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Stock Market Outlook for April 22, 2016

 

Yield plays falling out of favour as investors shed defensive bets.

 

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 ended lower on Thursday, led by the utilities sector as US treasury yields continue to rebound from the lows of the year.  Yields on US treasury bonds are suggesting a double-bottom pattern around the February lows as investor lighten up on the risk-off trade following a volatile start to the year.  Upside target of the bottoming pattern suggests a move back to levels around declining 200-day moving averages, potentially shaking loose weak hands in the fixed income market that had been betting on further equity market weakness.  The extent of the rebound in stocks has caught a number of analysts off-guard, forcing investment managers to reallocate positions, albeit at a very late stage in the game.  Seasonally, stocks and bonds typically see a shift in relative strength around the start of May, resulting in gains for the defensive asset class through the volatile summer months.  The potential of the bottoming pattern warrants further monitoring as we approach this average transition point for stocks and bonds.

The shift away from some of the defensive bets is not limited to the utilities sector and bonds.  Consumer staples, telecom, and REITs also saw losses in excess of 1% in Thursday’s session as demand falls for these higher yielding areas of the market; a shift towards cyclical sectors continues to be apparent.  Health care has been a notable beneficiary of the shift as biotech and medical equipment/supply companies start to regain favour following months of scrutiny pertaining to pricing practices in the sector.  As noted in a previous report, the health care equipment industry benefits from positive seasonal tendencies between the middle of April and the end of July, trading higher into a number of health care conferences through the spring and summer; the biotech industry starts gaining seasonal traction at the beginning of May.  Other sectors that are benefitting from positive relative trends, such as energy, industrials, and materials, see positive seasonal trends conclude around the start of May.

On the economic front, a report from the Philadelphia Fed shed light on manufacturing conditions within the region.  The Philadelphia Fed Business Outlook Survey dipped back into contraction territory in April, falling to –1.6 from +12.4 previous.  This missed the consensus estimate of a print of +9.0.  Stripping out seasonal adjustments, the index remained in the plus column at 9.1, however, this is well below the April average of 19.6.  The trend of the index between March and July is typically that of lower levels as manufacturing activity wanes following a strong first quarter.  This is yet another report in recent days that has come in below expectations, which is putting pressure on the Citigroup Economic Surprise Index.   The index, which measures the deviation between actual and expected economic results, tends to move in waves; a positive trend can act as a tailwind for stocks as economic beats become frequent, while a declining trend can act as a headwind, forcing analysts to adjust their expectations for the economy lower.  Assuming a shift in trend of the Economic Surprise Index is being realized, stocks may struggle under the backdrop of disappointing economic data.

Touching briefly on the weekly jobless claims, continued claims remains below the average trend as the labour market continues to point in the right direction ahead of the summer hiring season.  The more volatile initial claims is hovering slightly above average, but showing no significant deviations that would suggest something afoot in hiring momentum.  The trends in hiring typically remain positive into June.

Sentiment on Thursday, as gauged by the put-call ratio, ended bearish at 1.17.

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite