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Stock Market Outlook for September 12, 2016

 

Gap lower on the S&P 500 Index suggests the start of a new trend.

 

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 gapped lower on Friday as Fed rate hike fears re-emerged, resulting in the largest one-day decline in equity benchmarks since the end of June.  The S&P 500 Index dropped 2.45%, opening a gap between 2170 and 2180.  This type of trading activity is indicative of the start of a new trend, in this case lower.  The gap creates a zone of resistance that investors will seek to sell should price retrace back to this area in which no trades transacted.  The large-cap benchmark closed the day below variable support at its 20 and 50-day moving averages, creating another hurdle that investors will have to battle with on an upside attempt. 

Of course, the large and abrupt move is really no surprise given the tight trading range charted over the past couple of months.  As reported previously, the Bollinger Band width had become the tightest since 1995, suggesting an explosive move ahead, whether it be higher or lower.  These moves can often continue over the days and weeks that follow as the pent up momentum fuels the move in the direction of the break.

Continuing with the S&P 500, the critical zone to watch on the downside is the recent breakout range between 2100 and 2120.  A break of this zone could defeat the breakout to new highs charted over the past couple of months.  We’ll take it one step at a time.  Momentum indicators, which have been negatively diverging from price over the past six weeks, continue to point lower, having yet to show signs of bottoming. 

Perhaps needless to say at this point, September is typically the most volatile time of year for stocks, a fact that was certainly realized on Friday.  The volatility index jumped almost 40%, closing at the highest level since mid-June, just prior to the shock decline in stocks related to Brexit.  The average level of the VIX in the month of September is between 20 and 22, suggesting further upside potential just to get to this norm.  The magnitude of the jump in the VIX on Friday from a level of complacency, at 12.51 in the session prior, is rivalled by only three other occurrences since 1990.  In April of 2013, the VIX jumped just over 43% to 17.27 in a single session, coinciding with 2.3% drop in the S&P 500 Index.  When the shock wore off in the days that followed, the large-cap benchmark had shed just over 3.5%, quickly finding support at a rising 50-day moving average.  The other two events in February of 2007 and February of 1994 saw a decline in the S&P 500 index, from peak-to-trough, of around 6% and 10%, respectively, before the trend resumed its upward path.  While these shock events inevitably catch investors off-guard, the downside resolution is typically quickly resolved, suggesting appealing opportunities may arise in the weeks ahead.  Stay tuned!

But what is promoting the volatility jump is arguably not just the typical equity market weakness, but rather the weakness realized in a broad spectrum of assets.  Some of the weakest equity sectors on the day were the typical safe havens that investors tend to rotate to in time of volatility, such as utilities, telecom, and consumer staples.  Outside of the equity market, gold, which tends to benefit in times of volatility, and bonds, which has historically counteracted equity market declines, both recorded pronounced declines on the day, leaving investors with nowhere to hide.  Seasonally, each of these areas remain in a period of strength that typically peaks in and around October, however, fundamental factors may contradict the average tendency.

Not helping prospects on Friday was a lacklustre report on wholesale trade for July.  The headline print indicated that inventories were unchanged (0.0%) in July, while sales dipped by 0.4%.  Stripping out seasonal adjustments, inventories were actually higher by 0.1% and sales took a pronounced dip, falling by 9.3%; the average change for each in the month of July is +0.9% and –2.7%, respectively.  Focussing on the sales side, the year-to-date change is now hovering the furthest below its average trend since January, quickly eliminating the improvement in sales that was recorded through the spring.  Some very economically sensitive areas are indicated to have acted as a drag on the overall sales figure, including motor vehicles, furniture, lumber, and machinery.  Non-durable goods also took a hit, including an abrupt decline in drug, alcohol, and grocery sales, typically three stable areas in the summer months.  A number of components would be expected to snap-back in the month to follow, perhaps making future reports a better read of wholesale sales activity.  For the time being, the trend is certainly concerning, reminiscent of last year’s trend that saw a number of reports weaken through the back half of the year amidst declining commodity prices.

Wholesale Sales

The wholesale trade report is yet another disappointing read on the economy as we progress through the back half of the year.  The data has started to weigh on the Citigroup Economic Surprise index, which gauges the divergence of the results versus expectations.  When this indicator turns lower, it typically means that analyst expectations are too high, suggesting they may have to ratchet them back for future reports.  But, as alluded to, it may not be until October until some clean data starts to flow, eliminating some of the extreme seasonal adjustments that some reports have realized in July and August.

Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.18.

 

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite