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Stock Market Outlook for October 5, 2015

 

Friday’s employment report showed the lowest September increase in Average Hourly Earnings in over 50 years.

 

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:

Akamai Technologies, Inc. (NASDAQ:AKAM) Seasonal Chart

The Gap Inc. (NYSE:GPS) Seasonal Chart

Intel Corporation (NASDAQ:INTC) Seasonal Chart

 

The Markets

Stocks closed sharply higher on Friday, despite a lacklustre employment report that fuelled speculation that the Fed would be unable to act, in terms of raising rates, until as far out as 2017.  Bond yields initially plunged, along with equity prices, in a knee-jerk reaction to the economic headlines.   But as sell orders faded within the first five minutes of trade, buy orders started to flood in from investors looking for bargains, particularly in the energy, materials, and health care sectors.  Biotech, Oil Exploration and Production, and Mining stocks posted significant one-day returns, lifting their respective sectors from oversold territory.  Seasonal tendencies, however, are not favourable for these industries into the month of October, averaging flat to negative returns through what is typically a transition period for the broad market.  The decline in the US Dollar Index certainly acted as a benefit, supporting some of these commodity sensitive sectors as the currency benchmark resisted once again around its 50-day moving average.  The US Dollar index remains in a period of weakness through October.

The positive swing in the broad market on Friday was a significant reversal, encompassing a trading range greater than the previous session.   Looking at the S&P 500 Index ETF (SPY), a reversal candlestick was charted, typically a positive event that indicates that support is present beneath the market; the selling momentum in no longer strong enough to push the market lower over the near-term.  This candlestick pattern, combined with double bottom support, which has been highlighted over the past couple of sessions, has the potential to act as a strong catalyst for investors to step into the market, shedding negative bets, particularly ahead of earnings season.  The bullish setup has the potential to propel the benchmark back towards long-term resistance presented at the 200-day moving average, the break of which fuelled the waterfall selloff in August.  At this point, with the 200-day moving average pointing lower, a certain amount of scepticism remains warranted, particularly if resistance around this significant average becomes apparent.

As mentioned, Friday’s knee-jerk reaction in stocks resulted from the rather lacklustre employment report for September.  Headline print indicated that 142,000 payrolls were added last month, well off of the consensus estimate of 203,000.  Investors had become accustomed to monthly employment gains greater than 200,000 with the majority of reports since the spring of 2014 achieving this significant level of job creation.  Change in average hourly earnings was also weak, recording no change versus the expectation of a gain of 0.2%.  Stripping out seasonal adjustments, 558,000 payrolls were added, or an increase of four-tenths of one percent, almost half of the average September gain of 0.7%.  Earnings grew by 0.14%, non-adjusted, the lowest September increase in over 50 years and nowhere near the 1.3% average gain for September, based on data from the past 50 years; the previous lowest increase for September was recorded in 2010 when average hourly earnings rose by 0.4%.  Weakness was fuelled by a decline in manufacturing and wholesale trade payrolls, as well as payrolls often related to seasonal employment held by students, such as leisure and hospitality.  It appears that the later than usual labour day weekend was a factor behind the strength in August, leading to later factory shutdowns and seasonal employment declines.  Yet, despite  the weak report, the year-to-date trend is back inline with the average trend, hovering around a gain of 0.8%.  Looking forward, gains in retail and transportation help to influence payrolls higher through the end of the year, corresponding with the increase in consumer spending around the holiday season.   Seasonally, these industries of the market (retail and transportation stocks) tend to perform well over the same timeframe, peaking around Black Friday in November.

The other report released on Friday was Factory Orders for August, which was equally as disappointing.  The headline print showed a month-over-month contraction of 1.7%, worse than the consensus estimate of a contraction of 1.3%.  Stripping out seasonal adjustments, the Value of Manufacturers’ New Orders for All Manufacturing Industries increased by 0.9%, a significant lag of the 8.6% average gain for August, based on data from the past 20 years.  The year-to-date trend of the overall report is now well below the average trend through the first eight months of the year, but, as we’ve now seen with the employment report, the later than usual Labour day holiday may have had an impact in distorting some of these monthly numbers this past summer, suggesting the true read may not be available until September’s report is released.  The lag in non-durable goods, which has been impacted by weak commodity prices, is certainty a significant factor behind the weak report.  With areas of lag within the economy, the ability for the Fed to normalize rates is certainly constrained due to the risk that the areas of the economy that are performing well, those pertaining directly to the consumer, may be negatively impacted by an increase in the cost of borrowing.  The minutes from the latest FOMC meeting are due to be released this Thursday.

Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.09.

 

 

 

Seasonal charts of companies reporting earnings today:

  • No significant earnings reports scheduled for today

 

S&P 500 Index

 

 

TSE Composite