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Stock Market Outlook for April 4, 2018

Dow Jones Transportation Average quietly outperforming within period of seasonal strength.

 

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:

TransAlta Corp. (NYSE:TAC) Seasonal Chart

TransAlta Corp. (NYSE:TAC) Seasonal Chart

Socket Mobile, Inc. (NASD:SCKT) Seasonal Chart

Socket Mobile, Inc. (NASD:SCKT) Seasonal Chart

Alaska Communications Systems Group, Inc (NASDAQ:ALSK) Seasonal Chart

Alaska Communications Systems Group, Inc (NASDAQ:ALSK) Seasonal Chart

Kansas City Southern Corp. (NYSE:KSU) Seasonal Chart

Kansas City Southern Corp. (NYSE:KSU) Seasonal Chart

M&T Bank Corporation  (NYSE:MTB) Seasonal Chart

M&T Bank Corporation (NYSE:MTB) Seasonal Chart

AerCap Holdings NV (NYSE:AER) Seasonal Chart

AerCap Holdings NV (NYSE:AER) Seasonal Chart

 

 

The Markets

Stocks in the US bounced on Tuesday, attempting to retrace some of Monday’s loss.  The S&P 500 Index added 1.26%, continuing to gyrate around the rising 200-day moving average, a level that has become a battleground between the bulls and bears.  The energy sector topped the market return, while the technology sector continues to struggle amidst the threat of a trade war, as well as the Trump tweet risk.

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The volatility in the broader equity market in recent days has fuelled outperformance in some of the defensive sectors of the market.  Of course, as reported on previously, the utilities and REITs, which tend to trade higher at this time of year, have performed quite well since February.  And now consumer staples are showing relative strength, despite the fact that they have weakened along with the broader market.  The S&P 500 Consumer Staples Sector Index is showing resistance around its 20-day moving average and momentum indicators continue to hover in bearish territory.  The defensive sector has been underperforming the market since early 2016 amidst the risk-on rally in stocks that coincided with the manufacturing and earnings rebound from the 2015/2016 lows.  But with risk-assets under threat, a mean-reversion trade, may be upon us.  The staples benchmark is hovering at one of the lowest levels below the 200-day moving average since the economic recovery began in 2009, now 6.4% below this long-term hurdle.  This is almost the exact opposite situation that was seen at the start of this year when the index was over 6% above this long-term average level.   Seasonally, consumer staples tend to strengthen relative to the market around the end of April, on average.  Some of the move in this sector in the late spring and into the summer is attributed to the more defensive characteristics that these companies possess during the typically volatile period for stocks.  Other reasons are more traditional, relating to the seasons themselves.  Alcoholic drink companies are one such example.  The summer quarters tend to encompass the best earnings for the year for industry constituents as patio season opens and consumers buy more product for those summer events.  Also, agricultural constituents can often catch a bid as the growing season gets underway.  The Dow Jones US Distillers and Vintners Index continues to hold around the highs of the year, resisting around 480; a break of this hurdle presents upside to around 520.  The benchmark has shown a fairly consistent trend of outperformance for the past year as retail sales for the products show steady, above average gains.  You can browse the list of consumer staples companies in the chart database at http://charts.equityclock.com/category/consumer-staples.

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Consumer Staples Sector Seasonal Chart

STAPLES Relative to the S&P 500
STAPLES Relative to the S&P 500

STAPLES Monthly Averages

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While it would be easy to conclude a risk-off sentiment amongst investors based on the relative performance of the defensive sectors of the equity market, an important cyclical benchmark may dispute that.  The Dow Jones Transportation Average has been quietly outperforming the market since the start of March, strengthening amidst the period of seasonal strength for the economically sensitive industry.  The benchmark has been gyrating between its rising 200-day moving average and declining 50-day moving average, much like the broader market, but outperformance versus the market suggests that buying demand is apparent.  A recent gauge of freight activity from CASS Information Systems indicates that shipping activity and expenditures are trending above average through the first two months of the year as factory activity ramps up into the spring.  While headline risks pertaining to trade wars and interest rates are dominating market performance, manufacturing activity remains upbeat, which should otherwise benefit sectors of the market with exposure to this seasonal trend.  Seasonally, the transportation benchmark tends to outperform the US equity market between February and May, then turns lower, dragging on market indices, through the summer.

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Dow Jones Transportation Average Seasonality

$TRAN Relative to the S&P 500

Monthly Seasonal Dow Jones Transportation Average

On the economic front,a report on US construction spending was released on Monday.  The headline print indicated that activity in February increased by 0.1%, well short of the 0.5% increase forecasted by analysts.  Stripping out the seasonal adjustments, total construction spending actually increased by 0.3%, which is better than the 0.4% decline that is average for the second month of the year.  Above average temperatures in the month would have allowed for an earlier than average start to the construction season, although this strength is likely to have reversed into March given the Nor’easters that hit a few times in the past four weeks.  The month of March typically shows the strongest growth of the year for this segment of the economy.  Strength in residential spending help to buoy February’s result, while public spending weighed.  While little in the report to write home about, there are two trends that are starting to emerge in 2018: above average office & commercial construction activity and below average health care construction.  These trends are indicative of the stance of businesses in American under the Trump presidency.  Companies are expecting strength in hiring to continue and the recently passed tax cuts make it more desirable to invest in projects in the US, conducive to building offices following the weak activity seen in just the past year.  Office construction spending is typically a lagging indicator of economic activity, typically taking a number of years to rebound from recessionary conditions, such as what was experienced in 2015.  But along with the pro-business stance of President Trump, question marks continue to overhang health care as he seeks to weaken the Affordable Care Act.  Spending on health care projects are showing the weakest start to a year since 2010, falling 9.9% in January and February, double the average decline for this time of year.  Seasonally, construction activity tends to rise across all categories between March and August as the traditional building season flourishes with the warming temperatures.  You can pick out some of the stocks with direct exposure to this fundamental tendency by using search term “construction” in the seasonal chart database.

Total Construction Spending  Seasonal Chart

Monthly Total Construction Spending  Data

Total Construction Spending Seasonal Chart

Private Construction Spending: Nonresidential  Seasonal Chart Private Construction Spending: Residential  Seasonal Chart Public Construction Spending Seasonal Chart

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Sentiment on Tuesday, as gauged by the put-call ratio, ended bearish at 1.04.

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Seasonal charts of companies reporting earnings today:

Acuity Brands Inc (AYI) Seasonal Chart CarMax Inc (KMX) Seasonal Chart Franklin Covey Company (FC) Seasonal Chart Lennar Corporation (LEN) Seasonal Chart Novagold Resources Inc. (NG) Seasonal Chart  Resources Connection, Inc. (RECN) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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