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Stock Market Outlook for July 19, 2017

Outlook for the seasonal trade in Gold.

 

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:

  • No stocks identified for today

 

 

The Markets

Stocks closed mixed on Tuesday despite the apparent gridlock surrounding the republican health care bill in the US.  The S&P 500 Index closed predominantly flat for a second day, adding six basis points, enough to chart a new all-time closing high.  And after over a month on the sidelines, the Nasdaq Composite has re-joined the all-time high club, closing above the high charted on June 9th as the FANG stocks regain their mojo following the upbeat earnings report from Netflix (NFLX).  Shares of Facebook, Amazon, and Netflix, or the “FAN” in FANG, charted fresh closing highs, quickly shaking off the weakness that dominated the final trading days of the second quarter.  It is at this point in the earnings season that marks the end to the period of seasonal strength for the technology sector, which runs between the middle of April and the middle of July.  The Technology sector ETF (XLK) posted a gain of 9.5% over this timeframe, easily surpassing the 6.2% return for the S&P 500 total return index.  The sector tends to pull back into the end of July as investors book profits in some of the high-flying positions.  With overbought readings starting to materialize on the charts, a period of consolidation is certainly not out of the question.  The next period of strength for both the Nasdaq Composite and the technology sector runs from the beginning of October to early February, the period when cyclical stocks come back into favour.

TECHNOLOGY Relative to the S&P 500

With cyclical sectors out of seasonal favour over the next few months, defensive, often high yielding, investments dominate the market performance as investors seek to hedge against seasonal volatility through to the start of October.  The period of seasonal strength for the classic volatility hedge, Gold, is now underway.  The commodity has struggled over the past month as it battles with double-top resistance just under $1300.  The pattern suggests an unfulfilled downside target towards $1130, back to the low charted at the end of last year.  Beyond this overhanging technical setup, influences for the trade over the next couple of months are fairly mixed.  On the positive side are the favourable seasonal patterns for the metal and the miners, coinciding with the rise in the volatility index between the start of July and the start of October.  The commodity has averaged return of 3.4% during this period over the past 25 years with positive results recorded in 19 of those timeframes.  Volatility tends to flourish during periods of uncertainty and with the Trump agenda seemingly stalling, uncertainty has become the name of the game.

FUTURE_GC1 Relative to the S&P 500

Also supportive for the price of the yellow metal is the continued decline in the US Dollar, which according to the dollar index has retraced almost all of the gains achieved in the last half of 2016.  On Tuesday, the currency benchmark closed at the lowest level since last August, becoming the most oversold since August of 2015 in the process.  The index has charted a parabolic move lower through the first half of this year as the US Federal Reserve is no longer the only central bank in the world to begin a process of monetary tightening.  Significant support in the 93 to 94 range could unwind some of the negative bets fuelling this unsustainable slope lower.  Resistance at the 20 and 50-day moving averages are between 1.7% to 2.7% above present levels.  Commodity prices tend to move inversely to the value of the US dollar.  Seasonally, the US Dollar Index tends to decline between now and the middle of October.

DX.FUT Relative to the S&P 500

The headwind against the momentum of gold is perhaps subdued rates of inflation.  In addition to being the classic volatility hedge, Gold, and commodities in general, are known to hedge against the impacts of high rates of inflation, as was the case in the 70’s and early 80’s.  With Friday’s report on the consumer price index showing an annual pace of 1.6%, this fundamental influence appears to offer little help for the prospects of higher commodity prices, other than the fact that the Fed is likely to maintain a dovish stance into the back half of the year, thereby keeping the US Dollar depressed.  Friday’s report on CPI showed that the inflation rate for all items is higher by 1.5% through the first six months of the year, well below the average gain of 2.2% for this time of year, based on data from the past 20 years.  Less food and energy, the rate is higher by only 1.2% for the six months ending in June.  While the consumer has little to worry about with respect to price appreciation, producer prices are showing a pace this year that is inline to above the seasonal average. The producer price index for all commodities is showing a gain of 2.9% through the first half, marginally above the 2.7% average gain for this time of year.  Another gauge of inflation, the 5-year Breakeven Rate, continues to hold above long-term declining trendline resistance, although the more recent short-term trend of lower-highs and lower-lows remains ongoing.  Declining rates of inflation, or disinflation, have not typically been favourable for the price of gold. 

And finally, with any commodity it is desirable to see the stock prices of the producers outperform (or lead) the commodity itself as investors seek to leverage their bets.  Currently, the NYSE Gold Bugs Index relative to the price of gold is trading within a descending triangle pattern, potentially a bearish setup if price moves below the lower limit of the setup. Price is reaching the pinnacle of the pattern, suggesting a break, one way or the other, is imminent.  With the mix of positive and negative aspects that continue to influence, measured bets on the metal, given the low levels of volatility, continue to have appeal for the sake of adding portfolio insurance.  Further monitoring of some of the hurdles overhead is warranted.  Reaction by the precious metal to resistance at the declining 50-day moving average, as well as the performance of the miners relative to the commodity, could be very telling of the success of the seasonal trade in front of us.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.87.

 

Sectors and Industries entering their period of seasonal strength:

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite