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Stock Market Outlook for October 6, 2015

 

Easy buying opportunities are now behind us as the broad market touches the upper limit of the danger zone.

 

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 rallied on Monday, led, in part, by the industrial sector as shares of General Electic surged following news that activist investor Nelson Peltz had taken position in the multinational conglomerate.  Shares of GE broke above its 200 day moving average, which had recently acted as a level of resistance.  Momentum indicators are trending positive, as is performance relative to the S&P 500 Index, a trend that is typical through September and into October.  The stock is presently testing resistance around the multi-year highs near $27.50.  Industrials enter a period of seasonal strength later in October, benefitting from the strength in the broader market that runs from November through April.

GE Relative to the S&P 500

With Monday’s rally in the broader market, the S&P 500 Index is back within a range a resistance presented between 1970 and 2040.  More specifically, the large-cap benchmark is testing previous short-term resistance around 1990.  In addition, resistance at the declining 50-day moving average is directly overhead, a critical test in confirming whether or not the present rebound in equities from the double-bottom low has legs.  On the hourly chart, the benchmark is short-term overbought, potentially making the market vulnerable in the near-term; investors will want to continue maintaining stop levels around the August lows.  The recent bounce from double bottom support has provided appealing entry points to seasonally favoured sectors, such as Transportation, Canadian Banks, Technology, and Consumer stocks, all of which are showing outperformance versus the broader market.

Looking at an indicator of breadth, the percent of stocks within the S&P 500 Index trading above their 50-day averages has improved significantly since hitting a low of 4.6% near the end of August, now hovering around 47%.  However, the indicator is not out of the danger zone just yet.  For the past year the technical indicator has been trending lower as an increasing number of stocks lose support at this significant intermediate moving average.  As more and more stocks break support and fewer components are left to carry the weight, the broader market would be expected to show significant weakness, just as what occurred during the waterfall decline in August.  The opposite is also true; as an increasing number of stocks regain support at this significant intermediate average, the expectation would be that the broader market strength would be supported by its underlying constituents.  Until the negative trend in the percent of stocks trading above 50-day moving averages is broken, the broader market may still be at risk, vulnerable to another breakdown in stocks.

Meanwhile, as the market rallies, fear is fading.  The Volatility Index (VIX) is back below 20 and the average true range of the put-call ratio is also on the decline.  We’ve talked extensively about the strategy of using volatility as buying opportunities; be opportunistic when the VIX spikes and peaks above 21 and become cautious when the VIX plunges and hits a low below 12.  The strategy has been very effective over the past few years, clearly identifying high and low points in broad market indices.  The VIX peaked on August 24 around 53.29, coinciding with the low in the S&P 500 Index; the VIX has since declined further, falling back within a range that has in recent years represented a normal trading environment.   The easy buying opportunities are now behind us, but, assuming the market can exceed some of these short-term levels of resistance, identified above, upside potential is still present.  Seasonally, volatility typically peaks into the month of October, declining through the remainder of the year.

Sentiment on Monday, as gauged by the put-call ratio, ended around neutral at 1.01.

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite