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Stock Market Outlook for August 24, 2016

 

A volatility squeeze on the S&P 500 Index is resulting in the lowest Bollinger Band width in over 20 years.

 

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:

Hormel Foods Corporation (NYSE:HRL) Seasonal Chart

 

 

The Markets

Stocks closed higher on Tuesday, helped by a stronger than expected housing report that suggested the economy is on a solid footing.  Sales of new homes rose 12.4% last month to a seasonally adjusted annual rate of 654,000.  This is the highest level of the recovery and is back to levels last seen in 2007.  Analysts has expected a decline of 0.3% to 580,000.  Stripping out seasonal adjustments, sales of new homes actually rose by 7.5%, a significant divergence when compared to an average decline of 4.6% in the month of July.  Year-to-date, sales are up by 50%, firmly above the average increase for this time of year of 35%. The seasonal downturn in new home sales that is typically realized in the back half of the year has yet to be realized as buyers attempt to get into the housing market at record low interest rates in the US, keeping sales on an upward trajectory.  While sales (demand) remains high, supply is increasingly becoming a factor as the months of supply falls to the lowest level in three years at 4.3.  Generally 6 months of supply is considered to be a balanced market.  This lack of supply can be attributed to factors mentioned previously, which is that builders are having trouble acquiring new lots on which to build.  You would think that strong demand and limited supply would cause pricing pressures, but this was not apparent in Tuesday’s report.  Non-seasonally adjusted, the median sales price of new homes fell 5.1%, more than the 0.3% average decline for the month of July.  The year-to-date change has shown some wild swings over the past few months, bouncing above and below the seasonal average as sales vary between cheaper and more expensive homes.  Reports from Case-Shiller and the National Association of Realtors suggest that the price trend this year is above average, a divergence that might be expected between the new and existing home market.

The strength in the housing market is having a benefit on homebuilding companies that are striving to cover the supply shortfall.  Shares of Toll Brothers jumped almost 9% on Tuesday following the release of earnings that were better than expected.  The company indicated that it sold more luxury homes at higher prices.  The result lifted the S&P Homebuilders ETF (XHB) by close to 2%, pressuring a significant level of horizontal resistance at $36.50.  While homebuilding stocks tend to benefit from a minor period of seasonal strength between August and mid-September, the more prominent run is typically realized between early October and early February, ahead of the spring buying season.

S5HOME Index Relative to the S&P 500

With the help of housing stocks, the S&P 500 Index added two-tenths of one percent, falling short of charting a new all-time closing high.  The large-cap benchmark tested the previous intraday peak around 2193 early in the session, but profit-taking through the remainder of the day pulled the index off of its peak.  Short-term double-top resistance in becoming apparent at this intraday high.

Stepping back, looking at the daily chart of the large-cap benchmark, its fairly clear that volatility over the past few weeks has been low.  A Bollinger Band overlay emphasizes how low volatility has been.  The bands have narrowed to the lowest width since 1995, creating squeeze that could be unleashed at any time.  The bands narrow when volatility is low, typically a leading indicator of an explosive move ahead, either higher or lower.  For now, investors are waiting for that catalyst to unleash the volatility squeeze, fuelling the next move in stocks over the short-term.  Friday’s speech by Janet Yellen is certainly one possible candidate to trigger this move.

In other economic news, further clarification into the strength of the summer driving season was released on Tuesday with a report on Vehicle Miles Traveled.  With a non-seasonally adjusted increase of 1.0% to 282.3 billion miles, this is the highest level on record, but the pace of gains through the first half of the year falls short of the seasonal average.  Year-to-date, vehicle miles traveled is higher by 7.6%, short of the 10.9% average increase through this point in the year.  The below average pace of gains through this summer period likely attributed to the recent rise in gasoline inventories, which has reverted back to pressuring oil inventories as we reach the peak of this high demand season.  Vehicle travel tends to fall off sharply into the fall and winter.  It will take another month to receive the data for July, one of the strongest months of the year for driving activity, but the trend right now is certainly not what energy commodity producers would have desired to see as oil inventory levels remain bloated going into the lower demand fall season.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.86.

 

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite