal Chart C.H. Robinson Worldwide, Inc. (CHRW) Seasonal Chart Chubb Limited (CB) Seasonal Chart Corning Incorporated (GLW) Seasonal Chart Danaher Corporation (DHR) Seasonal Chart Dover Corporation (DOV) Seasonal Chart Electronic Arts Inc. (EA) Seasonal Chart Equity Residential (EQR) Seasonal Chart Harley-Davidson, Inc. (HOG) Seasonal Chart Harris Corporation (HRS) Seasonal Chart Illumina, Inc. (ILMN) Seasonal Chart Juniper Networks, Inc. (JNPR) Seasonal Chart Knight Transportation, Inc. (KNX) Seasonal Chart McDonald's Corporation (MCD) Seasonal Chart Nucor Corporation (NUE) Seasonal Chart PACCAR Inc. (PCAR) Seasonal Chart Packaging Corporation of America (PKG) Seasonal Chart Pentair plc. (PNR) Seasonal Chart Pfizer, Inc. (PFE) Seasonal Chart Polaris Industries Inc. (PII) Seasonal Chart PulteGroup, Inc. (PHM) Seasonal Chart SAP SE (SAP) Seasonal Chart Scotts Miracle-Gro Company (The) (SMG) Seasonal Chart Stifel Financial Corporation (SF) Seasonal Chart Stryker Corporation (SYK) Seasonal Chart T. Rowe Price Group, Inc. (TROW) Seasonal Chart Zimmer Biomet Holdings, Inc. (ZBH) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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