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Stock Market Outlook for May 30, 2018

Financials under pressure as the crowded short bet on the treasury market unwinds.

 

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:

Stericycle, Inc.  (NASDAQ:SRCL) Seasonal Chart

Stericycle, Inc. (NASDAQ:SRCL) Seasonal Chart

Universal Health Realty Income (NYSE:UHT) Seasonal Chart

Universal Health Realty Income (NYSE:UHT) Seasonal Chart

Otter Tail Power Co. (NASD:OTTR) Seasonal Chart

Otter Tail Power Co. (NASD:OTTR) Seasonal Chart

UNITIL Corp. (NYSE:UTL) Seasonal Chart

UNITIL Corp. (NYSE:UTL) Seasonal Chart

Laurentian Bank of Canada (TSE:LB) Seasonal Chart

Laurentian Bank of Canada (TSE:LB) Seasonal Chart

Erie Indemnity Co. (NASD:ERIE) Seasonal Chart

Erie Indemnity Co. (NASD:ERIE) Seasonal Chart

Oxford Industries Inc. (NYSE:OXM) Seasonal Chart

Oxford Industries Inc. (NYSE:OXM) Seasonal Chart

 

 

The Markets

Another summer, another European crisis.  Stocks sold off on Tuesday as traders price in the risks of Italy leaving the Eurozone given the rise in two populist parties that have been critical of Europe’s single currency in the past.  The yield on the 10-year Italian note has surged above 3% in just the past few weeks from a low of 1.8% charted closer to the start of May.  This sent shockwaves through the global financial sector as investors that have become accustomed to these Eurozone crises looked to cut exposure.  The S&P 500 Index fell by 1.16%, testing its 50-day moving average as support at the lows the session.  A retest of levels back towards previous trendline resistance remains fair game in the longer-term path of higher-highs and higher-lows.  This would suggest downside risks back to the rising 200-day moving average, at which point the more critical test would become apparent.  Daily momentum indicators have rolled over with Tuesday’s action, providing sell signals with respect to Stochastics and MACD.

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Financials led the declines on the day with the S&P 500 Financial Sector Index shedding 3.4% on the session.  The benchmark closed firmly below its rising 200-day moving average, raising concerns pertaining to the longer-term path of the sector benchmark.  The index had been trading within a narrowing range between long-term rising trendline support and declining trendline resistance, a range that was definitively resolved in Tuesday’s session.  This previous trendline support, hovering just above 450, is now in a position of resistance.  Declining relative performance since February suggested that buying demand was absent well before Tuesday’s slide.  In addition to concerns pertaining to debt in the Eurozone, declining treasury yields amidst the flight to safety in recent days did not help.  Investors have been using the sector as a bet on higher rates as the fed continues its plans to normalize rates.  Seasonally, the financial sector remains in a period of weakness through October as yields fall through the summer months.

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Financial Sector Seasonal Chart

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

FINANCIAL Monthly Averages

The abrupt decline in treasury yields in recent days has fuelled an aggressive short-covering rally in what had been a very crowded trade.  According to the recent commitment of traders report, large speculators are the most short treasury note contracts in decades as fund managers bet on higher rates ahead.  Speculators were also aggressively long light sweet crude oil contracts, another trade that has unwound in a big way just in the past few days.  These offside consensus bets, which often have tremendous contrarian value, typically can cause instability in the broader market as investors are forced to rapidly reposition in order to correct the imbalances within portfolios.  The yield on the 10-year note is closing in on support around 2.7% and crude oil is testing support around $66, a break of either of these levels is likely to induce further liquidation of these consensus plays.

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On the economic front, Case-Shiller released their latest look at home prices in the US.  The headline print indicated that prices in the 20 largest cities in the US increased by 0.5% in March, missing the consensus estimate calling for rise of 0.7%.  Stripping out the seasonal adjustments, prices were actually higher by 1.0%, which is much higher than the 0.3% gain that is average for the third month of the year.  Prices are now higher by 2.0% through the first quarter, which is 2.3% above average for this time of year.  This is the best start to a year since 2005 as supply constraints continue to make the housing market unaffordable to many.  Out of the 10 largest cities in the country, only Miami is showing a year-to-date change that is below average on the year.  Strength in Washington, Las Vegas, Denver, Boston, San Diego, Chicago, and San Francisco is pronounced, raising risks of a slowdown in buying activity as buyers fail to find housing within their budget.  Rising wages and a strong labour market certainly helps, but, with prices outpacing the rise in incomes, the marginal buyers could fall off, particularly if mortgage rates continue to rise.  Seasonally, home prices continue to rise through the summer, peaking in September ahead of the winter slowdown through the fourth quarter.  For a breakdown of results from the various cities, the charts are available via the database at https://charts.equityclock.com/sp-corelogic-case-shiller-home-price-index-city-breakdown.

 S&P/Case-Shiller 20-City Composite Home Price Index Seasonal Chart

Monthly  S&P/Case-Shiller 20-City Composite Home Price Index Data

Sentiment on Tuesday, as gauged by the put-call ratio, ended bearish at 1.09.

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Seasonal charts of companies reporting earnings today:

Amerco (UHAL) Seasonal Chart Analog Devices, Inc. (ADI) Seasonal Chart  Bank Of Montreal (BMO) Seasonal Chart  Chico's FAS, Inc. (CHS) Seasonal Chart Columbus McKinnon Corporation (CMCO) Seasonal Chart  Daktronics, Inc. (DAKT) Seasonal Chart Dick's Sporting Goods Inc (DKS) Seasonal Chart DSW Inc. (DSW) Seasonal Chart EVINE Live Inc. (EVLV) Seasonal Chart Golden Ocean Group Limited (GOGL) Seasonal Chart Guess?, Inc. (GES) Seasonal Chart Keysight Technologies Inc. (KEYS) Seasonal Chart MakeMyTrip Limited (MMYT) Seasonal Chart Michael Kors Holdings Limited (KORS) Seasonal Chart Movado Group Inc. (MOV) Seasonal Chart NGL ENERGY PARTNERS LP (NGL) Seasonal Chart PVH Corp. (PVH) Seasonal Chart QAD Inc. (QADA) Seasonal Chart RBC Bearings Incorporated (ROLL) Seasonal Chart Semtech Corporation (SMTC) Seasonal Chart The Descartes Systems Group Inc. (DSGX) Seasonal Chart Tilly's, Inc. (TLYS) Seasonal Chart 

 

 

S&P 500 Index

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TSE Composite

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