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Stock Market Outlook for August 4, 2016


Declining production and high demand still can’t seem to make a significant dent on oil inventories.


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**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 closed mildly higher on Wednesday, led by the energy sector, as the price of oil rebounded from multi-month lows.  The S&P 500 Index ended higher by three-tenths of one percent, continuing to hold support at its rising 20-day moving average.  Investors are noticeably keeping the tape very steady ahead of Friday’s non-farm payroll report, the expectations for which are calling for an increase of 185,000 on the headline number.  ADP weighed in on Wednesday with a better than expected 179,000.  While gone are the days when consecutive prints above 200,000 were the norm, July’s print does mark the 49th consecutive month of payroll gains greater than 100,000, the longest uninterrupted stretch in the report’s history.  Friday’s payroll number could be very telling of the strength of the economy going into the back half of the year as fading momentum becomes apparent across a range of reports, continuing to suggest an economy that is maturing.

Perhaps holding greater importance given the recent fall in oil prices, the latest oil inventory report was released on Wednesday.  The Energy Information Administration indicated that oil inventories expanded by 1.4 million barrels last week, while gasoline stocks recorded a draw of 3.3 million barrels amidst declining production for the refined commodity.  As a result, the days of supply of oil remained unchanged at 31.3, now 8.5 days above average, while the gasoline days of supply contracted by four-tenths to 24.4, narrowing the gap versus the average through the end of July.  With the supply of gasoline showing signs of contracting given the start of the seasonal decline in production, the upward pressure is shifting back towards the raw input, oil, which has recorded its second week of inventory gains.  Gasoline production seasonally declines through the refiner maintenance season and into September and October as producers shift from the summer to winter blend.  Overall, the report provides a very mixed picture on the state of the oil and gas market.  While the story surrounding oil remains centered on the supply side, the demand side still appears to be insufficient to make a sustained dent on bloated inventory levels.  Considering that we are around the peak of summer driving season with demand at the highs of the year, the typical demand drain into the fall threatens to exacerbate the supply situation.  Last week’s result shows that domestic production is back to around the lows of the year, down 8.2% through July, but investors still need to become confident that this trend will continue, especially with reports that drilling rigs are coming back online.  From this perspective, it is very easy to make a bull or bear case for prices as investors speculate upon the net impact on supply once demand starts to decline. 

The rise in the supply of oil did little to deter investors from bidding the price of oil higher on Wednesday as investors nibbled at the four-month lows.  The price of WTI Crude is attempting to hold on to support around psychological support at $40, rebounding from a very oversold condition realized in just the past couple of days.  The price of oil remains in a range, all the way down to $37.50, that if an intermediate low is carved out, a very bullish chart pattern would become apparent.   This was highlighted in a report last week where it was suggested that chart watchers were already starting to highlight a reverse head-and-shoulders pattern.  The problem remains that the higher intermediate low, the most important component of the setup, has yet to be confirmed.  The positive reversal recorded on the chart of oil during Wednesday’s session does make significant progress in hinting a tradable low is upon us.  Calculated upside potential of oil, should resistance at $50 be taken out, is all the way to $73, which would test the underbelly of the breakdown point from the highs charted a few years ago.  Much to look out for as investors once again scrutinize oil and its impact on the equity market, particularly if it moves firmly below psychological support at $40.  The price of oil typically peaks around the middle of September.

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.94.



Seasonal charts of companies reporting earnings today:


S&P 500 Index



TSE Composite