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Stock Market Outlook for August 8, 2016


Breakdown of the Nonfarm Payroll report, from a seasonal perspective.


Real Time Economic Calendar provided by


**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:

Alaska Communications Systems Group, Inc (NASDAQ:ALSK) Seasonal Chart

PG&E Corporation (NYSE:PCG) Seasonal Chart

E TRADE Financial Corporation (NASDAQ:ETFC) Seasonal Chart

Adobe Systems Incorporated (NASDAQ:ADBE) Seasonal Chart

Valeant Pharmaceuticals Intl Inc (TSE:VRX) Seasonal Chart



The Markets

Stocks surged to all-time highs on Friday following a much stronger than expected Nonfarm Payroll report for July.  The headline print indicated that 255,000 jobs were added last month, well above the consensus range that topped out at 215,000.  Prior periods were also revised higher.  The unemployment rate ticked mildly higher to 4.9% as a result of an increase in the participation rate.  As for the real story, while July’s change was better than average, it probably doesn’t live up to the hype generated by the seasonally adjusted dataset.  The US economy actually lost 1.03 million payrolls in July, or a decline of 0.7%.  The average decline for this summer month is 0.9%, based on data from the past 50 years.  The year-to-date trend is back inline with the seasonal average, closing a gap that had become apparent in recent months.  Looking through the details, the story remains the same, which is that strength remains dominated by the lower paying segments of the economy, such as retail and leisure/hospitality, each trending above the average pace; professional and business services continues to lag the seasonal norm.  But the strength of the headline number might not be attributed to a gain in any particular component, but rather a lack of decline in just one.  Manufacturing employment remained essentially unchanged in July, failing to realize the typical swoon that accompanies the summer factory shutdown period.  The abnormally may merely be a timing issue as a slightly earlier than average dip in weekly initial jobless claims in the month suggested that workers were back to their posts by the time the establishment survey was derived.  The flipside of having no dip in manufacturing employment in July is that the rebound in the month of August is unlikely, a scenario that was realized last year.  While the adjustment factor accounts for a positive boost in the month of July, the anomaly has a high likelihood of correcting in the month that follows, all else being equal.

As for the hourly earnings, the seasonally adjusted print had wages growing 0.3% in July, inline with the consensus estimate.  Ex-adjustment, average hourly earnings of production and nonsupervisory employees increased by 0.6%, double the average gain for July of 0.3%.  Despite the upbeat return for the month, the year-to-date trend continues to lag the average pace, the result of sluggish movement over the past six months.  The lack of improvement of higher paying areas of the economy is obviously taking a toll, keeping a lid on inflationary pressures.  Overall, while the seasonally adjusted payroll data had investors cheering, stepping back, it appears that the results may not be as euphoric as initially presented.  The year-to-date change for payrolls has converged with the average trend, unfortunately failing to provide clarity pertaining to evidence of waning momentum realized in the spring.  The adjustment factor may come back to bite the result in the month ahead, unless some other factor can pick up the slack in the meantime.

The US wasn’t alone in releasing employment data.  Statistics Canada released their Labour Force Survey for the month of July and it was equally shocking, but for the opposite reason.  Employment declined by 31,200, significantly missing estimates calling for a gain of 10,000.  Stripping out seasonal adjustments, employment actually declined by 109,000, or 0.6%.  The average change for July is a gain of 0.6%.  The year-to-date change is firmly below the average trend having diverged from the norm over the past three months.  While the talk focuses on the 71,400 drop in full time positions, offset by the 40,200 rise in those of the labour force that are employed part-time, the actual change is quite the opposite.  Full-time employment increased by 63,200, or 0.4%, while part-time employment fell by 172,200, or 5.1%.  The average change for each is +2.6% and –9.2%, respectively.  The growth in full-time employment through the first seven months of the year is lagging the average trend by a considerable margin, while part-time employment is staying afloat as those unable to find full time work stay put.  Regardless of which way you look at it, adjusted or not, the conclusion is the same, which is that the economy is struggling to create sufficient quality/high paying jobs.   It remains a plus that the trend unemployment remains at or below average, but the economy will never regain a strong  growth trajectory when incomes are insufficient to support it.  Stocks, for now, remain undeterred in their path higher.

The reaction to the employment reports in the equity market was swift.  With investors speculating that the Fed would be more likely to raise rates by the end of the year, financials led the rally with the S&P 500 Financial Sector Index breaking above resistance around 320.  Zooming out, a massive reverse head-and-shoulders pattern appears on the chart of the financial sector benchmark, the upside target of which points to around 375, or 16% above present levels.  Investors have refrained from becoming too aggressive in the financial sector pretty much for the past decade as investors anticipate that rates will stay lower for longer.  But now, the bullish setup presents investors with an opportunity to shed their defensive bets in the consumer staples and utilities sectors, and rotate towards this more cyclical area of the market, a scenario that could act as the fuel for the next leg higher in the broad market.  Seasonally, the next period of strength for the financials, banks in particular, is from October through December.

The next move in treasury yields will be key.  Friday’s knee-jerk reaction sent investors out of bonds and into stocks, driving yields higher.  Momentum indicators on the 10-year note are pointing higher as short-term trendline resistance is tested.  Horizontal resistance remains apparent at 1.7%, a level that if broken would begin to get investors to think twice about their fixed income holdings.  While banks remain out of seasonal favour over the next couple of months, treasury bonds typically realize some of their best returns of the year through August and September as volatility in equity markets becomes realized.  Watch the technical levels overhead as the a breakout would threaten the seasonal norms for this time of year.

And coming full circle, the S&P 500 Index jumped higher to fresh all-time highs, opening a gap close to its 20-day moving average around 2165.  Both the gap and the 20-day now present support for investors to shoot against as the broad market benchmark attempts to fulfill the reverse head-and-shoulders pattern that was carved out in June.  Upside target of the setup points to 2220, or another 1.7% above present levels.  Defensive bets in the consumer staples and utilities sectors continue to underperform the market, contradicting seasonal norms, while cyclical sectors are market perform or better, suggesting increased risk taking.  Technology, the largest sector constituent in a number of benchmarks, continues to move above a massive consolidation pattern from the past year, as indicated by the S&P 500 Technology Sector Index.   The breakout calculates a move on the technology benchmark to 860, or approximately 10% above present levels.   While the period of seasonal strength for technology begins at the start of October, a trend of outperformance is the average through the summer, a trend that is presently being realized.

TECHNOLOGY Relative to the S&P 500

All that being said, we must be cognizant not to become complacent at these high market levels.  The VIX is firmly below 12, an exceptionally low level for this time of year.  Historically, when the VIX has bottomed below 12, a top in equity benchmarks has typically followed.  While we haven’t seen a bottom as of yet, but it could be implied that the risks are potentially greater than the reward at this juncture as the easier gains are now firmly behind us.  At present, perhaps the most threatening risk is the strength in the US Dollar, which if continued could weigh on stocks and commodities.  It is hard to imagine a scenario where investors adopt the belief that the Fed will raise rates, diverging from the path of many central banks around the globe, and the dollar not go higher.  The US Dollar Index has been jumping around quite a bit over the past couple of weeks, opening gaps on both the upside and the downside acting as hurdles on a move in either direction.  Seasonally, while August can be a strong month for the dollar index, the trend turn negative in September and October, a timeframe in which treasury yields typically falter.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.92.








Seasonal charts of companies reporting earnings today:


S&P 500 Index



TSE Composite