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Stock Market Outlook for November 2, 2016

 

Equity benchmarks breakdown leading to a surge in hedging activity.

 

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 drifted lower on Tuesday as investors positioned portfolios ahead of Wednesday’s FOMC rate decision.  The S&P 500 Index fell 1.30% at the session low, breaking support at 2120, as well as piercing psychological support at 2100.  This is the first close below 2120 since the breakout that was recorded in July, in the midst of the typical summer rally period.  Tuesday’s move suggests a breakdown from the descending triangle pattern that we have been highlighting over the past month.  Resistance has become implied at both the 20 and 50 day moving averages.  As long as these major moving average levels cap the upside momentum, the broad equity market looks to be heading lower, unless a positive catalyst is revealed.  Below psychological support at 2100, the next major hurdle is the 200-day moving average at 2080, followed by the calculated downside target of the bearish triangle setup of 2060.

Taking the brunt of the selling pressures over the past few days has been small cap stocks, as represented by the Russell 2000 Index.  Last Thursday, the benchmark broke below support at 1200, completing a short-term double-top pattern.  Downside target of the bearish setup is to around the 200-day moving average at 1150.  The 20 and 50 day moving averages of the benchmark are rolling over for the first time since the decline that started the year; momentum indicators are also trending lower.  The small-cap benchmark has been underperforming its large-cap counterpart for almost a month now as investors shed risk in segments of the market that are potentially more sensitive to a rate increase.  The decline in the relative performance is signalling investor risk aversion to stocks.  Seasonally, the Russell 2000 Small Cap index benefits from a period of strength between mid-December and early March.

On the economic front, a report on construction spending disappointed versus analyst expectations.  The headline print indicated that spending on construction projects fell 0.4% in September, a significant miss when compared to expectations of a gain of 0.6%.  Stripping out the seasonal adjustments, total construction spending actually fell by 1.6%, which is still less than the average decline for September of 1.8%.  The year-to-date change continues to lag the seasonal average as the autumn slowdown gets underway.  Public construction spending continues to act as a drag on the overall report.  Construction spending had previously been a bright spot in the economy as residential projects kept workers busy trying to meet demand, but we are now seeing signs of slowing growth, perhaps in reaction to the prospect of higher borrowing costs.  Home construction stocks are down by around 15% since peaking in July as a result of this waning momentum.  Seasonally, homebuilders typically strengthen between now and February, but, as of present, they are still trying to gain a foothold in what continues to be a challenging tape.

S5HOME Index Relative to the S&P 500

Sentiment on Tuesday, as gauged by the put-call ratio, ended overly bearish at 1.43.  This is the most bearish reading since mid January amidst the panic selling that started the year.  The indicator emphasizes that investors were aggressively hedging positions during Tuesday’s session, protecting portfolios in the event of continued market weakness.  The good news for the bulls is that when investors are aggressively hedged, the desire to sell positions is decreased, typically leading to appealing buying opportunities as selling pressures become exhausted.  The VIX, which also spiked during Tuesday’s session, presently sits at 18.56; in recent years, appealing buying opportunities in equity positions have generally coincided with a peak in the indicator above the 21 level, such was the case at the end of June.  The VIX bottomed in August below 12 and the equity market has gradually faded over the period that followed.  Be opportunistic when the VIX spikes and peaks above 21 and become cautious when the VIX falls and bottoms below 12.

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite