Stock Market Outlook for May 30, 2019
Should you sell the head-and-shoulders topping pattern on the S&P 500 Index? While the technicals look threatening, sentiment indicators suggest an appealing risk to reward.
*** 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:
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Charter Communications Inc. (NASD:CHTR) Seasonal Chart
Fairfax Financial Holdings Ltd. (TSE:FFH.TO) Seasonal Chart
Laurentian Bank Of Canada (TSE:LB.TO) Seasonal Chart
Brixmor Property Group Inc. (NYSE:BRX) Seasonal Chart
Bank of Montreal (TSE:BMO.TO) Seasonal Chart
Erie Indemnity Co. (NASD:ERIE) Seasonal Chart
Oxford Industries Inc. (NYSE:OXM) Seasonal Chart
The Markets
Stocks closed firmly lower on Wednesday as investors bet that the trade war between the US and China would get worse before it gets better. The S&P 500 Index shed just less than seven-tenths of one percent, weighed down by interest rate sensitive areas of the market (Utilities and REITs). The selloff was fuelled by a break below support on the large-cap index around 2800, which also marks the neckline to a head-and-shoulders topping pattern that we highlighted in previous reports. Downside target of the topping pattern points to 2650, or around 4.8% below Wednesday’s close. Financial news was quick to jump on this technical event, with analysis overwhelmingly turning bearish of the market technicals and fundamentals. The market has shifted from being overly complacent as of the start of May, which suggested downside risks in stocks, to the other extreme of excessive pessimism, which now opens the door to opportunities. At the lows of the session, the large-cap benchmark bounced from around its 200-day moving average, an important hurdle that will keep long-term investors enticed as long as price holds predominantly above. As we will note at the end of this commentary, sentiment indicators are now the most bearish since the December low for stocks, which is a classic contrarian buy signal for short to intermediate-term gains. Nothing is guaranteed, but the risk-reward of the market has once again become appealing.
The price action of defensive assets has suggested that investors have been preparing for a decline for some time. Bond prices have been rising alongside stocks through the first four months of the year and have continued to rise through the month of May. The intermediate treasury bond ETF hit a new 52-week high during Wednesday’s session, but it was unable to remain in positive territory by the close, reversing the day’s gain. The price action suggests buying exhaustion, which from present overbought levels would not be unexpected. The ETF has been trading within a rising trend channel, now between $106 and $108.50, since the year began; downside risks to that lower limit are implied. Treasury bond have become a crowded trade over the past few months and are now vulnerable to a pullback as the tide flows back the other direction.
Sentiment on Wednesday, as gauged by the put-call ratio, ended overly bearish at 1.41. This is the highest ratio since December 20th, just a couple of sessions before the ultimate low in equity benchmarks on December 24th. Readings of this magnitude have typically coincided with excellent contrarian buying opportunities as the downside risk in stocks is mitigated when investors are hedged and/or defensively positioned.
Seasonal charts of companies reporting earnings today:
S&P 500 Index
TSE Composite
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