Stock Market Outlook for January 8, 2019
The ratio of bond vs. stocks suggesting that the long-term outperformance in equities may be set to continue.
*** 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:
Northrop Grumman Corporation (NYSE:NOC) Seasonal Chart
L-3 Communications Holdings, Inc. (NYSE:LLL) Seasonal Chart
Coca-Cola Enterprises Inc. (NYSE:CCE) Seasonal Chart
Stanley Furniture Co., Inc. (NASD:STLY) Seasonal Chart
Marten Transport, Ltd. (NASD:MRTN) Seasonal Chart
Hasbro, Inc. (NYSE:HAS) Seasonal Chart
The Markets
Stocks closed with gains on Monday as investors monitored trade talks between the US and China. The S&P 500 Index returned seven-tenths of one percent, closing above its 20-day moving average for the first time since the start of December. Next major hurdle is the 50-day moving average at 2641, likely a critical test in the trend of lower-lows and lower-highs for the large-cap benchmark. Momentum indicators continue to rebound from the oversold levels charted around the Christmas holiday. The outcome of the trade talks, quite obviously, will be a significant influence on market direction in the near-term.
Remaining conducive to further gains in stocks is the re-accumulation of risk assets. Consumer discretionary, energy, materials, and financials have outperformed the market in recent days and weeks, while consumer staples and utilities lag the broad market return. Treasury bonds, the classic risk-off play that flourished in both November and December, are starting to roll over from one of the most overbought levels since 2008. Junk/high yield bonds have come storming back in recent sessions as investors become more confident with the debt of some of these risker issuers. The ratio of the high-yield bond ETF versus the investment grade corporate ETF has retraced the most of the losses realized in the past month in just two sessions, moving back towards previous rising trendline support. Much like the equity market, a trend of lower-lows and lower-highs continues to be implied.
While treasury bonds have certainly been the place to be over the past couple of months, there is one chart that suggests that equities may be set to resume their outperforming trend. The ratio of the 10-year treasury note price versus the S&P 500 Index recently tested the upper limit of its long-term declining trend channel. We highlighted this chart in late January of last year as the ratio tested the lower limit of this range, suggesting a period of risk-aversion was to follow. The ratio similarly touched the lower limit of its span in September. Of course, both of these events preceded very tough periods for stocks in the months that followed. Looking at the present test, the precedent of a rollover from the upper limit of the span has been very good since the end of the last recession. The last two times the ratio touched the upper limit of this span was in early October 2011 and mid-February of 2016. Of course, stocks flourished following both events. A declining trading range in the ratio of bonds versus stocks is fairly typical in non-recessionary periods, however, should the ratio breakout, suggesting a new risk-off trend, it would likely coincide with a defined economic downturn.
Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.87.
Seasonal charts of companies reporting earnings today:
S&P 500 Index
TSE Composite
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