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Stock Market Outlook for May 16, 2016

While retail sales are showing strength, so are inventory levels, resulting in margin compression.

 

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:

Northland Power Inc. (TSE:NPI) Seasonal Chart

TC Pipelines, LP (NYSE:TCP) Seasonal Chart

Westshore Terminals Investment Corp (TSE:WTE) Seasonal Chart

 

 

The Markets

Stocks continued to weaken on Friday as investors sought to shed risk given the overhanging resistance at the recent highs for many equity benchmarks. Concerning signals sent from a number of retail companies took their toll on consumer discretionary stocks throughout the week, jump starting the period of seasonal weakness for this sector of the market.  The S&P 500 Index closed below its 50-day moving average, reaching towards horizontal support at 2040.  Market participants are closely watching the head-and-shoulders topping pattern on the chart of the large-cap benchmark, the neckline of which is at the aforementioned 2040 level of support.  Calculated downside target on a break of the neckline is towards 1980, which would represent a 3.3% decline below present levels.  Renewed downside momentum has emerged following the early week bounce from the rising 50-day moving average. 

With  stocks rolling over, investors took refuge in the classic safe-haven plays, namely gold, the US Dollar, and treasury bonds, each of which gained around 4 to 5 tenths of a percent during the session.  The ratio of stock-to-bonds, as highlighted last week, continues to favour the fixed income asset class.

While investors may want to take on an allocation in Gold given the uptick in equity market volatility, they may want to refrain from becoming overly anxious in accumulating positions with around two months to go until the period of seasonal strength begins.  Coming off its secondary period of strength between mid-December and late-February, the price of gold has grinded marginally higher since March, remaining supported by its 50-day moving average.  Momentum indicators are negatively diverging from price, unwilling to confirm the recent 52-week high in the price of the metal.  Between mid-May to early July, the price of the yellow metal shows a slightly negative bias, pulling back from the highs of the year as it nears the quarterly futures expiration date in June.  This is typically the result of the contango amongst commodity futures, forcing the futures price to converge with the spot price in the weeks prior to the expiration event.  As highlighted earlier in the year, the technical profile of Gold has changed, breaking out from a declining wedge pattern that kept the price constrained to a pattern to lower-lows and lower-highs; a positive long and intermediate-term trend is emerging.  Weakness/consolidation in the price of the commodity over the weeks ahead would provide an ideal setup to the period of seasonal strength that runs between July and October.

On the economic front, a report on retail sales for April helped to allay fears that the consumer is slowing following some very disappointing earnings reports released by retailers over the past week.  The headline print indicated that retail sales jumped by 1.3%, beating estimates calling for an increase of 0.9%.  Less the more volatile components of gas and autos, sales were still higher by a better than expected 0.6%, rebounding from the rather flat result that was originally reported for March.  Stripping out seasonal adjustments, total retail trade actually declined by 2.3%, worse than the average change for April of –1.6%.  Year-to-date, the trend has ticked marginally below the seasonal average.  The biggest drag on total retail sales remains automobile sales, which are lagging the average trend, as well as lagging the trend set last year.  Ex-autos, retail sales continue to show an above average rate of change, suggesting healthy consumer spending, despite what some retailers have suggested in recent days. 

The biggest difficulty for retailers as of present is clearing out bloated inventory levels, most often by way of discounting.  In another report released on Friday, it was indicated that retailers are sitting on inventories that have grown above average through the first quarter of the year, the result of which is likely to keep margins low, impacting profitability.   This is going to become a broader theme of how well businesses can control inventories, which, relative to sales, remain well above the 10-year average.  The report on business inventories and sales highlights the strain on sales below the retail level.   Total business sales increased by a non-adjusted 12.8% in March, which was slightly above the average gain for the third month of the year of 12.7%.  However, the year-to-date change is down by 2.1% versus the norm through the first quarter of the year, the result of a lag amongst manufacturers and wholesalers who are limited in their ability to sell though to their retail counterparts.  Manufacturers and wholesalers are aggressively trying to limit their inventory growth now that their inventory-to-sales ratios are at the highest levels since the great recession.  So while the consumer is showing its willingness to purchase discounted merchandise, there is work to be done amongst businesses to bring inventories back inline with sales in order to avoid further margin compression.

Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.15.

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite