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Stock Market Outlook for April 14, 2016

 

 

Head-and-Shoulders bottoming patterns on the charts of European benchmarks present upside potential of around 12%.

 

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:

Cambrex Corporation (NYSE:CBM) Seasonal Chart

Alliance Resource Partners, L.P. (NASDAQ:ARLP) Seasonal Chart

Canadian Utilities Limited (TSE:CU) Seasonal Chart

Leggett & Platt, Inc. (NYSE:LEG) Seasonal Chart

Keyera Corp (TSE:KEY) Seasonal Chart

 

The Markets

Stocks rallied for a second day, led by the financial sector, following a better than expected earnings report from JP Morgan.  Shares of the financial titan jumped over 4%, instantly moving back to previous support, now resistance, at its 200-day moving average; newly defined support is apparent at its rising 50-day moving average.  The strength of JPM relative to the market has broken above declining trendline resistance that constrained buying demand in the stock since the end of last year.  Bank of America and Wells Fargo continue with the banking industry results on Thursday in what could be another market mover.  Generally, a healthy financial sector is conducive to strength in the broader market given that it is the second largest sector weight in the S&P 500 Index.  Seasonally, strength in the financial sector concludes in the middle of April, reverting to a trend of underperformance versus the market through the end of June.

JPM Relative to the S&P 500

JPM Relative to the Sector

The influence of the financial sector on the broad market, as gauged by the S&P 500 Index, was obvious with the benchmark charting new year-to-date highs.  The benchmark closed within the previously mentioned range of resistance that spans between 2080 and 2100, a range that we identified as likely requiring a catalyst to break through; support remains firm between 2020 and 2040.  The benchmark opened a gap around 2065, which, albeit may be filled at some point, presents yet another level for investors to shoot off of as the market continues its grind higher.  So far, three major earnings reports have been released: Alcoa (AA), CSX (CSX), and JP Morgan (JPM).  While the reaction following Alcoa’s release was initially negative, the loss was erased by Wednesday’s gain and the strength in CSX and JPM are suggesting an emerging positive intermediate-term trend following a bounce over recent days from their 50-day moving average lines.  While too early to conclude that earnings will be the catalyst to break the range of resistance overhead for the large-cap benchmark, the reaction, thus far, is conducive to it.  Earnings reports start being released fast and furious next week, providing further insight as to how investors are perceiving present valuations.

One headwind to note for US equity benchmarks is something we’ve speculated upon over the past couple of weeks.  The US Dollar Index has been grinding along the lower limit of a declining trend channel for many days now, limiting further downside potential.  On Wednesday, the dollar index finally bounced from this lower limit, trading instantly to short-term resistance around its 20-day moving average.  The lower limit of the intermediate-term trend channel is coming close to converging with horizontal long-term support around 93, presenting a level of significance from which a sizable rally could occur.  The declining US Dollar has been a tailwind for stocks and commodities so far in 2016, but a resumption in strength for the domestic currency would revert to a headwind for both asset classes.

The offset of a stronger US Dollar index is a weaker Euro, which gapped lower from resistance.  The stronger Euro has been a headwind for stocks overseas, which have underperformed US counterparts.  But with global economic data firming and a drop lower in the European currency, foreign benchmarks are starting to turn, setting up for a possible bullish scenario.  The DAX, CAC, FTSE MIB, IBEX, and Nikkei all posted gains in excess of 2% on Wednesday, starting to confirm a higher intermediate low above February’s bottom.  The setup is almost obvious as each approaches the neckline of head-and-shoulders bottoming patterns.  Upside potential for each is around 12% upon a break above neckline resistance overhead.  Seasonally, April is one of the strongest months of the year for European indices, gaining around 70% of the time in the fourth month of the year.  For some, positive tendencies can persist into the summer months, while others see the typical May peak that has become conducive to the well known saying “Sell in May and Go Away.”  The bullish setups across European benchmarks has the potential to lead to a massive shift away from US equities and into benchmarks overseas as investors search for value, which has become slim picking on this side of the pond.

On the economic front, a report on retail sales had investors discussing the lack of strength amongst the consumer in the month of March.  The headline print indicated that retail sales declined by 0.3%, missing estimates calling for a gain of 0.1%.  Less gas and autos, retail sales did tick into the plus column at 0.1%, but this was still below the growth analysts expected of 0.3%.  Stripping out seasonal adjustments, retail sales actually advanced 11.9%, which is less than the average increase for March of 13.4%.  However, alleviating concerns that the consumer was weak in the first quarter is the fact that the year-to-date change in sales is marginally above average at –12.8%.  The average change through the first three months of the year, based on data from the past 20 years, is –13.3%.  The year-to-date pace for automobile sales continues to lag the average trend, weighing on the overall report.  So while the seasonally adjusted numbers for the month of March may concern some investors, the above average activity year-to-date suggests that the consumer is undeterred in doing its part to support the economy.  Retail sales typically continue to grow through the month of May before plateauing into the summer.

And, of course, we can’t go a week without discussing the EIA oil inventory report.  Crude inventories rebounded last week, adding 6.6 million barrels, while gasoline inventories reverted back to the average trend, declining by 4.2 million barrels.  As a result, the days of supply of oil ticked higher by four-tenths to 33.3, hovering just below the multi-decade highs charted in the middle of March.  Domestic production continues to fall, but the upside influence on this week’s report was a result of a sharp uptick in imports in what remains a fairly unknown variable in estimating where oil inventories will peak.  The days of supply of the energy commodity typically reaches a high in the month of April, rolling over into the summer months.  Gasoline days of supply reverted back to its declining trend following last week’s unexpected deviation, falling by six-tenths to 25.5.  The change in ending stocks of gasoline remains above the average trend, but as the weather warms and the driving season begins, expect this “froth” to come off given that supply and demand fundamentals remain inline with each other.

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.61.  This is the lowest level since August 10th of last year and just screams of investor complacency.

 

Seasonal charts of companies reporting earnings today:

     

 

S&P 500 Index

 

 

TSE Composite