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Stock Market Outlook for July 25, 2016

 

MSCI ACWI ETF showing a very bullish setup as emerging market equities improve.

 

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:

Mosaic Co (NYSE:MOS) Seasonal Chart

GlaxoSmithKline plc (ADR) (NYSE:GSK) Seasonal Chart

Consolidated Edison, Inc. (NYSE:ED) Seasonal Chart

Netflix, Inc. (NASDAQ:NFLX) Seasonal Chart

Gilead Sciences, Inc. (NASDAQ:GILD) Seasonal Chart

Automatic Data Processing (NASDAQ:ADP) Seasonal Chart

 

 

The Markets

Stocks closed higher on Friday with the S&P 500 Index and Dow Jones Industrial Average reaching back towards the all-time intraday highs charted earlier in the week.  The S&P 500 Index added 0.46% to close just below the intraday high of 2175.63 charted on Wednesday; very short term resistance is becoming apparent around this all-time peak, while short-term support at 2159 continues to mitigate downside pressures.  It would be difficult to entice the shorts back into the market without a close below 2155.  On the Dow, that short-term support is apparent at 18,470 with shorts likely to be enticed by a break below 18,400.  Until then, the market may be in this distribution phase where investors that have realized solid gains over the past many weeks seek to book profits, while investors that missed out seek to buy the breakout.  Support for each benchmark is back around the breakout point: 2110 on the S&P 500 Index and 18,000 on the Dow Jones Industrial Average.  So while there remains minor downside risks over the short-term, the intermediate trend continues to look quite positive with the recent breakout to new highs.

On broader scale, an important global ETF is breaking above what could potentially be a very bullish setup.   The MSCI ACWI (All-Country World Index) ETF is moving above the neckline of what appears to be an inverse head-and-shoulders pattern.  Calculated upside target of the setup points to around $64, or approximately 10% above present levels.  Momentum indicators on the weekly chart of the global ETF continue to point higher, suggesting improving buying pressure.  The ACWI ETF has been underperforming the S&P 500 Index for the past five and a half years, in part due to the struggle imposed by emerging market indices.  But with the Emerging Market ETF (EEM) showing a similar bottoming pattern, the tide may be about to shift.  Continued improvement in benchmarks around the globe could draw investors away from stocks at home and into some of the more international opportunities, which remain well below all-time highs.  Seasonally, August can be a tough month for some of these worldwide benchmarks, but, beyond that, they tend to flourish in the last third of the year. 

Of course the technical outlook is well telegraphed by now, but the dilemma remains how to partner the positive intermediate-term trend with seasonal tendencies that reached a peak for the quarter over the past few days and the fundamentals, which have enough arguments on either side of the coin to justify a move in either direction. Valuations continue to expand and become increasingly expensive as the market moves higher.  Global sovereign yields are hovering around levels that are more consistent with a struggling economy.   Meanwhile economic data has increasingly been reported better than expected, pushing the Citigroup Economic Surprise Index to the highest level since 2014.  But perhaps the most important fundamental factor, threatening the equity market rally, is the rise in the US Dollar.  Just this past week, the US Dollar Index broke above a flag pattern, pressuring the index above its 200-day moving average and into the upper half of its long-term range.  While equities have yet to realize any significant impact, commodity prices are showing signs of languishing.  Oil prices, which acted as a significant weight on equity prices earlier in the year, are increasingly rolling over as the currency moves higher.  Agricultural commodities are also sharply lower since hitting a peak in early June. As well, some of the metals have realized minor losses over the past couple of weeks.  Should the strength in the US Dollar continue, the pressure on commodity prices will increase, eventually spilling over to some of the commodity sensitive and internationally focussed names in the equity market, such as the energy, materials, and consumer staples sectors where negative relative trends have started to emerge.  The less exposed small-cap Russell 2000 Index, meanwhile, has shown an uptick in performance relative to the market since the end of June, undeterred by this currency headwind.  For the time-being, investors are focussed on earnings reports, but as soon as the bulk of reports have been disseminated, focus will likely shift to some of the concerns out there.

While remaining on the topic of economic fundamentals, a report on Canadian retail sales was released on Thursday.  The headline print showed an uptick in sales by 0.2% in May, exceeding the consensus estimate calling for a flat (0.0%) result.   Ex-adjustments, sales in Canada were higher by 5.6%, which is actually light compared to the average increase for May of 9.1%.  Despite the lower than average result, sales remain firmly above the average trend, which tend to peak in this fifth month of the year.  Sales tend to decline between June and September, then jumping into the last quarter of the year.  Overall, sales in both Canada and the US have been a bright spot in the economy, certainly showing no ill effects from sluggish manufacturing activity or weak export demand.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.82.

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite