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Stock Market Outlook for September 15, 2015

 

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:

China Mobile Ltd. (ADR) (NYSE:CHL) Seasonal Chart

 

The Markets

Stocks drifted lower on Monday as investors position for the events ahead.  Short-term support that had been identified in a recent report remains intact, now trending around 1950; resistance remains apparent at 1990.   The market is coiling, gearing up for a significant move, one way or the other, waiting for that catalyst to fuel the break.  Stay tuned!

Looking at the chart of the Federal Funds Rate, presently around 0.14%, the yield has broken marginally above declining trendline resistance that stretches back to 2009.  Market pressures have led to increasing overnight rates since the yield bottomed early in 2014 as investors anticipate the looming rate hike.  Seasonally, looking at the tendencies of the Federal Funds Rate, history suggests that rate increases during the last four months of the year are not as common as rate decreases.   September has shown an increase in the federal funds rate only 48% of the time over the past 60 years, while December has shown even less of a tendency for gains at 38%.  The period between February and June has shown the greatest probability of a fed funds rate increase.   Obviously, the least of the Fed’s concerns is what the calendar says or what time of year rate increases have typically occurred, but rather the strength of economic data and the direction of inflation.  Presently, inflation expectations, as gauged by the 5-year breakeven rate, remains under pressure, holding around the low of the year, and economic data remains fairly mixed when taking into account the impact of lower commodity prices.  Employment continues to gain above trend, however, fuelled by strength in the consumer segment.  We shall know soon enough how the Fed is weighing each component as it determines its path to normalize rates.

Monthly average changes to the Effective Federal Funds Rate:

Historically, there is not much precedent to normalizing rates following a prolonged period of zero interest rate policy (ZIRP).  The chart of the effective funds rates, including recessionary periods highlighted in grey, shows that yields have typically increased within three years following the conclusion of a recession.  With six years  behind us since exiting the last recession and no change in rates, reaction to an increase, should one be announced on Thursday, is difficult to gauge. Assuming we are at the end of the multi-decade bull run for bonds and at significant low in yields,  the following trend is implied to be flat to positive for yields for the years ahead.  Looking through history, the last time we saw this occur was following the Second World War, which led to a multi-decade rise in rates until the 1982 peak.  This period was characterized as a period of significant growth and unsustainably high levels of inflation, forcing the Fed to take steps to increase rates.  Economic growth and inflation are nowhere near the levels seen then, therefore comparisons to this era are difficult to make.  However, the rate rise didn’t hold back the equity market from the substantial gains that persisted through to the late 60’s.  It will be interesting to see if the Fed can force a rate hike on the market this year given that the preconditions that have typically warranted one are not present; this may be the first time in that past 100 years that the Fed considers hiking rates amidst inflation rates that are trending lower.

US Inflation Rate (Data courtesy the US Bureau of Labor Statistics and Robert Shiller):

Sentiment on Monday, as gauged by the put-call ratio, ended bearish at 1.03.

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite