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Stock Market Outlook for April 20, 2016

 

Housing starts well below average for March, raising concerns pertaining to the spring selling season.

 

Real Time Economic Calendar provided by Investing.com.

 

**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates.   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:

Waste Management, Inc. (NYSE:WM) Seasonal Chart

 

 

The Markets

Stocks continued to push higher on Tuesday, fuelled by strength in the commodity market as the US Dollar Index dropped back to the lows of the year.  Energy and metal commodities posted gains that in many cases topped 2% on the session, firming with the influence of a lower domestic currency.  As a result, the materials and energy sectors topped the market leaderboard, charting new year-to-date highs in the process.  While both sectors, as gauged by the S&P 500 Indices, are hovering around overbought levels, they have yet to show signs of peaking.  The two sectors seasonally peak, on average, around the start of May, trading flat to negative thereafter.  The US Dollar Index continues to test that lower limit of the declining intermediate trend-channel and horizontal support at 93 is quickly approaching, providing a pivotal point for the currency in the very near future.

The strength in commodity sensitive sectors helped propel the S&P 500 Index up to the 2100 level of resistance that we’ve been highlighting for the past few weeks.  The benchmark stalled around this pivot point for much of the session, but clearly the range of resistance highlighted between 2080 and 2100 is slowly being chipped away.  Raising the level of resistance again puts the benchmark at the all-time high around 2135, the last hurdle in the way of moving beyond the approximately two year old trading range between 1800 and 2130.  The short-term trend, supported by the 20-day moving average, continues to be that of higher-highs and higher-lows and evidence of a topping pattern equivalent to last summer or fall is not yet apparent.  While cognizant of sounding like a broken record, watch that 20-day moving average.  Stocks typically remain supported through to the start of May as investors digest earnings and react to guidance for the year ahead.

As benchmarks in the US battle with resistance, benchmarks overseas are breaking above resistance, clearing the neckline of apparent head-and-shoulders patterns that were highlighted last week.  The German DAX and French CAC surged well over 1%, trading above their March highs and the upper limit to the bullish setup.  Calculated upside potential for each is around 8% above present levels, which would take each benchmark back to around the highs set last November.  Performance of the European benchmarks is starting to tick higher relative to benchmarks in the US as investors seek equities with lower multiples than stocks at home.  Seasonally, while equity benchmarks around the globe realize an average peak at the beginning of May, the German DAX has often extended its run to as far as mid-July, trading lower thereafter.  The 50-day moving average for each benchmark is starting to curl higher, providing support to the intermediate trend.

On the economic front, a report on housing starts offered a disappointing glimpse into an area of the economy that is typically strong into the spring.  Housing starts declined by 8.8% in March to a seasonally adjusted annual rate of 1.089 million, below the consensus forecast of 1.167 million.  Permits also missed expectations, coming in at 1.086 million versus the forecast of 1.200 million.  Stripping out seasonal adjustments, starts were higher by 7.3%, significantly lower than the average increase for March of 34.8%.  Following an above average start to the year, the year-to-date change has fallen well below average following this March misstep.  Weakness was spread across all regions with the West actually turning lower in this third month of the year, something that has happened in only four other Marchs in the past 50 years.  The West, however, is the only region to show a year-to-date change that is inline with the average, so we can’t be too hard on a little reversion to the mean.  While starts and permits lag the year-to-date average, housing units authorized but not started and housing units completed continue to follow their average trends through the first three months of 2016, which alleviates some of the concern pertaining to the headline print.  Housing starts  provide indication as to how builders are perceiving future demand, but sales are the other side of the equation, insight into which will be provided with a report on existing home sales on Wednesday.  Sales have been lagging the average trend so far in 2016, therefore builders may be ratcheting down starts to reflect the sluggish sales activity.  Neither side of the equation is providing an upbeat outlook on the housing market in the first quarter.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.62.  This comes close to matching the low of the year, also the lowest since August of last year, just before the significant downturn in stocks.  As we indicated the last time that the put-call ratio was this low, complacency in the market is obvious.  The average true range (ATR) of the ratio is also on the rise, another reason for concern.

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite