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Stock Market Outlook for May 10, 2016

 

Ratio of stocks to bonds presently favours the fixed income asset class.

 

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:

Intuit Inc. (NASDAQ:INTU) Seasonal Chart

 

 

The Markets

Stocks ended mixed on Monday, trading on either side of the flatline for a second day as investors reacted to a stronger US Dollar.  Commodity sensitive names in the energy and materials sectors acted as the biggest drag on broad market benchmarks, while a rebound in health care stocks, particularly within the biotechnology industry, saw a reprieve from recent selling pressures.  The US Dollar Index, which measures the value of the dollar versus a basket of foreign currencies, is once again testing resistance around its declining 20-day moving average.  The currency benchmark spent last week digging itself out of the hole it created when it moved below support around 93, unhinging traders from their long positions in the process.  A long-wick candlestick charted at the start of last week shows similarities to previous short-term lows, which has many commodity traders concerned for a retracement of the year-to-date declines in the currency.  Seasonally, the US Dollar Index tends to rise in the month of May, gaining an average of 0.4% over the 31-day period.

As alluded to, with the strength of the US Dollar Index during Monday’s session, commodity prices suffered, including the price of copper, which lost 2.3%, testing the April lows.  The price of the metal, which many have argued has a PhD in economics due to its sensitivity to economic fluctuations, recently charted a short-term double-top pattern around $2.30.  The price pattern was accompanied by negatively diverging momentum indicators, providing a strong signal for the losses that followed.   A break below support around $2.10 targets a move towards $1.90, back to around the lows of the year.  The 200-day moving average of the price of copper continues to point lower, suggesting a long-term declining trend.  The period of seasonal strength for copper concludes at the start of May, on average, trading flat to negative through to the quarterly futures expiration date in June.

Despite the push and pull amongst the market sectors, major benchmarks continue to find support around their 50-day moving averages.  Negative momentum divergences with respect to MACD did a good job at foretelling of the weakness in equity prices since late April.  Investors continue to wait for a catalyst that will either renew upside momentum or fuel a breakdown.  Seasonally, there is typically not much to be constructive of from a broad market perspective between May and October, forcing investors into the defensive sectors, something that was evident during Monday’s session.  Health care, Utilities, and Staples topped the leaderboard on the day as investors reach for yield while the direction of the broad market seeks to resolve itself.

And while major benchmarks test their respective 50-day moving averages, the percent of stocks within the S&P 500 Index trading above their intermediate-term moving averages continues to trend lower.  As an increasing number of stocks weigh upon and break their respective intermediate moving averages, the weaker the broad market benchmark becomes as support is stripped away from the constituents.  We last highlighted the percent of stocks trading above 50-day moving averages in the middle of April when the technical indicator peaked above and broke back below 90, typically an indication of a substantially overbought market.   Past instances have seen the broad market benchmark trade flat to negative shortly thereafter, something that appears to be playing out, yet again.  As with other indicators, the percent of stocks trading above this moving average just reiterates the lack of positive momentum in the broad market, keeping investors on the sidelines until the upside potential improves.

And, finally for today, investors implementing a seasonal investment strategy in their personal portfolios should pay close attention to the ratio between stocks and bonds now that the period of seasonal weakness for equity markets has begun.  Looking at the SPDR S&P 500 ETF (SPY) relative to the iShares US Aggregate Bond ETF (AGG), the ratio of the pair recently hit long-term declining trend line resistance in the second to last week of April and has traded lower since.  Investor bias has shifted away from stocks and back towards bonds, resuming a trend that began last July, just before the market downturn in August.  The ratio is important in a seasonal mandate at this time of year because of the tendency of investors to become risk averse during the May through October period.  When the ratio is trending lower, investors, quite obviously, should increase exposure to bonds rather than stocks, taking advantage of the seasonal strength in the bond market.  Whether the ratio is suggesting another decline in equity markets similar to last August or January has yet to be seen, but, for the time being, it is suggesting that the more prudent allocation is towards bonds given the stall in equity prices.

Sentiment on Monday, as gauged by the put-call ratio, ended bearish at 1.14.

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite