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Stock Market Outlook for July 27, 2017

Commodities on the rise as the dollar continues its parabolic move lower.

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:

Denison Mines Corp. (TSE:DML) Seasonal Chart

Gold Fields Limited (ADR) (NYSE:GFI) Seasonal Chart

Tetra Tech, Inc. (NASDAQ:TTEK) Seasonal Chart

IAMGOLD Corporation (TSE:IMG) Seasonal Chart

Eldorado Gold Corporation (TSE:ELD) Seasonal Chart

Autodesk, Inc. (NASDAQ:ADSK) Seasonal Chart

 

The Markets

Stocks held their all-time high levels as the Fed provided some insight as to how it would unwind its massive stimulus program that helped to lead the economy out of the “Great Recession.”  The statement indicated that the balance sheet normalization program would begin relatively soon, starting initially with a cap on the reduction of holdings in treasury, agency, and mortgage-backed security debt by $10 billion per month.  The pace would increase by $10 billion quarterly until reaching a run-rate of $50 billion per month.  Fixed income investors have inevitably been concerned of the impact that this will have on the bond market should demand be insufficient to absorb the supply.  Treasury bond prices traded sharply higher following the announcement as fears related to a hawkish statement were quickly realized as being overblown.  The iShares 7-10 year treasury bond ETF (IEF) added nearly a third of a percent, closing a gap that was charted in the previous session.  The more widely traded long-term treasury ETF (TLT) wasn’t as fortunate, unable to get anywhere near the gap recorded in the $124 range.  These gaps remain as resistance on any rebound attempts as traders take advantage of this range in which these funds essentially did not price.  Seasonally, treasury bonds are in the strongest period of the year, ranging from mid-July to early October, but, as highlighted yesterday, Tuesday’s price action presents risks to this seasonal trade.

The reaction to Wednesday’s Fed statement was also evident in the value of the US Dollar, which pushed lower versus a basket of international currencies.  According to the US Dollar Index, the currency benchmark fell by four-tenths of a percent, reversing earlier gains and closing at the lowest level in over a year.  The dollar index is right on top of significant support at 93, which has a high likelihood of reversing, at least temporarily, the parabolic trend lower over the past six months.  Dollar weakness has been supportive of higher commodity prices over the past month, including a bump in the price of gold and silver following the FOMC statement release.  The Gold ETF (GLD) charted an outside reversal candlestick during Wednesday’s session, giving rise to gold mining stocks in the process.  In a recent report we highlighted the need to be cognizant of overhead hurdles going into the period of seasonal strength for the precious metal.  Well one hurdle broke in a big way with Wednesday’s price action.  The relative performance of the NYSE Gold Bugs Index versus the price of the commodity itself surged above declining trendline resistance, which presented risks of a downside scenario.  The breakout is being picked up on the average start to the period of seasonal strength for gold mining stocks, which runs between now and the end of September.  The gold bugs index has recorded an average gain of 5.81% during this seasonally strong period over the past 20 years with positive results recorded in 13 of those timeframes.  The trade is not for the faint of heart, however, with returns over the past 20 years ranging from a loss of 17.8% to a gain of 32.6%.  The impact of a snap-back higher in the US Dollar remains the unknown, but it is fair to say that the more intermediate path lower in the currency should remain supportive of commodity prices thereafter.

On schedule for this time of week is the latest read of oil inventories in the US.  The Energy Information Administration reported that oil inventories declined by 7.2 million barrels last week, while gasoline inventories fell by 1.0 million barrels.  The result stripped six-tenths of a day of supply of oil from the market, pushing the running tally to 28.1, the lowest level in over 18 months.  Stockpiles of the unrefined commodity have quickly fallen back to levels that it entered the year with, on track to record the first calendar year draw since 2013.  Seasonally, oil inventories continue their declining path through the month of September as demand for the commodity outweighs supply during the height of driving season.  The price of oil tacked on an additional 1.8% to the previous session’s rise, increasingly moving in on declining trendline resistance and the 200-day moving average around $50.

As for gasoline, stockpiles of the refined commodity are already lower than what they were at the end of last year, falling by 2.2% year-to-date, firmly below average for this time of year.  This is the result of the rise in the level of product supplied, higher by 16.0% year-to-date, outpacing the gains in production, which is higher by only 9.8%.  Despite the appearance of strong demand for gasoline in 2017, as gauged by the trend in the level of product supplied, the latest release from the US Federal Highway Administration shows demand is right around seasonal norms, at least through the month of May.  In a report released on Tuesday, the gain in vehicle miles traveled through the month of May is inline with its seasonal average.  This suggests that individual consumers may not be driving more than usual through the course of the year and the strength in the level of quantity supplied can be chalked up to simple population growth.  Weather has no doubt been a factor in hindering greater individual consumption with temperatures generally below average this summer and precipitation above average.  Should weather improve through the back half of the summer season, a meaningful withdrawal in petroleum inventories may be realized by year end; current long-term forecasts call for above average temperatures in the weeks ahead.  It is during this summer period that OPEC desires the initiatives it implemented earlier to cap production to bear fruit given that once the summer ends inventory injections will once again become the norm.  With the price of oil closing in on the $50 level, the supply glut arguments won’t stay dormant for long.

On the economic front, the string of strong housing reports continues, this time with a report on new home sales.  The headline print indicated that sales rose by 0.8% in June to a seasonally adjusted annual rate of 610,000.  This was inline with the consensus estimate that called for a pace of 611,000.  Stripping out the seasonal adjustments, sales actually fell by 3.5%, slightly more than the average decline for the month of June of 3.1%.  The year-to-date change remains above average, higher by 41.0%.  Sales of new homes not started was unchanged in the month, enough to put this category into an above average position on the year, perhaps an indication of future optimism.  As for prices, a 4.2% decline in the median sales price of new homes is a divergence from the 0.6% gain for this sixth month of the year.  Builders are increasingly focussing on the first time home buyers who have been priced out of the resale market, resulting in the below average trend in prices amongst the new home segment.  Overall, the results continue to suggest a solid real estate market, a plus for the broader economy.

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.74.

 

 

Sectors and Industries entering their period of seasonal strength:

^GOX Relative to the S&P 500

$SPTGD Relative to the S&P 500

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite