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Stock Market Outlook for July 26, 2017

Bond prices gap lower ahead of Wednesday’s FOMC announcement.

 

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:

  • No stocks identified for today

 

 

The Markets

Stocks once again closed at record levels as earnings continue to come in better than expected, allowing analysts to attempt to justify present valuations.  The S&P 500 Index notched a gain of three-tenths of one percent, led by the energy sector, which got a boost from a jump in the price of oil.  On Monday it was announced at a meeting of oil producers that Saudi Arabia would limit crude exports to 6.6 million barrels per day in August, down nearly a million barrels per day versus this time last year.  West Texas Intermediate Crude closed higher by over 3% on the session, supporting an equal rise in the ETF that tracks exploration and production companies (XOP).  Short-term bottoming patterns are becoming apparent across the charts of energy companies as the period of seasonal strength for the sector gets underway.  Looking at the Dow Jones US Exploration and Production Index, a short-term head-and-shoulders bottoming pattern is very much apparent with the neckline to the setup around Tuesday’s closing level.  The pattern projects a calculated move higher of around 6% above present levels, potentially intersecting once again with the declining 200-day moving average.  The energy benchmark tested support at its 20-day moving average in previous days, the first time this shorter-term average has provided sufficient support since December of last year.  The relative strength index (RSI) is slowly moving into bullish territory above 50 following many months of gyrating below this crucial level.  Seasonally, oil exploration and production stocks tend to rise between the end of July into the middle of September, benefitting from the height of demand for oil through the end of summer.  We’ll have more analysis on the state of the oil market tomorrow when the weekly petroleum inventories are released.

The rise in stocks on Wednesday coincided with a selloff in the bond market as investors position ahead of the FOMC meeting announcement on Wednesday afternoon.  The consensus is that the Fed will keep rates on hold following the 25 basis point hike announced at the last meeting.  But, as always, it is the language in the announcement that will draw the attention of analysts as they look for clues as to the plans to unwind the Feds bloated balance sheet.  The long-term treasury bond ETF (TLT) gapped lower on Tuesday, closing down by 1.30%.  The move instantly charts a lower short-term high following a trend of higher-highs and higher-lows from a low set in December of last year.  The open gap in the $124 range provides a level for investors to shoot off of, albeit for a move to the downside, as investors digest the details of the Fed statement.  Significant support is evident in the 1 range.  Seasonally, bond prices are in the strongest time of year, spanning from the middle of July through to the start of October, coinciding with the period of strength for equity volatility.  The swing lower in prices on Tuesday presents risks to this seasonal trade, which investors will be looking to Yellen to salvage in the days ahead.

Turning to the economic data released on Tuesday, a report on house prices for the month of May confirmed the results stated in the previous day’s report on existing home sales.  The headline print of the S&P Corelogic Case-Shiller House Price Index showed that the prices of homes in the nation’s 20 largest cities rose by a seasonally adjusted rate of 0.1% in May, short of analyst estimates that called for a 0.3% increase.  Stripping out the seasonal adjustments, the 20-city composite house price index rose by 0.8%, two-tenths of a percent below the seasonal average increase for this spring month.  But the year-to-date performance shows the strong trend in the housing market with prices up by 3.4%, double the average increase through this point in the year of 1.7%.  Looking through the components, weakness in San Francisco, New York, Boston, and Chicago weighed on the aggregate result for the month, however, all but San Francisco remain above their seasonal averages through the first five months of the year.  Given the high valuation of prices in some of these regions, moderation of prices is not necessarily a bad thing.  The strength in house prices tends to soften in the back half of the year as the weather limits demand for housing into the winter months.

Elsewhere in the economy, Cass Information Systems recently released their monthly freight index for the month of June.  Cass is reporting that their shipments index fell by 0.4% last month, a negative divergence compared to the average increase of 1.9%.  The decline for this last month of the second quarter is very rare with only 12% of Junes over the past 17 years showing a negative result as manufacturers ship their goods before the summer shutdown period.  As a result, the year-to-date trend has fallen back below the seasonal average for this time of year, up by 8.3%, still an improvement versus the trends realized in recent years.  As for the expenditure side, while the index did show a gain for the month, it was well short of the average increase for June.  The total amount spent on freight was higher by 1.9% for the month, almost half of the average increase of 3.5%.  The 9.8% rise in expenditures through the first half of the year is inline with the historic norms, a significant improvement from the trends reported during the last couple of years that saw the amount spent to ship freight decline amidst soft demand and weak commodity prices.  While the June weakness does present some concern, the strength in some of the manufacturing gauges reported for July indicates that the typical slowdown for this summer month may not be as bad as usual, potentially resulting in higher than average shipments for the current month.  Seasonally, both shipments and expenditures tend to peak for the year between now and September, alongside the height of industrial production in the US.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.80

 

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite