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Stock Market Outlook for May 7, 2018

Middle-ground employment report fuels rally in stocks.

 

 

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:

CHS Inc. (NASD:CHSCP) Seasonal Chart

CHS Inc. (NASD:CHSCP) Seasonal Chart

Athenahealth Inc. (NASD:ATHN) Seasonal Chart

Athenahealth Inc. (NASD:ATHN) Seasonal Chart

Insulet Corp. (NASD:PODD) Seasonal Chart

Insulet Corp. (NASD:PODD) Seasonal Chart

Arena Pharmaceuticals (NASD:ARNA) Seasonal Chart

Arena Pharmaceuticals (NASD:ARNA) Seasonal Chart

Merit Medical Systems, Inc. (NASD:MMSI) Seasonal Chart

Merit Medical Systems, Inc. (NASD:MMSI) Seasonal Chart

Ensign Group Inc. (NASD:ENSG) Seasonal Chart

Ensign Group Inc. (NASD:ENSG) Seasonal Chart

Sandstorm Gold (TSE:SSL) Seasonal Chart

Sandstorm Gold (TSE:SSL) Seasonal Chart

CommVault Systems Inc. (NASD:CVLT) Seasonal Chart

CommVault Systems Inc. (NASD:CVLT) Seasonal Chart

Allergan, Inc.  (NYSE:AGN) Seasonal Chart

Allergan, Inc. (NYSE:AGN) Seasonal Chart

Keyera Corp (TSE:KEY) Seasonal Chart

Keyera Corp (TSE:KEY) Seasonal Chart

 

 

The Markets

Stocks rallied on Friday as investors reacted to the monthly employment report, which on the headline print was neither too hot nor too cold.  The S&P 500 Index gained 1.28% to move back towards the upper limit of the descending triangle that has been widely telegraphed by market participants.  As highlighted in the last report, the action on Thursday was very encouraging as investors maintained a level head as the benchmark cracked below the 200-day moving average intraday.  Friday’s follow through starts to alleviate concerns that the break of the triangle pattern will be to the downside.  Obviously the final break, either higher or lower, will be very telling, but as of present the bulls are showing signs of regaining control.

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Despite the strong finish to the week, both the S&P 500 Index and Dow Jones Industrial Average ended rather flat of the week overall.  Both benchmarks are showing support at the 50-week moving average, while the 20-week moving average is showing resistance overhead.  The long lower wicks across many of the weekly candlesticks suggests that investors have been more willing to buy the lows rather than sell the highs.  Will a black swan catalyst come about to change that?  Who knows, but you certainly cannot position portfolios based on the unknown.  The benchmark has been stuck around the mid-point to a longer-term rising trend channel, the upper and lower limits of which hover around 3100 and 2200, respectively.  At this point, the longer-term risk-reward proposition for stocks is fairly balanced with prices expected to remain in this rising range through the year ahead.

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As for the employment report, the headlines indicated that 164,000 payrolls were added last month, falling short of the 191,000 forecast by analysts.  The unemployment rate ticked lower to 3.9%, from 4.0% previous, and average hourly earnings increased by a tenth of one percent for the month, about half of the increase that was expected.  Stripping out the seasonal adjustments, payrolls actually increased by 998,000, or 0.7%, which is marginally below the average increase for the month of 0.8%.  For the year, thus far, payrolls are trending three-tenths of one percent above average through the end of April.  The result is inline with the pace seen last year, which showed above average growth through the middle of the year before hiring stumbled surrounding the hurricanes that hit the south in the month of September.  Parsing the details, most of the categories in the report are running firmly above average.  Manufacturing employment is running 1.2% above average year-to-date, the second best performance in the past three decades.  Further peeling back the onion shows that computer and electronic products employment is running 1.3% above the seasonal norm, the best performance since 1997.  Yet again we are seeing strength in the technology sector that is equivalent to the late 1990’s.  Elsewhere, employment in those areas of the economy pertaining to the consumer factor prominently in the results.  Retail employment is running eight-tenths of one percent above average, showing the third best start to the year (through April) since 1990.  Two areas that are lagging their seasonal average trends, however, are financial activities and health care.  Finance is realizing a drag from insurance carriers and related activities, which is lagging its seasonal average trend by half of one percent.  And health care has been showing waning growth for some time, although the trends remain steadily higher as companies in the sector continue to bring on employees amidst an aging demographic.  Overall, the report suggests strength in all of the areas you would expect following a major tax overhaul.  Strength is apparent across businesses and consumers, suggesting renewed breadth at this late stage in the economic cycle.  This strength in the economy should continue to act as a tailwind for stocks in the year ahead.  For a complete breakdown of the results, you can access the charts via the database at https://charts.equityclock.com/u-s-employment-situation.

Total Nonfarm Seasonal Chart

Monthly Total Nonfarm Data

Manufacturing Seasonal ChartManufacturing: Computer and electronic products Seasonal ChartRetail trade Seasonal ChartFinancial activities Seasonal ChartHealth care Seasonal Chart

As for average hourly earnings, which investors are using as a gauge of inflation, they were actually higher by 0.9% in April, which is more than double the average increase for the month of 0.4%.  Year-to-date, earnings are higher by 1.9% through the end of April, firmly above the 1.4% increase that is average by this time of year.  This is the widest dispersion above the seasonal norm through the end of April since 2006.  In recent years there has been a dip in wages following the month of April as lower paying summer jobs dilute the average result.  The laborforce continues to tighten, which makes it inevitable that wages will have to increase in order to attract qualified employees to fill positions, particularly in the higher paying technology opportunities.  Whichever way you look at it, inflation is here, which will pressure rates higher.  But as long as growth remains as robust as it is now, the higher cost of borrowing is not yet something to fear.

http://charts.equityclock.com/seasonal_charts/economic_data/CEU0500000008_seasonal_chart.PNG

While stocks recorded solid gains on Friday, bond prices once again remained essentially unchanged.  The iShares 7-10 Year Treasury Bond ETF (IEF) closed higher by a mere basis point. The yield on the 10-year note was similarly little changed.  But it is not the level of yields that seems to be garnering significant chatter, but rather the yield spreads.  The spread of treasury 10’s over 2’s is now at 44 basis points and treasury 30’s over 10’s is at 18 basis points.  The pace of the narrowing suggests a flat curve at the long end within the months ahead, while the shorter-end could reach parity with longer-term counterparts within the next year.  A flattening of the yield curve is the first step towards inversion, often the precursor to recession and prolonged equity market weakness.  We are still far away from that occurring.  Seasonally, yield spreads tend to widen through the summer months.

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While analysts debate at which point the increase in bond yields will compete with the equity market, one chart indicates that investors are already content to see the spread between the 10-year treasury note widen relative to the yield on the S&P 500 Index.  The spread between the yield in the treasury and equity market has been narrowing for decades, reaching a low in mid 2016 when the yield on the S&P 500 was greater than the fixed income yield.  Over the past two years, yields between the pair have widened and now are  breaking trendline resistance that has constrained the spread since the early 80’s.  While the break of trend could derive multiple interpretations, depending on your thoughts of where yields for each asset class are moving, the move above trend presents a bit of a nod toward stocks as investors venture further out on the risk spectrum to generate yield.

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Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.96

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Seasonal charts of companies reporting earnings today:

AMC Entertainment Holdings, Inc. (AMC) Seasonal Chart American States Water Company (AWR) Seasonal Chart Andeavor (ANDV) Seasonal Chart Apartment Investment and Management Company (AIV) Seasonal Chart Cabot Corporation (CBT) Seasonal Chart Central Garden & Pet Company (CENT) Seasonal Chart Chimerix, Inc. (CMRX) Seasonal Chart Cognizant Technology Solutions Corporation (CTSH) Seasonal Chart E.W. Scripps Company (The) (SSP) Seasonal Chart Iamgold Corporation (IAG) Seasonal Chart Internationa Flavors & Fragrances, Inc. (IFF) Seasonal Chart Louisiana-Pacific Corporation (LPX) Seasonal Chart Mosaic Company (The) (MOS) Seasonal Chart Nutrien Ltd. (NTR) Seasonal Chart PetMed Express, Inc. (PETS) Seasonal Chart Southwest Gas Holdings, Inc. (SWX) Seasonal Chart Sysco Corporation (SYY) Seasonal Chart The Andersons, Inc. (ANDE) Seasonal Chart Tyson Foods, Inc. (TSN) Seasonal Chart Veeco Instruments Inc. (VECO) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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