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Stock Market Outlook for May 31, 2016


Driving season off to a strong start with vehicle miles traveled up 17.8% in March.


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**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 higher on Friday as investors reacted favourably to comments from Fed Chair Janet Yellen who indicated that an interest rate hike may soon be appropriate.  The S&P 500 Index added 0.43%, touching resistance at 2100.  The large-cap index chalked up its best week since the start of March, gaining 2.28% and moving back into positive territory for the month of May, a month that has gained a notorious reputation for being the best time of year to sell equity holdings.  Looking at the weekly chart of the S&P 500 Index, over the past two weeks, the benchmark has bounced firmly from its 50-week moving average, a level that has shown significant intermediate support and resistance characteristics in the past.  Momentum indicators are also showing signs of turning higher after stalling over recent weeks.  While it is encouraging that the market benchmark is turning higher from an important level of support, we have to be cognizant of the fact that the index remains bound by a range that tops out around 2110.  At the end of the day, a catalyst is likely required to fuel a move, one way or the other.  Fortunately, or maybe unfortunately, the potential catalysts in June are many with the FOMC meeting mid month, the Brexit referendum vote, and the start of the ECB’s Corporate Sector Purchase Program.  The end of the second quarter and the anticipation that surrounds the coming earnings season are other factors to consider from a seasonal perspective.  The summer is not known for many market moving events, at least not positive in nature, but with the political landscape and uncertainties over monetary policies, there will continue to be events on the calendar that should keep investors on their toes through the months ahead.

With all of the political and monetary policy uncertainty, investing in Gold may seem like a safe bet.  While it may become a profitable holding in the near future, the month of June has not been kind to the yellow metal.  It was just a couple of weeks ago that we suggested caution in becoming overly anxious in the gold trade, which at the time was hovering around 52-week highs.  Momentum indicators had been negatively diverging from price, failing to confirm the April peak above the March high.  Gold is presently testing support around $1200, a break of which could see a test of the 200-day moving average, which is now pointing higher following years of declines.  Gold enters a period of seasonal strength starting in mid to late July, running through to October, benefitting from the typical rise in equity market volatility over the same period.  Gold appears to be in the early stages of longer-term strength, but a retracement over the near-term would be a healthy progression towards a trend of higher-highs and higher-lows.

While there are a number of indicators investors can follow to gauge the strength of the economy, statistics pertaining to transportation provide particularly valuable insight into the movement of goods and people, obviously a critical component to any economy.  Reports released over the past couple of weeks present somewhat of a mixed view.  Starting with the rails, Rail Freight Intermodal Traffic, as measured in ton miles, rose a very marginal 1.4% in March, significantly less than the average increase for the last month in the first quarter of 10.7%.  The year-to-date change has fallen below average through the first three months of the year, somewhat of a concerning outcome given the strength in manufacturing activity and international trade to start the spring season.  March is typically the strongest month of the year for transportation by rail, accounting for a significant share of the gains for the year.  Declining commodity shipments, such as coal and oil, has been holding back activity for the past couple of years.  Some economic reports have indicated increased activity more towards April, so we may have to wait until the next set of rail transportation results are released to make a more appropriate conclusion.

On to transportation by water, the tonnage for internal US waterways increased by 10.7% in March to kick off the start of the shipping season following the winter, which is often prohibitive for this method of transportation between November and February.  The result, however, failed to live up to the 15.8% average increase for this time of year.  The year-to-date change is now 1.3% below average through the first quarter, not a large divergence, but it does warrant further monitoring through the seasonally strong spring period. Shipments by water in 2016 continue to show a noted improvement versus the trend set last year, which saw the weakest activity since 2008 as the economy was contracting.

And finally, low gas prices are certainly making it more conducive for Americans to stay in their cars, something that is very important given that the summer driving season has just begun.  Vehicle miles travelled jumped 17.8% in March, better than the average gain for the third month of the year of 16.8%.  The year-to-date trend is running fairly close to the seasonal average as the positive trend that spans the summer months gets underway.  And while not the most cited indicator, public transit ridership is trending below average, providing indication that personal automobile use is more economically feasible with gas prices around present levels.  Public transit ridership typically has a direct relationship with the price of fuel, moving higher or lower as the cost of operating a personal vehicle becomes more or less expensive. 

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.90.





Seasonal charts of companies reporting earnings today:



S&P 500 Index



TSE Composite