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Stock Market Outlook for July 17, 2017

VIX closes at the lowest level in more than 20 years as period of seasonal strength for the volatility index begins.

 

 

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:

Teva Pharmaceutical Industries Ltd (ADR) (NASDAQ:TEVA) Seasonal Chart

Aqua America, Inc. (NYSE:WTR) Seasonal Chart

Chorus Aviation Inc (TSE:CHR) Seasonal Chart

 

 

The Markets

Stocks posted solid gains on Friday as earnings season got underway with better than expected reports from JP Morgan, Citigroup, and Wells Fargo.  The three banking stocks, and the industry in general, traded lower following the release in a bout of profit-taking following strength over the past few weeks.  The S&P 500 Index added almost half of one percent, closing at a new all-time high as the benchmark tacks on further gains to this seasonally positive time of year.  Recall, between the close of June 27th and the close of July 17th, the S&P 500 Index has gained an average of 1.11% with positive results realized in two-thirds of the seasonally favourable timeframes over the past 50 years.  As of Friday’s close, the benchmark is higher by 1.65%, helped by the financial and technology sectors, each of which have gained over 3%.  With one session left in the short-term seasonal summer trade, the technicals of the market continue to be positive.  Support on the large-cap index continues to hold at the rising 50-day moving average and momentum indicators have just started to curl higher after dipping into the end of the last quarter. While the new highs amongst the major equity benchmarks have a suggestion that the sky is the limit, traders must be mindful that the conclusion of this summer rally period also coincides with the start of the most volatile time of year for stocks, which can see significant swings in either direction.  The volatility index (VIX) tends to rise between now and the beginning of October, often benefitting volatility hedges, such as Gold.  On Friday the VIX closed at 9.51, the lowest level in more than 20 years and suggestive of investor complacency.  From the 9.31 closing low charted on December 22, 1993, the VIX more than doubled in the three months that followed while stocks traded predominantly sideways over the subsequent year.  It’s quiet…too quiet.

On the economic front, a report on retail trade revealed a consumer that is showing signs of slowing.  The headline print indicated a 0.2% decline in sales for the month of June, diverging from expectations calling for a 0.1% gain.  Excluding the more volatile components of autos and gas, sales were still lower, this time by 0.1%, another miss versus the consensus estimate that called for a 0.4% rise.  Stripping out the seasonal adjustments, sales actually fell by 3.1%, more than the average decline for the month of June of 2.4%.  The year-to-date trend is now below the seasonal average by seven-tenths of one percent.  Weakness in auto sales continues to weigh on the aggregate result; retail trade excluding autos continues to show above average growth at this mid-point to the calendar year.  Strength centers around purchases for the home, whether it be building materials, electronics, or furniture.  These constituents are all trending above average through the first half of the year as consumers look to improve their living conditions given the low cost of borrowing.  But the most telling category of consumer sentiment does not pertain to material goods.  Sales at food services and drinking places (a.k.a restaurants) were down by 3.9% in June, firmly below the average decline of 2.5% for this last month of the second quarter.  The year-to-date change is in negative territory by 1.1%, the first time in the history of the report that restaurant spending has fallen through the first half of the year.  This category is the easiest for consumers to substitute, making it the most discretionary, providing a reasonable gauge as to how willing consumers are to open their wallets.  Should consumers further rein in spending, other categories would surely suffer.  Bottom line is that the consumer is becoming increasingly selective of their purchases, presenting a threat to sales at retail stores through the remainder of summer.  Non-store, or online, retailers are benefiting from this selective shift, but even their activity is only marginally above average as low cost goods continue to be a driver.  Consumer spending represents the lion share of GDP and for the sake of declaring a robust economy, greater discretionary spending is obviously desired.

In other economic news, June’s report on industrial production makes some progress in closing the gap with respect to the year-to-date and seasonal average trends.  The headline print indicated that production increased by 0.4% last month, above the consensus estimate calling for a 0.3% increase.  The manufacturing component was reported inline with the consensus estimate, up by 0.2%.  Stripping out the seasonal adjustments, industrial production was actually higher by 3.0%, above the 2.7% average gain for June.  Manufacturing, meanwhile, was higher 2.2%, slightly below the 2.4% average gain.  The year-to-date change for each remain below the seasonal average.  Strength in material and utility production helped to support the aggregate result for June.  Material production saw a gain of 3.1% in the month, while electric and gas utility production increased by 11.8%; the average gain for each is 2.4% and 8.4%, respectively.  Material production is now firmly above average on the year, a significant improvement compared to the lacklustre trend recorded last year, which showed the weakest first half of the year since the recession.  Industrial production/manufacturing activity has been very spotty through the first half of the year with regional surveys suggesting robust conditions, while some of the actual results, such as in this report, show a segment of the economy that is below average.  Weak commodity prices are one factor and lacklustre export growth another.  A weakening US Dollar will help as the US is no longer the only country that has shifted its monetary policy towards a path of tightening.  Looking ahead, the month of July is typically the weakest month of the year for industrial production as factory shutdowns limit activity.  The month can also be highly variable, depending on demand, and an above average result could quickly put this segment of the economy into an above average position going into the back half of the year.

Just briefly on the report of Business Sales and Inventories for the month of May, manufacturers sales have jumped back to an above average position on the year following a brief swoon in the month of April. Sales by manufacturing companies are higher on the year by 6.2%, above the 5.1% average gain for the first half of the year.  Out of the three categories of business sales, manufacturers are the only segment to show an above average result as final demand (retailers) and the intermediaries (wholesalers) lag their historic norms.  Businesses continue to take steps to rein in inventories, conducive to capping the gains seen in the inventory-to-sales ratio recorded in recent years.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.84.

 

 

Sectors and Industries entering their period of seasonal strength:

^AXJO Relative to the S&P 500

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite