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Stock Market Outlook for February 4, 2016

 

Vehicles and the fuel that moves them, from a seasonal perspective.

 

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:

  • No stocks identified for today

 

The Markets

Stocks rallied on Wednesday, fuelled to a large extent by a plunge in the US Dollar.  Commodity prices skyrocketed, boosting prices of commodity sensitive stocks in the energy and materials sectors.  The S&P 500 Energy and Materials sector benchmarks gained over 3% on the day, finding support at their respective 20-day moving average lines.  As highlighted the other day, these two sectors have historically been the strongest performers in the second month of the year as industrial production ramps up into the spring and the US Dollar begins to top out.  The US Dollar index broke through support at is 20 and 50-day moving averages, escalating selling pressures down to the benchmark’s 200-day average.  The currency benchmark is now back to around the mid-point of its year-old trading range that spans from 93 to 100 as expectations grow that the Fed will hold off on further rate hikes amidst weakening economic data.  Friday’s employment report will likely dictate the direction of the dollar index over the month ahead as currency traders weigh the ongoing strength of employment, which tends to be a lagging indicator, with some of the more leading economic data points.

With the plunge in the US Dollar, as well as rumours of another attempt at an emergency OPEC meeting, the price of oil soared on Wednesday, despite another large build in inventories.  The Energy Information Administration (EIA) indicated in its weekly report that oil inventories grew by 7.8 million barrels last week, increasing the days of supply for the commodity by another full day to 31.5.  This is the highest level since 1984 when oil prices traded around a similar $30 range.  This early 80’s supply glut marked a peak in the price of oil that persisted for the two decades that followed; the price of oil lost over 70% between 1980 and 1986 as supply outpaced demand, much like it is today.  The pace of oil inventory builds continues to pose a significant concern, tracking closely with last year’s rate of change.  Inventories are now larger by 4.2% in 2016, well above the 0.6% average through the end of January.  And while the pace of oil additions to inventory remain large, they would be even larger if refiners hadn’t processed so much of the raw input to gasoline, which saw a 5.9 million barrel build.  The days of supply of the refined product now sits at 29.2, almost two days more than the historical average for this time of year of 27.6 days.  However, the ability of refiners to push through the raw product during the weeks ahead may be difficult.  Seasonally, refiners are entering their maintenance period, leading to a peak in the days of supply of gasoline by mid-February, on average.  This suggests that the recent trend of inventory gains for gasoline may soon come to an end, shifting the emphasis away from gasoline and back on oil. 

Following the petroleum inventory report, crack spreads (the price of gasoline relative to the price of oil) plunged, impacting shares of refining companies that have been benefitting in the low oil price environment.  We’ll have to see over the weeks ahead, when the supply of gasoline typically peaks, whether or not crack spreads can continue this emerging trend lower.  Seasonally, crack spreads typically widen between October and March.

While the supply of gasoline has caught the attention of investors, the demand side of the equation is likely to have taken a hit over the past week as the US northeast recovers from one of the worst blizzards in history, limiting driving activity.  This may just be a one-off event, however there is evidence that demand over the longer-term may be waning.  Last week, the US Federal Highway Administration released the statistics pertaining to vehicle miles traveled.  For the month of November, miles traveled were lower by 7.4%, greater than the average decline of 6.8%.  Year-to-date, through November, the miles traveled is in contraction territory, down by 0.2%, below the average through to the second to last month of the year of a gain of 1.7%.  The 2015 actual change has remained below average since the spring, despite cheap gas prices.  Below average vehicle miles traveled have often preceded recessions as consumers refrain from taking those longer road trips, opting instead to staying home.  Seasonally, the miles traveled tends to decline through the winter months, rebounding into the spring and summer, acting as the catalyst for higher oil prices during this warmer weather period.

And while on the topic of vehicles, a report on motor vehicle sales was released yesterday, the details of which may not be us upbeat as what the headlines suggested.  The headline print indicated that total vehicle sales rose to a seasonally adjusted annual rate of 17.6 million units, beating estimates calling for 17.5 million.  Stripping out seasonal adjustments, total vehicle sales were actually lower by 29.9% in January, more than double the average decline for the first month of the year of 13.5%.  Vehicle sales had been running below average through most of 2015, but, with the help of an end of year jump, managed to end the year above the full year norm, keeping the seasonally adjusted annual rate elevated.  January’s decline more than offsets the abnormally high increase in December.  Overall, the almost 30% decline in vehicle sales in January is the fourth weakest start to a year since 1977, possibly setting the stage for the first full year contraction since the great recession.  The health of the consumer is becoming questionable.

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.85.

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite