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Stock Market Outlook for May 6, 2016

 

Double-top patterns on the Retail and Transportation ETFs suggest downside potential of around 7%.

 

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 relatively flat on Thursday as investors wait for the release of the monthly nonfarm payroll report on Friday.  Analysts are expecting a headline print of 200,000 new jobs, despite the recent report from ADP suggesting that 156,000 is a more appropriate estimate.  Non-adjusted, April is typically the strongest month of the year for employment, gaining an average of 0.8% for the period with a frequency of gains of 100% over the past 50 years.  This would imply an increase in payrolls of 1.14 million, on a non-adjusted basis.  The year-to-date change in employment continues to trend above average, suggesting a solid labour market into the summer hiring season.  As for what the seasonally adjusted print will reveal is anybody’s guess.  April is typically one of the most adjusted reports in the year given the changing date of the Easter holiday.

Turning to the S&P 500 Index, the benchmark is testing support around its rising 50-day moving average ahead of Friday’s report.  This is typical ahead of a potentially market moving event when the index clings to a major moving average, whether it be the 20, 50, or 200-day.  The benchmark continues to hold above horizontal support at 2040, an important pivot point in the intermediate trend of the market.  Revisiting a chart that we posted about a month ago, the market appears bound by a short-term trading range that spans 2100 on the upside and 2020 on the downside as investors wait for a catalyst to fuel a breakout.  Keep in mind that the bias for the broad market between now and October is for flat to negative trading, therefore, a certain degree of caution is warranted until the market can confirm direction given that the recent positive short-term trend has concluded with the break below the 20-day moving average; the intermediate-term trend, however, continues to evolve.

Three sectors tend to act as a drag on the broad market benchmark through the period of seasonal weakness for stocks from May through to October: Consumer Discretionary, Industrials, and Materials.  Evidence of this was certainly apparent on Thursday with retail stocks firmly lower and the transportation industry under pressure.  Looking at the top ETFs that track these two industries, double-top patterns quickly become apparent, downside targets of which suggest a move of around 7% lower than present levels.  Momentum indicators have been trending lower since March, rolling over from overbought levels achieved within their period of seasonal strength.  The transportation industry tends to act as a leading indicator to the strength of cyclical sectors and the degree of risk sentiment in the broad market, therefore, its performance warrants close attention.

On the economic front, weekly initial jobless claims showed a slight uptick last week, albeit remaining close to multi-decade lows.  The headline print indicated that initial claims increased by 17,000 to 274,000 for the week ending April 30th.  Analysts had expected a level of 262,000.  Stripping out seasonal adjustments, initial claims declined by seven-tenths of one percent to 243,365.  Year-to-date, initial claims are lower by 29.8%, remaining above the average decline through the first four month of the year of 38.5%.  The change is showing signs of plateauing, suggesting that the count of new claimants may be bottoming around the lowest levels since the 1970’s.  Turning to continuing claims, the year-to-date trend of these ongoing applications remains below average, coming in at –16.4% versus the average change through the second to last week of April of –11.9%.  Overall, taking into account that initial claims remain around multi-decade lows and continuing claims are trending below the seasonal average, the report continues to suggest a strong labour market.  Investors will be looking for confirmation of this fact with this Friday’s BLS non-farm payroll report.

Sentiment on Thursday, as gauged by the put-call ratio, ended bearish at 1.20.

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite