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Stock Market Outlook for May 18, 2016

 

Find out what Industrial Production and Housing Starts have to say about the economy.

 

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:

H&R Block, Inc. (NYSE:HRB) Seasonal Chart

 

 

The Markets

Stocks traded sharply lower on Tuesday, giving back the gains accumulated in Monday’s session as investors saw a greater chance of a Fed rate hike this summer given the release of a stronger than expected consumer price index (CPI) for April.  CPI increased by 0.4% in April, the strongest monthly gain in over three years, influenced by stronger gasoline prices.  Less food and energy, CPI rose inline with expectations, up by 0.2%.  The argument for a rate increase in the near future was bolstered by comments from two Fed policymakers that suggested the central bank could hike rates two or three times this year.  Stocks took a noticeable leg lower on those remarks, impacting higher yielding sectors the most, namely consumer staples and utilities.  The two defensive sectors saw losses close to 2% during the session, while the core cyclical sectors (energy, materials, and industrials) saw a daily change that held up better than the market return.  The S&P 500 Consumer Staples Sector Index had been bucking the losses in the broader market since the end of April, trading to new 52-week highs in the process.  However, a negative divergence with respect to RSI and MACD raised concerns over the strength of the positive trend.  Seasonally, May is one of the strongest months of the year for the sector, showing gains 80% of the time over the past 20 years for an average return of 1.7% as investors rotate towards the defensive constituents within.  The Consumer Staples benchmark closed below its 20 and 50-day moving averages, testing trendline support around 535.  Horizontal support and previous resistance around 525 would provide a logical test show the benchmark break trend.

The largest declines amongst broad market indices were apparent in small cap benchmarks as traders used the higher beta characteristics of the holdings as a downside hedge to other portfolio positions; investors have been shorting benchmarks such as the Russell 2000 Index in order to take advantage of the downside potential in equity markets.  The small cap benchmark has been increasingly showing resistance around significant moving averages over the past couple of weeks, first at the 20-day, and then more recently at the 200-day.  As with other benchmarks, a short-term head-and-shoulders topping pattern suggests downside potential ahead, in this case just over 3% below present levels to around 1060.  Momentum indicators continue to point lower, suggesting waning buying pressures following the significant jump from the February lows.  The performance of small caps is typically a good gauge of risk sentiment in the market; as of present, with small caps showing underperformance versus the large cap S&P 500 Index over the past few weeks, risk aversion is being suggested.

On the economic front, a report on industrial production had investors surprised by the unexpected strength for the month of April.  The headline print indicated that industrial production increased by 0.7% last month, better than the analyst estimated increase of 0.2%.  Stripping out seasonal adjustments, total industrial production was unchanged (0.0%) in April, a positive revelation considering the average change for the month is a decline of 1.2%.  The fourth month of the year has seen declines in activity 88% of the time over the past 50 years, in part due to one less calendar day versus the month prior, as well as the variable holiday presented by Easter, which was in March this year.  This makes April one of the most seasonally adjusted month on the calendar for many economic reports.  The year-to-date trend for industrial production remains below average, albeit better than last year’s trend, which was heavily influenced by weakening commodity prices.  May and June are two big months for this area of the economy as activity is ramped up prior to the summer shutdown period in July.  Below the headline print, the results are somewhat encouraging.   Aside from what has become typical weakness is areas surrounding the production of oil, many components are showing above average trends, year-to-date, including consumer goods and business equipment, two important areas providing insight into the health of the consumer and business. The production of consumer goods and business equipment are both trending around 1.3% above average.  Most of the components in the report are indicating an improvement versus last year as activity normalizes given the lows set in commodity prices earlier this year.

A report on housing starts for April also came in better than expected on Tuesday.  The headline print indicated that starts increased by 6.6% to a seasonally adjusted annual rate of 1.172 million.  Analysts had expected 1.135 million.  Stripping out the adjustments, housing starts actually increased by 20.5%, much better than the average increase for April of 12.7%.  The gap versus the seasonal average that was created following the weak report for March is quickly closing as starts in the south and widwest, chart a significant jump.  Housing starts typically peak in May & June, declining into the back half of the year as weather becomes unfavourable for building conditions.  Turning to permits, a gauge of future building activity, the seasonally adjusted annual rate of 1.116 million was an improvement versus the month prior, but failed to meet expectations calling for 1.130 million.  Stripping out seasonal adjustments, permits were higher by a very marginal 0.7%, significantly below the 5.3% average gain for April.  Along the same lines of future building activity, a divergence in the number of housing units authorized but not started has gapped away from its average trend.  But the negative divergence wasn’t just apparent in the gauges of future activity.  The number of housing units completed also pulled back from its seasonal norm after holding fairly tight to its average trend over the past couple of years; the level housing units completed is hovering around the lows of the year that was set in the middle of winter.  The following excerpt from the Wall Street Journal explains why:

Some builders have been struggling to keep pace, with many reporting shortages of skilled construction labor and affordable lots on which to build. And in many areas, home-price gains are outpacing wage increases, making it harder for people to save for a down payment. 

Housing units completed, as well as sales, warrant attention through the months ahead as the home furnishing and appliance manufacturers/retailers are heavily exposed to this seasonal uptick in housing activity through the spring and summer months.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bearish at 1.21.

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite