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Stock Market Outlook for August 3, 2016

 

As economic data continues to deteriorate, recession risks creep higher.

 

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:

Expeditors International of Washington (NASDAQ:EXPD) Seasonal Chart

 

 

The Markets

Stocks dipped on Tuesday following weak reports on automobile sales for the month of July and another pronounced decline in the price of oil.  GM and Ford reported that sales fell 2% and 3%, respectively, taking a bite out of the share prices of each.  The S&P 500 automobiles industry index was lower on the session by over 3%, falling further below its declining 200-day moving average that was broken to the downside last week.  Resistance on the auto benchmark is apparent around 124.  Seasonally, declines in this segment of the economy are typical through August and September as the spring buying season becomes a distant memory. 

One seasonal influence that has historically factored into the decline of auto sales through the summer is not as much of a factor this year.  Oil and gasoline prices typically remain strong through the summer months as the driving season fuels demand for the refined commodity, thereby pressuring the sales of autos over the same timeframe.  But with an increasing supply of gasoline amidst an ongoing glut in oil supplies, the price of gasoline has realized a pronounced decline over the past month and auto sales have remained on a downward trajectory, declining year-over-year as the argument for peak auto becomes increasingly valid.  The price of gasoline typically rises by 2.0%, on average, in the month of August, through to the typical peak for consumption into the beginning of September.  Further analysis on oil and gas prices will be provided tomorrow, following the release of the weekly EIA report.

The combination of weak economic data and ongoing weakness in oil prices pressured the S&P 500 Index below its recent tight trading range, testing the first level of support around 2155.  Of course, the more critical level to watch to confirm the breakout to new all-time highs is 2110, a level that restricted any upside move over the past year.  Should this previous resistance be confirmed as support, it could draw investors back into the market after being net sellers around resistance through the first half of the year.  Momentum indicators for the large-cap benchmark, which had been rolling over, are now pointing down, triggering short-term sell signals.

So far, the start of August is living up to its reputation as being one of the weakest and most volatile months for stocks.  Over the past 50 years, the S&P 500 Index has declined by 0.1% in this eighth month of the year, followed by a 0.6% average decline for September.  While emphasis is place on “sell in May," August and September are the months investors should focus on as volatility rises.  Over the past 20 years, cyclical sectors have tended to dominate the losses in August with the energy, materials, industrial, consumer discretionary, and financial sectors all averaging a loss of more than 1%; the utilities sector has been the lone standout, averaging a gain amidst low bond yields and strong demand for water and electricity.  With defensive sectors up significantly on the year, their performance will be very telling of risk sentiment as expensive valuations amongst consumer staples and utilities have investors thinking twice about whether or not they are the better bet with the broad market showing signs of breaking out.

On the economic front, a report on construction spending was released on Monday.  The headline print indicated that spending declined in June by 0.6%, opposing expectations that called for a gain of the same margin.  Stripping out seasonal adjustments, spending actually increased by 5.4%, which is shy versus the average increase for the month of June of 6.8%.  A particular burden in June’s report was a weak private non-residential print, which gained a mere 0.3%, in part due to weakness in the manufacturing subcomponent.  The average increase for private non-residential spending in the sixth month of the year is 4.0%.  Construction spending continues to lag the seasonal average through the first half of the year as projects are put on hold in certain areas of the economy due to strained conditions, either with respect to commodity prices or export activity.  Seasonally, the momentum in construction spending starts to fade through the summer, eventually declining through the last four months of the year in conjunction with the winter weather.  What becomes critical to watch in these reports is the deterioration that is being realized versus the trend set last year and the average trend.  The decline has been obvious with respect to auto sales and now construction spending is failing to live up to the norm.  This has also become apparent in employment indicators, transportation data, manufacturing gauges, and, to a certain extent, retail sales, which raises concerns pertaining to future economic growth.  If these trends continue to materialize (and we’ll know more as soon as this Friday when the monthly non-farm employment report is released), then recession within the next year becomes increasingly probable.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bearish at 1.15.  Investors have been aggressively hedging over the past few sessions as upside momentum has stalled.  This is typically a positive for stocks as it removes the catalyst for investors to sell as stocks move mildly lower.

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite