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Stock Market Outlook for May 3, 2016

 

US Dollar Index breaks significant support; suggests an important topping pattern.

 

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:

Telephone & Data Systems, Inc. (NYSE:TDS) Seasonal Chart

 

 

The Markets

Stocks jumped to start the first day of May as the US Dollar tumbled, a tailwind for earnings of multinational companies that should see a benefit in their second quarter results.  The S&P 500 Index gained 0.78%, moving back above its 20-day moving average and clawing back most of the losses realized over the past couple of sessions.   On the hourly chart, it is clear that the benchmark is testing previous support presented by the neckline of a head-and-shoulders topping pattern as a potential level of resistance; rejection from around present levels could see a continuation of the losses attributed to this bearish setup, the downside target of which points to around 2050.  Significant horizontal support can be found around 2040.

One of the catalysts that has influenced stocks higher since the February low is the decline in the US Dollar.  The dollar index had been holding within an intermediate declining trend channel since the year began, pushing towards significant support around 93, presented by last summer’s lows.  Over the past two sessions, the currency benchmark broke below its intermediate trend channel, but more significantly, broke below horizontal support around 93.  This move breaks the long-term trading range that began around the start of 2015.  The breakdown portends to a more substantial topping pattern, which could result in a significant retracement of the gains accumulated between mid-2014 and early 2015.  Calculated downside potential of the head-and-shoulders pattern points down to around 88, a move that could see a retest of previous resistance around 89.  The fundamentals for the US Dollar continue to suggest longer-term strength should be expected given that the US Fed appears more likely to take the next step towards monetary policy tightening than other central banks around the globe.  But for now, with analysts maintaining the view that rates will stay “lower for longer,” the wildly popular dollar bull trade seems to be unwinding, a trend that could remain supportive of stocks and commodities.  Seasonally, the US Dollar Index tends to gain in the month of May, gaining an average of 0.3%.  Next major catalyst for the currency is the monthly employment reports, due to be released on Wednesday and Friday.

Despite the fall in the US Dollar, many commodities traded lower on Monday.  The dollar sensitive sectors (energy, materials, and industrials) lagged the market return on the session.  Consumer stocks were the market leader on the day, in part due to comments from Warren Buffet following the Berkshire Hathaway meeting over the weekend.  Lots of gyrations in what appeared to be a typical rise to start the month of May.

With just days left in the period of seasonal strength for stocks, which concludes, on average, on May 5th, the S&P 500 Index is presently looking at a flat return (+0.75%) for the timespan that began on October 28th.  Should the benchmark end around these levels, this would be the weakest return for the period of seasonal strength for stocks since 2007/2008 when the index lost 8.32% between the October through to May period.  For over 40 years, weak seasonally strong periods that have returned less than 1% have typically coincided with economic recessions in the US, the result of which spilled over to equity market weakness in the following summer period between May and October.  When the S&P 500 Index returned 1% or less between October 27th and May 5th, the large-cap benchmark has gone on to average a loss of 8.05% in the following weak period from May 5th through to October 27th.  Keep in mind, however, that in many cases the underlying fundamentals of the economy were already weak and had been deteriorating for some time prior, resulting in the average decline realized.  Many economic indicators, mostly related to manufacturing and industrial production, had deteriorated in 2015 related to the strength in the US Dollar.  However, with the US Dollar retracing its gains, economic reports have been showing signs of closing the gap versus their average trends since the year began, mitigating the recessionary path that seemed very much apparent as of the end of last year.  This trend could reverse, but, for the time-being, economic data suggests a very low risk of recession (1.78% according to one recently released report). This stronger economic position could mitigate the historical tendency of large losses between May and October following weak October through to May returns.

 

S&P 500 Index performance following returns of 1% or less during the period of seasonal strength from October to May.
Seasonally Strong Period Seasonally Weak Period
Start End Return Start End Return
10/27/07 5/05/08 -8.32% 5/05/08 10/27/08 -39.69%
10/27/01 5/05/02 -2.82% 5/05/02 10/27/02 -16.38%
10/27/00 5/05/01 -8.19% 5/05/01 10/27/01 -12.79%
10/27/93 5/05/94 -2.85% 5/05/94 10/27/94 3.21%
10/27/89 5/05/90 0.99% 5/05/90 10/27/90 -9.95%
10/27/83 5/05/84 -3.48% 5/05/84 10/27/84 3.88%
10/27/81 5/05/82 -1.36% 5/05/82 10/27/82 14.97%
10/27/76 5/05/77 -1.62% 5/05/77 10/27/77 -7.76%
10/27/73 5/05/74 -18.04% 5/05/74 10/27/74 -23.19%
10/27/72 5/05/73 0.34% 5/05/73 10/27/73 0.34%
10/27/69 5/05/70 -19.77% 5/05/70 10/27/70 5.75%
10/27/68 5/05/69 0.16% 5/05/69 10/27/69 -6.13%
10/27/65 5/05/66 -4.95% 5/05/66 10/27/66 -8.76%
10/27/61 5/05/62 -3.07% 5/05/62 10/27/62 -17.66%
10/27/59 5/05/60 -4.46% 5/05/60 10/27/60 -2.26%
10/27/56 5/05/57 0.15% 5/05/57 10/27/57 -12.41%
Average: -4.83% -8.05%

 

On the economic front, a report on construction spending for March was released on Monday morning.  The headline print indicated that spending on construction projects increased by 0.3% in the last month of the first quarter, slightly less than the consensus estimate of a 0.5% gain.   Stripping out seasonal adjustments, total construction spending increased by 10.1%, which is slightly less than the average increase for March of 11.6%.  Year-to-date, the change is slightly below the seasonal average, weighed down by below average results in public construction spending.  March is just the first month in a trend of increasing construction spending that typically peaks in August.

Sentiment on Monday, as gauged by the put-call ratio, ended bearish at 1.08.

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite