You may want to sell the breakout in the retail industry.
**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:
The grind higher continues with all three of the major equity benchmarks in the US (Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite) charting new all-time highs. The Dow Jones Industrial Average crossed a key psychological level at 19,000, pushing further into overbought territory. Despite momentum indicators hovering around extremes, they have yet to show signs of peaking. Moving averages continue to curl higher, renewing the upside momentum following a couple of months of declines. Keeping with the stair-step pattern on the blue-chip benchmark, the breakout from the approximately 600-point range, which recently topped out close to 18,600, projects upside potential to around 19,200. A similar 600 point range in the spring of this year realized a commensurate breakout following the Brexit vote. A rising 200-day moving average continues to underpin the longer-term trend.
Gains on Tuesday were led, in part, by the retail industry, fuelling a breakout in the Retail ETF (XRT) above resistance at $46.20. This also marks the upper limit to an ascending triangle pattern, typically a bullish setup. However, there may be reason to use the breakout as a selling opportunity as opposed to a buying opportunity. Seasonally, the retail industry benefits from a period of seasonal strength through October and November, concluding around Black Friday in the US; the event itself typically leads to a sell-on-news scenario as the results from the buying spree are released. With the average peak to this seasonal trade closing in, the tailwind to push stocks in this space higher may fade. The trade has charted gains exceeding 7% since the beginning of October, or over 9% since the technical buy signal was provided on November 9th with the massive engulfing candlestick that followed the Trump election result. The retail industry has shown a history of charting an equal number of gains and losses in December and January, settling down before the next period of strength that runs between late January and mid-April.
On the economic front, a report on home sales came in well ahead of estimates. Existing home sales increased by 2.0% in October to a seasonally adjusted annual rate of 5.60 million. Analysts had forecasted a rate of 5.42 million. Stripping out the seasonal adjustments, sales were actually lower by 8.2%, much lower than the average change for the month of October of -0.6%. The year-to-date change has fallen back below the average trend, nearing the flatline on the year. This is one of many reports released recently that has seen a better than expected headline print, but the non-adjusted data has suggested something less upbeat. So what is going on? While October still had 31 days, as usual, but only 21 of those days were considered business days (falling between Monday to Friday). This is below the average number of business days for the month of over 22 (22.27 to be precise over the past 15 years). As a result, the seasonal adjustment factor compensates for this theoretical loss of a day, which inflates the headline print. Whether this adjustment is justified is up for debate, particularly in this age where the lines between what constitutes a business day and a non-business day is becoming increasingly blurred. If the adjustment fails to properly compensate for this calendar anomaly, the headline print in the month(s) that follow could be impacted.
Sentiment on Tuesday, as gauged by the put-call ratio, ended neutral at 1.00.
Seasonal charts of companies reporting earnings today:
S&P 500 Index