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Stock Market Outlook for February 22, 2018

Need evidence of inflationary pressures curtailing activity? Existing home sales have been showing this for the past year.

 

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:

Ulta Beauty, Inc. (NASD:ULTA) Seasonal Chart

Ulta Beauty, Inc. (NASD:ULTA) Seasonal Chart

Tiffany & Co.  (NYSE:TIF) Seasonal Chart

Tiffany & Co. (NYSE:TIF) Seasonal Chart

Pioneer Natural Resources  (NYSE:PXD) Seasonal Chart

Pioneer Natural Resources (NYSE:PXD) Seasonal Chart

Itron, Inc. (NASD:ITRI) Seasonal Chart

Itron, Inc. (NASD:ITRI) Seasonal Chart

McCoy Bros., Inc. (TSE:MCB) Seasonal Chart

McCoy Bros., Inc. (TSE:MCB) Seasonal Chart

American Financial Group  (NYSE:AFG) Seasonal Chart

American Financial Group (NYSE:AFG) Seasonal Chart

Air Products & Chemicals, Inc.  (NYSE:APD) Seasonal Chart

Air Products & Chemicals, Inc. (NYSE:APD) Seasonal Chart

Cato Corp. (NYSE:CATO) Seasonal Chart

Cato Corp. (NYSE:CATO) Seasonal Chart

 

 

The Markets

A reversal day for stocks saw the S&P 500 Index end lower by just over half of one percent as treasury yields hit a four-year high following the release of the latest Fed minutes.  The yield on the 10-year treasury note is around five basis points away from the psychologically important 3% level, an important pivot point that if broken would complete a longer-term double bottom pattern.  Upside target of the bullish setup points to around 4.5%, a level not seen since 2007, ahead of the financial crisis.  Historically, levels above the 4% to 5% range have typically had a negative influence on equity market momentum as economic growth is smothered and competition with the fixed income asset class grows. 

The strength in the cost of borrowing continues to instil a bid to the financial sector, which was one of only two sectors to close higher on the day, according to the SPDR Sector ETFs.  Outperformance versus the market remains apparent.  The Financial ETF tested gap resistance around 29.30 at the highs of the session before turning lower.  Short-term support is apparent around $28.80, a break of which could see a quick move down to the next level of support around $28.35.  Seasonally, the financial sector remains in a period of seasonal strength through mid-April.  Note: The BMO Equal Weight US Banks Hedged to Cad Index ETF (ZUB) was a top pick of ours in a September episode of BNN’s Market Call.

Financial Sector Seasonal Chart

FINANCIAL Relative to the S&P 500
FINANCIAL Relative to the S&P 500

FINANCIAL Monthly Averages

As highlighted in yesterday’s report, the reversal in stocks comes at an important technical level presented by declining 20-day moving averages.  As it pertains to the S&P 500 Index, this level also intersects with trendline resistance, providing a significant short-term hurdle in the way of further upside.  Levels on the large-cap benchmark between 2662 and 2703, representing the 38.2% and 50% Fibonacci retracement levels of the 340 point decline to start the month, are key levels to watch as a break of this zone would suggest intermediate-term implications for equity markets.

On the economic front, a report on existing home sales is the latest report representing January activity that has missed analyst expectations.  The headline print indicated that sales of existing homes fell in January by 3.2% to a seasonally adjusted annual rate of 5.38 million.  The consensus estimate was for a rate of 5.65 million from 5.56 million previous.  Stripping out the seasonal adjustments, existing home sales actually fell by 26.7%, which is seven-tenths of one percent above the average change for this first month of the year.  The result follows the worst year for home sales activity since the end of the last recession as higher housing costs weigh.  Looking through the regions, the south and mid-west appear to be driving January’s above average change.  Sales in the south were 2.1% above average, while the mid-west was 1.2% better than the seasonal norm for the month.  Demand for housing following the storms that hit the south in the third quarter of last year looks to be a factor.  But while demand, as gauged by the level of sales, was above average for the month, so too was the change in supply as the inventory of homes climbed by 5.4%.  The average change in inventories for this first month of the year is 3.8%.  The months of supply of housing ticked higher by two-tenths to 3.4, still well below levels that would be considered a balanced market at six months of supply.  The battle between supply and demand has yet to take a toll on the strength of the median sales price of existing homes, which showed a change in January that was 1.3% above average.  The housing market is in its seventh year of above average price growth and while that is good for the balance sheets of American homeowners, it is not good for activity as buyers are priced out of the market.  Rising mortgage rates also does not help.  The crimping of activity as a result of inflationary pressures, whether it be in housing or elsewhere, is the biggest risk to the economy, raising threats of a recession should economic growth rates fail to keep pace.  Seasonally, housing activity typically ramps up between March and June, a critical test for the health of the housing market in this new tax and rate environment.

Existing Home Sales Seasonal Chart

Monthly Existing Home Sales Data

Existing Home Sales Seasonal Chart

Existing Home Sales - Northeast Seasonal Chart Existing Home Sales - Midwest Seasonal Chart Existing Home Sales - West Seasonal Chart Existing Home Sales - South Seasonal Chart

Inventory of Existing Homes for Sale Seasonal Chart

Inventory of Existing Homes for Sale Seasonal Chart

Median Sales Price of Existing Homes Seasonal Chart

The distortions provided by the seasonal adjustment factor in January reports is taking a toll on the Citigroup Economic Surprise Index.  The index, which measures the variance between actual and estimated economic results, peaked just below 90 at the end of last year and is now sitting around 50 as seasonally adjusted data fails to meet analyst estimates.  Reports on industrial production, retail trade, and, now, existing home sales have all missed, indicating declines when the non-seasonally adjusted data show results that are firmly above normal.  This could also be weighing on equity market activity as analysts adjust to the apparent reality, not fully respecting the underlying non-adjusted trends.  The divergence between the seasonally adjusted and non-adjusted datasets can persist only for so long before converging once again, therefore the present headwind could turn to a tailwind in the months ahead, assuming the above average strength continues.

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Sentiment on Wednesday, as gauged by the put-call ratio, ended bearish at 1.06.  Investors remain skittish of the snap-back in equity prices, opting to protect portfolio positions via put options since the market hit a low on February 9th.  This bearish sentiment is a welcome shift compared to the overly bullish readings provided in the days leading up to the abrupt correction.

 

 

 

Seasonal charts of companies reporting earnings today:

Alamos Gold Inc. (AGI) Seasonal ChartACI Worldwide, Inc. (ACIW) Seasonal Chart Air Lease Corporation (AL) Seasonal Chart  Alliant Energy Corporation (LNT) Seasonal Chart American Software, Inc. (AMSWA) Seasonal Chart Apache Corporation (APA) Seasonal Chart Barclays PLC (BCS) Seasonal Chart Canadian Imperial Bank of Commerce (CM) Seasonal Chart Century Aluminum Company (CENX) Seasonal Chart Chesapeake Energy Corporation (CHK) Seasonal Chart Diana Shipping inc. (DSX) Seasonal Chart Edison International (EIX) Seasonal Chart First Solar, Inc. (FSLR) Seasonal Chart Gildan Activewear, Inc. (GIL) Seasonal Chart Herbalife LTD. (HLF) Seasonal Chart  Hormel Foods Corporation (HRL) Seasonal Chart HP Inc. (HPQ) Seasonal Chart Intuit Inc. (INTU) Seasonal Chart Magna International, Inc. (MGA) Seasonal Chart Mitel Networks Corporation (MITL) Seasonal Chart Newmont Mining Corporation (NEM) Seasonal Chart Nordson Corporation (NDSN) Seasonal Chart Pembina Pipeline Corp. (PBA) Seasonal Chart Quanta Services, Inc. (PWR) Seasonal Chart  Scana Corporation (SCG) Seasonal Chart Stantec Inc (STN) Seasonal Chart Teekay Corporation (TK) Seasonal Chart Tempur Sealy International, Inc. (TPX) Seasonal Chart Toro Company (The) (TTC) Seasonal Chart Visteon Corporation (VC) Seasonal Chart Wayfair Inc. (W) Seasonal Chart Welltower Inc. (HCN) Seasonal Chart Zebra Technologies Corporation (ZBRA) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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