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Stock Market Outlook for January 19, 2016

 

Head-and-shoulders topping patterns now glaringly obvious across the charts of major equity benchmarks.

 

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:

Rio Tinto plc (ADR) (NYSE:RIO) Seasonal Chart

Home Capital Group Inc (TSE:HCG) Seasonal Chart

Valero Energy Corporation (NYSE:VLO) Seasonal Chart

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) Seasonal Chart

Equifax Inc. (NYSE:EFX) Seasonal Chart

 

The Markets

Stocks continue to fail to bounce.  With the catalyst of plunging oil prices and weak economic data, stocks took another leg lower.  At the lows of the session, the S&P 500 Index broke below the lows charted last August, cracking the widely followed level of support.  Other notable benchmarks, such as the Nasdaq Composite and Dow Jones Industrial Average, are testing similar 52-week lows as investors aggressively price in the risks presented by the waning economic fundamentals.  As of the close, the August lows held as support, for now, leaving investors to contemplate the deteriorating technical status of the equity market over the three-day weekend. 

While continuing to try to peg a short-term low in many equity benchmarks given their significantly oversold state, which at some point should lead to an abrupt counter-trend rally, the broader risks are that of a longer-term topping pattern.  As has been highlighted and speculated upon on this site over the past couple of weeks, the head-and-shoulders topping pattern remains glaringly obvious across the charts, no matter which major US equity benchmark you look at.  The downside risks that this bearish setup presents suggests that the downturn is only half complete and losses of 10% to 15% could still be realized.  While that may panic some investors, a break (and close) below the August lows may present the ideal time to pull out your shopping list.  Many are aware that equity markets are in their best six months of the year from a seasonal perspective, but as we’ve pointed out at the start of the year, the best chance for turmoil in stocks during this favourable period is in the first two months of the year.  Behold what has materialized.  The next month of significance is March.   In this third month of the year, the S&P 500 Index has gained 66% of the time over the past 50 years, averaging a return of 1.1%; April is even better with a gain frequency of 70% and an average return of 70%. 

So why are these stats significant given that we are still 6 weeks away from the start of March?  With all of the technical damage charted in the first two weeks, it could take at least six weeks in order to find a footing stable enough to establish a positive intermediate-term trend.  That is why if equities continue to crash in the weeks ahead, closing definitively below neckline support of the head-and-shoulders patterns on the charts of major indices, pull out your shopping lists to find the best holdings to take advantage of the spring rebound.  Keep in mind, there is a lot of speculation with this call as trying to peg direction, distance, and time in the equity market is like trying to call a trifecta in horse racing; you may nail one or two parts of the bet, but it doesn’t matter unless you are 100% correct.  A lot of fundamental factors will be clarified over the weeks ahead, mainly with respect to earnings.  Watch the slope of the forward 12-month EPS curve that we profiled the other day; you need optimism of future earnings potential in order to reinvigorate positive equity price momentum.

Now on to the economic data.  Friday was a busy session with retail sales, industrial production, business inventories, manufacturing and consumer data all having an influence on market activity.  Starting with Retail Sales for December, the headline print indicated that sales fell by 0.1% last month, disappointing analyst expectations calling for no change.  Excluding the more volatile Auto and Gas components, sales were unchanged (0.0%), also missing estimates calling for a 0.3% gain.  Stripping out seasonal adjustments, Total Retail Trade increased 16.5% last month, less than the average increase for December of 17.4%, based on data from the past 20 years.  While not the lowest December increase in the past 20 years (2012 takes the top spot for for the weakest December increase of 13.1%), the full year increase in sales was the lowest since 2008.  Retail trade was higher by 2.22% in 2015, which is disappointing compared to the average yearly increase of 3.68%; in 2014, the increase for the year was 4.30%.  December’s print was the largest negative divergence from the average trend seen all year, certainly concerning given the significance of consumer spending around the end of year holidays.  The strain of sales at gasoline stations took a toll on the top line number; many components in the report actually closed the year with above average gains.  Retail trade for Autos, Furniture, Building Materials, and Sporting goods all saw above average gains for the year.  It’s no wonder that retail sales were less than expected as everyone was out playing sports or decorating their house.  Food services, electronics, health & personal care items, and clothing saw less than average results, in some ways attributed to the warmer than average weather.  So while there are a few ways to spin the report as being negative given the less than average annual gain, we know that the depressed price of gasoline and the warmer than average weather did play a role in constraining the final result, which doesn’t exactly conclude that the consumer is unwilling to spend.  The risk remains that weakness in manufacturing segments of the economy spill over to the consumer, which is a driving force for economic activity in the US, but nothing too threatening has materialized as of yet.

With respect to manufacturing/industrial production in the US, the results do not appear to be improving.  The headline print indicated a 0.4% contraction in industrial production in December, double the expected decline of 0.2%.  Stripping out seasonal adjustments, the decline was similar to the adjusted figure at 0.4%, which is marginally better than the 0.6% decline that is average for the last month of the year.  With all numbers in for the year, the final tally showed industrial production declined in 2015 by 1.98%, which is the first full year decline since 2009.  Over the past 50 years, industrial production has averaged an annual gain of 2.7%.  One of the few areas of industrial production that showed above average results for the year was in durable consumer goods as manufacturers made all of the automobiles and furniture that retailers were selling.  The rest of the report generally showed below average results as depressed commodity prices and weak export demand constrained activity.  One chart that is rather telling of the state of the economy outside of the consumer is industrial production of business equipment, which has significantly diverged from the average trend over the past four months.  Business equipment ended down for the year by 0.6%, much lower than the 4.7% average annual gain.  While the focus of the economy is generally on the consumer, deteriorating business conditions will eventually trickle down to consumer spending, significantly increasing the risk of a recession.

Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.52.  This is the highest reading since late August, amidst the panic selling that quickly sent equity benchmarks to the lows of the year.  With investors overwhelmingly leaning towards one side of the boat, piling on the short positions, the sustainability of the decline over the short-term is in question. 

 

Sectors and Industries entering their period of seasonal strength:

^BKX Relative to the S&P 500

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite