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Stock Market Outlook for October 31, 2017

TSX Composite breaks out to new all-time high; trendline resistance overhead.

 

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:

Express Scripts, Inc. (NASDAQ:ESRX) Seasonal Chart

 

 

The Markets

Stocks took a bit of a breather on Monday, pulling back following Friday’s rally as investors questioned the method of rollout for the proposed corporate tax cuts.  The S&P 500 Index shed around a third of a percent, led by healthcare, consumer staples, and industrials.  On Friday, the S&P 500 Consumer Staples sector index closed firmly below the neckline of a head-and-shoulders topping pattern, trading down from resistance presented at the declining 50-day moving average.  Weighing on the sector are a strengthening US dollar and increasing risk sentiment, which has pulled assets away from some of the more defensive areas of the market.  The topping pattern targets the year-to-date lows around 530, or another 2% to 3% below present levels.  Momentum indicators, moving averages, and relative performance have been pointing lower for the past three months, preceding Friday’s breakdown.  The move comes despite positive seasonal tendencies for the sector through to the US Thanksgiving holiday, closer to the end of November.  This defensive bet on the consumer has shown one of the best sector performances over the past 20 years during the month of October, rising by 2.6% on average and showing positive results 70% on the time.  That frequency of success continues into the month of November, although the average return is nearly halved, down to 1.4% by month-end.  The consumer is a dominant theme in the market in the last quarter of the year as spending ramps up surrounding the year-end holidays, but the performance of the stocks with exposure to this space remains questionable.  Of course, the problems relating to e-commerce drawing away activity from brick-and-mortar stores is ongoing, but also weakness in the most discretionary items of the average consumer budget suggests that consumers are becoming increasingly discerning of their purchases and, perhaps, less willing to open their wallets for the random knick-knacks that often make their way under the Christmas tree.  Purchases this year are likely to be targeted, such as with new Apple products, primarily benefitting the profits of a select few companies rather than many.  This has essentially been the theme all year as companies such as Amazon, Netflix, and Apple soar, while other stocks within the consumer segment languish.  The overall result may mute the average tendency for strong equity market gains though November and December, a trend that has historically benefitted from the rise in consumer stocks, both staples and discretionary.

STAPLES Relative to the S&P 500

DISCRETIONARY Relative to the S&P 500

Pegging the two consumer sectors against one another, staples relative to discretionary, the trend continues to suggest positive risk sentiment.  We noted earlier this month that the relative performance of the defensive sector versus its cyclical counterpart had broken below a massive descending triangle pattern, a setup that projected further downside potential ahead.  Of course, positive risk sentiment is conducive to equity market strength.  But one other gauge of investor risk sentiment is suggesting an alternate scenario.  The Dow Jones Transportation Average rallied to a new all-time high earlier this month, breaking free of a massive consolidation range.  The transportation benchmark has since rolled over as the broader market hits new highs.  Price is back below rising trendline resistance and the relative performance, versus the Dow Jones Industrial Average, is closing in on the lows of the year.  Resistance on the relative performance chart has become apparent at the declining 200-day moving average.  A break of the lows of the year would suggest an additional 12% of underperformance ahead, based on the target of a head-and-shoulders pattern that has been charted over the past couple of years.  The last time the transportation average outperformed its blue-chip counterpart on a sustained basis was from late 2012 to late 2014, a period characterized by broad equity market strength.  The current negative trend could be signalling something more negative ahead for stocks, despite solid transportation data.  We’ll keep an open mind, but the trend certainly warrants continued monitoring.  Transportation stocks seasonally strengthen through October and November.

$TRAN Relative to the S&P 500

While stocks in the US traded lower on Monday, stocks in Canada showed gains, propelling the S&P/TSX Composite to a new all-time high.  The Canadian equity benchmark broke above horizontal resistance presented at the previous year-to-date high of 15,943 and is now pushing against rising trendline resistance around 16,000.  This important hurdle overhead has essentially capped the performance of the Canadian equity market for the past decade as stocks in the US attracted the lion share of the global flow of funds.  The essentially “flat” performance for the Toronto Stock Exchange amazingly is still better than the performance of the MSCI World ex-US Index, which needs to climb another 20% to match its all-time high charted at the end of 2007.  The relative performance of the global benchmark just broke out relative to the S&P 500 Index this year, suggesting that flows are just starting to make their way back to these depressed areas of the world.  Seasonally, both the TSX Composite and MSCI World ex-US follow the same seasonal pattern as benchmarks in the US, rising between October and May.

^GSPTSE Relative to the S&P 500

Sentiment on Monday, as gauged by the put-call ratio, ended close to neutral at 0.94.

 

 

Seasonal charts of companies reporting earnings today:

     

 

 

S&P 500 Index

 

 

TSE Composite