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Stock Market Outlook for June 4, 2018

Technology sector breaks to new all-time high as investors cheer a stronger than expected employment report.

 

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:

Microsoft Corporation  (NASDAQ:MSFT) Seasonal Chart

Microsoft Corporation (NASDAQ:MSFT) Seasonal Chart

Vaalco Energy Inc. (NYSE:EGY) Seasonal Chart

Vaalco Energy Inc. (NYSE:EGY) Seasonal Chart

Bitauto Holdings Ltd. (NYSE:BITA) Seasonal Chart

Bitauto Holdings Ltd. (NYSE:BITA) Seasonal Chart

Ducommun, Inc. (NYSE:DCO) Seasonal Chart

Ducommun, Inc. (NYSE:DCO) Seasonal Chart

Westwood Holdings Group, Inc. (NYSE:WHG) Seasonal Chart

Westwood Holdings Group, Inc. (NYSE:WHG) Seasonal Chart

Klondex Mines (TSE:KDX) Seasonal Chart

Klondex Mines (TSE:KDX) Seasonal Chart

 

 

The Markets

Stocks jumped higher on Friday following a better than expected employment report for May.  The S&P 500 Index gained over one percent on the session as cyclical sectors that were sold off in recent days caught a bid.  Utilities and staples, the so-called defensives, ended flat to lower.  Despite the headline risks and volatility over recent days, investors continue to find ways to position themselves in this market and stocks are slowly finding their way back to all-time high levels.  The S&P 500 Technology Sector Index hit a new all-time high on Friday as investors keep their bias firmly embedded on growth.  The technology sector has been showing tremendous growth numbers through the start of the year, as gauged by a number of economic reports, and this positive fundamental backdrop is finally making its presence felt in stock prices.  The technology benchmark has been showing short-term support around its 20-day moving average over the past month and outperformance versus the market has been apparent since the end of April.  Seasonally, the technology sector benefits from positive seasonal tendencies between the middle of April and the middle of July.

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Technology Sector Seasonal Chart

TECHNOLOGY Relative to the S&P 500
TECHNOLOGY Relative to the S&P 500

TECHNOLOGY Monthly Averages

After a volatile week, the large-cap S&P 500 Index managed to punch out a return of around half of one percent.  The benchmark is slowly making progress in moving back into the upper half of a rising long-term trend channel that stretches all the way back to the 2009 low.  The trend channel trading range has limits at approximately 2300 and 3100.  Momentum indicators on the weekly scale are showing signs of curling higher following the downturn in the market through the fourth quarter.  Support remains firm around the 50-week moving average and 20-week moving average support is coming back into view following the intra-week breakdown.  Short-term resistance remains directly overhead at 2742.

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As for the month ahead, June tends to be a lacklustre month with few catalysts to drive direction one way or the other. The S&P 500 Index has averaged a return of a mere tenth of one percent in the month over the past 50 years with gains recorded in 54% of periods. Returns have ranged from a loss of 8.6% in June of 2008 to a gain of 5.4% in June of 1999. The benchmark tends to show a neutral bias through the first half of the month, followed by a dip into the back half as investors square away positions ahead of the end of the quarter. This end of month dip typically leads to ideal buying opportunities for the average summer rally period, which ranges from June 27th to July 17th, on average, essentially leading into the heart of earnings season. Over the past 25 years, the S&P 500 Index has gained an average of 1.46% during this approximately three-week stretch, realizing positive results in 68% of periods.

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The month of June tends to be risk averse with materials, industrials, consumer discretionary, and financials dragging on market performance.  Over the past 20 years, health care has been the only sector to average a gain in this sixth month of the year, while technology averages a flat (0.0%) result.  Investors have typically been well suited to reducing cyclical exposure to the broader economy, but with economic data running so hot, fundamental support may mitigate these typical headwinds.

Healthcare Sector Seasonal Chart

HEALTHCARE Relative to the S&P 500
HEALTHCARE Relative to the S&P 500

HEALTHCARE Monthly Averages

As for the employment report, the headline print indicated that payrolls increased by 223,000 in May, better than the 190,000 increase forecast by analysts.  The unemployment rate fell by one-tenth to 3.8% and average hourly earnings rose by 0.3%, one-tenth of a percent better than expectations.  Stripping out the seasonal adjustments, payrolls actually increased by 943,000, or 0.6%, which is marginally less than the average increase for the month of 0.7%.  Year-to-date, payroll growth in 2018 remains firmly above average showing a pace that is two-tenths of one percent above the seasonal norm.  Parsing the details, manufacturing continues to factor prominently behind the results.  With a gain on the year that is 1.4% above average, manufacturing employment is showing the third best growth in the past three decades.  The results span across activity directly and indirectly related to the manufacturing process, such as mining, construction, transportation, and machinery, all showing results that are firmly above average.  Regional manufacturing surveys suggest some of the best growth for the manufacturing economy on record, not only carrying on with an above average pace that initiated with the Presidential election in the US, but expanding on it following the recent tax cuts.  The results have come at a toll to other economies that were previously benefitting from global synchronized growth.  Weakness in the report is isolated to the utilities and health care sectors, two areas that are less exposed to the positive economic backdrop in the broader US economy.  Both  sectors are showing employment growth that is below average year-to-date, although the trend is above the pace set through he first five months of 2017.

Total Nonfarm Seasonal Chart

Monthly Total Nonfarm Data

Construction Seasonal ChartManufacturing Seasonal ChartWholesale trade Seasonal ChartRetail trade Seasonal ChartTransportation and warehousing Seasonal ChartUtilities Seasonal ChartFinance and insurance Seasonal ChartReal estate Seasonal ChartHealth care and social assistance Seasonal Chart

As for those areas of the labour market that typically perform well at this time of year, employment at building materials and garden supply stores is trending 2.9% above average and leisure / hospitality is running 2.5% above average.  These lower paying areas of the economy have acted as a drag on average hourly earnings in recent years, causing this wage metric to negatively diverge from the average seasonal trend.  While this proved to be the case again this year, the actual decline in hourly earnings was rather muted compared to last year.  Average Hourly Earnings of Production and Nonsupervisory Employees actually declined by 0.6% in the month, which is better than the 0.8% decline recorded in the same month of 2017.  Wages are now higher on the year by 1.3%, which takes the sting away from the 1.9% gain shown through the month of April, but it is still the second strongest increase through the first five months of the year in the past decade.  Wages showed a calendar year increase of 2.6% in 2017 and they are currently running three-tenths of one percent above that, suggesting an annual rate closer to 3%.  Seasonally, wage growth tends to be rather stagnant through the summer as a result of the lower paid seasonal workers, but once September rolls around wages typically spike as full-time workers return to work and the next seasonal hiring period, ahead of Christmas, begins.

Building material and garden supply stores Seasonal ChartLeisure and hospitality Seasonal Chart

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

In other economic news, construction spending for April suggested upbeat activity in this emerging construction season.  The headline print indicated that construction spending was higher by 1.8% in April, which is a full percentage point above the consensus analyst estimate.  Stripping out the seasonal adjustments, total construction spending was actually higher by 6.7%, which is slightly less than the 7.4% average increase for the month.  The year-to-date change is 1.4% above average, buoyed by strength in residential spending; both non-residential and public spending are trending inline with seasonal norms, but this is still an improvement from the below average pace recorded through this point in 2017.  Office construction on the non-residential side has improved notably since the imposition of the tax cuts at the end of last year as companies look to invest more domestically.  Office construction often has longer-term positive implications for the economy as companies look further out to anticipate future needs.  Seasonally, construction spending typically rises through the remainder of spring and through the summer as the warmer weather is conducive for these projects.

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

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.85.

 

 

 

Seasonal charts of companies reporting earnings today:

Ascena Retail Group, Inc. (ASNA) Seasonal Chart Capital Southwest Corporation (CSWC) Seasonal Chart    HealthEquity, Inc. (HQY) Seasonal Chart Palo Alto Networks, Inc. (PANW) Seasonal Chart Quanex Building Products Corporation (NX) Seasonal Chart  Tarena International, Inc. (TEDU) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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