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Stock Market Outlook for August 2, 2017

Financials taking another stab at resistance, despite falling yields.

 

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 notched another set of gains on Tuesday as start of the month inflows pushed the Dow Jones Industrial Average to a fresh all-time high.  Financial stocks topped the leaderboard, despite the decline in treasury yields, which are attempting to fill the gap opened during last week’s surge higher.  The S&P 500 Financial sector index is taking another stab at resistance at 420, remaining supported in the short-term at the rising 20-day moving average.  A breakout would see price move above a trading range that has developed over the past seven months, projecting upside potential towards 460, or almost 10% above present levels.  The move, if accomplished, would have to play out in the midst of negative seasonal influences, which typically sees lower debt yields through the end of summer.  Financials are one of the worst sectors in August, losing 1.8%, on average, over the past 20 years.

FINANCIAL Relative to the S&P 500

Remaining in the same neighbourhood as the cost of borrowing, statistics released from the New York Stock Exchange in recent days indicates that investors trimmed their holdings of stocks bought on margin in the month of June.  Margin debt fell by 0.2% in this last month of the second quarter, a divergence from the average gain of 1.0% for this time of year.  The year-to-date change is now 2.1% above average through the first half of the year as investors leverage their bets in stock positions.  The rate of change in the level of debt that investors are taking on can often provide clues as to how complacent they are with markets around all-time high levels.  Historically, gains in margin debt of 20% above the seasonal norm have typically been destabilizing to equity prices in the months that follow as investors seek to abruptly deleverage on any sign of weakness.  While above average, the gain in margin debt is inline with the return in broad market benchmarks for the year, suggesting the rise is more the result of capital appreciation rather than excessive risk taking.  Through the summer months, margin debt tends to remain stagnant, along with the broader market, as investors refrain from aggressive bets in this slower summer season for stocks.  The indicator remains an interesting one to watch as we look for signs of euphoria in the market, typically a sign of a significant top to follow.

NYSE Margin debt Seasonal Chart

On the economic front, a report on construction spending provided a disappointing result as we enter into the height of construction activity in the summer. The headline print indicated that construction spending fell by 1.3% in June, a significant miss versus forecasts of a 0.5% increase.  Stripping out the seasonal adjustments, construction spending actually increased by 4.6%, far less than the 7.2% average increase for June.  Year-to-date, spending on construction projects is higher by 16.6%, well below the average increase through the first half of the year of 23.6%.  Weakness in private non-residential spending has been evident all year, but now public construction spending is reverting to a below average pace, the result of a significant dip in highway/street and transportation construction.  While the read-through to the broader economy based on these public spending statistics is virtually nil, these large-scale public construction projects can often be a big windfall for construction companies, often supporting their stock prices in the process.  Depending on the nature of the business, some construction stocks tend to show positive characteristics through this summer period.  Seasonally, construction spending tends to peak for the year in the month of August as projects are pushed through ahead of the colder winter months.

Total Construction Spending Seasonal Chart

Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.88.

 

 

Seasonal charts of companies reporting earnings today:

                   

 

S&P 500 Index

 

 

TSE Composite