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Stock Market Outlook for July 11, 2016


Average hourly earnings realized one of the largest June declines on record.


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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:

Las Vegas Sands Corp. (NYSE:LVS) Seasonal Chart

Wynn Resorts, Limited (NASDAQ:WYNN) Seasonal Chart



The Markets

Stocks surged on Friday as investors reacted to a much stronger than expected employment report for June.  The headline print indicated that employers added 287,000 jobs last month, bouncing back from May’s lacklustre print and exceeding the consensus estimate calling for a gain of 180,000.  The unemployment rate ticked mildly higher to 4.9%, as a result of an increase in the participation rate, and average hourly earnings was higher by only 0.1%, half of the consensus estimate.  The surge payrolls between May and June highlights the significant manipulation present within the seasonal adjustment, justifying a non-seasonally adjusted breakdown in order to accurately pinpoint the underlying trends.  Stripping out the adjustments, the enthusiasm surrounding the report quickly disappears.  Payrolls actually increased by 0.5%, remaining light versus the average increase for June of 0.7%.  A negative gap versus the average seasonal trend continues to open with the year-to-date change now sitting at +0.8% versus the average change of +1.0%.  This follows years of above average growth as the economy recovered from the depths of the recession.  This year’s growth in employment puts the change at the lowest since 2010 when employment growth by the end of the year was less than half of the average annual increase.  Looking through the details of the report, the story doesn’t get much better.  Low paying opportunities in the retail and leisure/hospitality industries continue to realize above average employment growth for the year, while the often higher paying opportunities in professional and business services continues to lag the average trend.  As a result, average hourly earnings realized a pronounced decline by 0.8%, essentially matching the largest June decline on record and realizing the fourth largest monthly drop in the past 50 years.  This certainly doesn’t bode well for wage inflation or the demand for labour in general as the calendar flips to the month of July, the second weakest month of the year for employment as the summer factory shutdown period begins.  Overall, this previous bright spot in the economy is slowly becoming a flickering light as employment trends show signs of maturing and employers cut back on the pace of hiring given the global uncertainties.

The weekly report on jobless claims somewhat confirms the maturing employment trend.  While initial jobless claims have continued to hover around the recovery lows, continued claims showed a bit of an abrupt uptick in last week’s report, rising ahead of the spike attributed to the summer slowdown.  Following a below average trend through the first five months of the year,continued claims have jumped to an above average pace, on track to realize one of the largest June increases in almost 50 years.  While we have to remain cognizant of the fact that the sluggish employment data has only been realized over the past many weeks, ahead of the widely anticipated Brexit referendum and looming presidential election, it may be premature to conclude anything significantly detrimental.  However, it is clear that a shift is underway that is suggesting that the trend of above average employment growth is perhaps behind us.

With investors reacting to the strong headline print with regards to employment, the S&P 500 Index flirted with all-time highs.  On the weekly chart of the large-cap index, the benchmark finally recorded a close above the 2100 pivot point, a level it had been toying with for the past year.  Despite the intra-week break of the 50-week moving average following the Brexit volatility, this average is slowly cementing itself as a level of support as significant overhead resistance continues to be chipped away at.  With all off the volatility in recent weeks and signs of waning momentum, a bearish MACD crossover failed to materialize on this weekly look, keeping the benchmark on a buy signal from the February crossover event.  Of course, the recent gains have fallen precisely within the average time of year that stocks typically rally, running through to the doorstep of peak earnings season, on or about July 17th (see chart below originally posted on June 27th).  Earnings season makes its unofficial start today with a report from Alcoa, a stock that has typically realized negative tendencies following this pre-earnings run-up period.  Investors should be watching closely for evidence of selling on news, a catalyst that could quickly claw back the gains accumulated over the past couple of weeks.

Meanwhile, turning to a chart that we presented a few times over the past year, the ratio of stocks to bonds continues to punch up against declining trendline resistance as the fixed income asset class remains in a position of outperformance.  It has been well documented that bonds are rising alongside stocks and that something eventually has to give as investors cast their vote in favour of one asset class or the other.  The declining ratio continues to suggest that the bond market remains the better hold and any sustainable equity market rally may require bond market participation, leading to a breakout in stocks relative to bonds.  The fixed income market remains in a period of seasonal strength between May and October, but keep this ratio handy in case a shift away from the defensive asset class is warranted.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.73.


Seasonal charts of companies reporting earnings today:



S&P 500 Index



TSE Composite