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Stock Market Outlook for September 28, 2015

 

While bearish crossover of 20 and 50-week moving averages on the chart of the S&P 500 Index may have provided a buying opportunity in the past, this time the benchmark may not be as fortunate.

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:

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Seasonal Chart

 

The Markets

Stocks ended mixed on Friday as the health care sector acted as a significant drag on broad market benchmarks.  The S&P 500 Health Care Sector shed 2.70% on Friday, capping off a decline of almost 6% for the week.  While the health care sector is firmly in correction territory, as defined by a decline of 10% or more from the previous peak, the biotech industry is well entrenched in bear market territory having posted a decline of over 20% since the peak in July.  Concerns over the pricing practices of some of these highly valued biotech companies is leading to the panic in the industry, which was once a favoured segment of growth investors.  Health care, which biotech represents a significant weight of, accounts for just over 15% of the S&P 500 Index, the third largest sector constituent.  Health care had previously been the “go-to” trade for many investors that were looking for a place to diversify away from cyclical equities; opportunities to purchase the sector were presented upon every test of the rising 50-day moving average over the last many years.   Resistance is now apparent at this intermediate average.  The 50-day average has been pointing lower since the end of August; the 200-day moving average is now curling lower, implying longer-term negative implications.  Seasonally, while biotech has concluded its period of strength, health care is typically strong into the fourth quarter, lifted by, among other things, pharmaceuticals; pharmaceutical stocks are suffering the same fate as constituents of the biotechnology industry.  It’s always a concern when the “darlings” of the market fall out of favour, forcing investors to hastily reshuffle portfolios.

HEALTHCARE Relative to the S&P 500

S5PHARX Index Relative to the S&P 500

For the week, the health care rout influenced a 1.36% decline in the S&P 500 Index, which isn’t terrible for what is typically the weakest week of the year.  Quadruple witching hangover and the reallocation of portfolios, ahead of the end of the third quarter, results in this phenomena as traders start to position for the fourth quarter.  At this point, portfolio reallocation should be predominantly complete in order to settle the trades prior to September 30th; traders will now be looking to gauge upcoming earnings season, betting on the expected outcomes of the quarterly reports.  Looking at the weekly chart of the large-cap index, the benchmark is recording a bearish crossover with respect to its 20 and 50-week averages, an event that was last realized four years ago amidst the Eurozone debt crisis and concerns pertaining to the downgrade of the US credit rating.  Back in 2011, the bearish crossover coincided with appealing opportunities to buy the broad market as benchmarks were charting 52 week lows; the benchmark was supported around its 200-week average after becoming exhausted in oversold territory.  Technically, stocks have not achieved oversold status on the week chart and the 200-week is still around 10% below present levels at 1722.71.  A number of indicators that would suggest positive momentum is building in the background have not been achieved.  Overall, the market remains at risk.  One month remains until the average start to the period of seasonal strength for the equity market, so equity market strength could become apparent at any point now, but the low risk entry point still seems far away.

On the economic front, the latest report on New Home Sales was released on Thursday.  While the headline print indicated the highest seasonally adjusted annual rate of the recovery, the non-seasonally adjusted trend continues to fall below average.  The headline print indicated a seasonally adjusted annual rate of 552,000, well above the analyst consensus range that peaked 531,000.  Stripping out seasonal adjustments, the highly volatile sales of new homes increased by 2.3%, slightly above the 50-year average gain for August of 1.4%.  The year-to-date change in sales at 28.6% is below average through the first eight months of the year at 37.0%.  Sales of completed homes is now showing a year-to-date contraction; the rise in the 30-year fixed mortgage rate since hitting a low in February may be weighing on activity.  Seasonally, the last four months of the year are the weakest for home sales, declining by an average of 6.7% per month through December.

Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.30.

 

Sectors and Industries entering their period of seasonal strength:

^FTSE Relative to the S&P 500

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite