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Stock Market Outlook for September 21, 2018

Dow Jones Industrial Average joins other benchmarks in all-time high territory.

 

Real Time Economic Calendar provided by Investing.com.

 

*** 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:

Cavco Industries, Inc. (NASD:CVCO) Seasonal Chart

Chatham Lodging Trust (NYSE:CLDT) Seasonal Chart

Heidrick & Struggles Intl (NASD:HSII) Seasonal Chart

SkyWest, Inc. (NASD:SKYW) Seasonal Chart

Koninklijke Philips Elect (NYSE:PHG) Seasonal Chart

Fang Holdings Ltd. (NYSE:SFUN) Seasonal Chart

PHX Energy Services Corp (TSE:PHX) Seasonal Chart

Advance Auto Parts Inc. (NYSE:AAP) Seasonal Chart

Mawson Resources Ltd. (TSE:MAW) Seasonal Chart

Seagate Technology Holdings (NASD:STX) Seasonal Chart

SEI Investments Company (NASDAQ:SEIC) Seasonal Chart

Emergent BioSolutions Inc. (NYSE:EBS) Seasonal Chart

 

 

The Markets

Investors threw caution to the wind on Thursday, sending stocks strongly higher as portfolio managers start to chase performance into the end of the quarter.  The S&P 500 Index and Dow Jones Industrial Average closed at fresh all-time highs, the first time the Dow has been able to achieve a new milestone since January.  The blue-chip benchmark is now in overbought territory, according to the relative strength index (RSI), typically a leading indicator that price has moved too far, too fast.  Still, there is nothing to suggest that a top is imminent.  In the Seasonal Advantage Portfolio that we run with CastleMoore, we continue to look for signs of vulnerability in stocks in order to trim equity exposure, but we have yet to receive signals to warrant such a move, keeping us positioned in seasonally favoured segments of the market despite the negative tendencies that are average for this time of year.  To learn more about the seasonal strategy that we run at CastleMoore, please visit http://www.equityclock.com/About/Seasonal-Advantage-Portfolio/.

$INDU Relative to the S&P 500

Strength in consumer staples, financials, health care, materials, and technology led the rally on Thursday, representing a broad swath of the US equity market.  The S&P 500 Financial sector index broke above the neckline of a reverse head-and-shoulders pattern, projecting upside potential towards a new all-time high at 510, or another 6% above present levels.  Financials are one of many sectors that have yet to chart a new high within the past couple of months.  Technology, consumer discretionary, and health care are the only three sectors to achieve this feat.  This has led to the argument that the narrow breadth in equity markets is unsustainable and that the broad market is vulnerable to losses.  Simple rule about equity markets is that performance begets performance; investors will tend to gravitate towards large growth names during periods of market weakness, assuming fundamental factors do not change.  Until the sectors are reconstituted, the areas of growth are the technology and consumer discretionary sectors given the dominance of FANG (Facebook, Amazon, Netflix, and Google).  Evidence in recent weeks suggests that the FANG trade has started to unwind, providing fuel for some of this summer’s underperforming sectors.  While losses into the end of the quarter are common, so too is rotation, something that may be more prevalent this time around than lower prices.

FINANCIAL Relative to the S&P 500

On the economic front, a report on existing home sales was released during Thursday’s session.  The headline print indicated that sales of existing homes were unchanged in August at 5.34 million, a slight miss versus estimates calling for an increase to 5.36 million.  Stripping out the seasonal adjustments, sales were actually higher by 3.1%, which is slightly above the 2.9% increase that is average for the summer month.  The result did little to improve the year-to-date change, which remains 2.7% below the seasonal average trend.  Below average results in the south and west offset strength in the north-east and mid-west in the month just past.  For the most part, each region is showing a trend that gyrating around its seasonal norm, which suggests that demand is around normal levels, but, as we have alluded to in the past, the concern in the housing market is with respect to supply.  Inventories of homes were unchanged in August, higher by 31.8% on the year, almost double the 20-year average increase.  The high cost of homes has been an overhang, taking a toll on activity as affordability wanes.  The above average increase in inventories suggests that prices are vulnerable to declines.  The year-to-date gain in the median price of existing homes sold is 0.8% above the average trend, but it is already showing signs of converging with the seasonal norm.  Housing is typically a leading indicator of economic activity and, therefore, an important gauge of the direction of US stock markets.  While recent reports do not provide any immediate concerns, the breadcrumbs presented could lead to something more detrimental for economic activity and stocks if conditions in the housing market deteriorate (ie. sales activity declines, prices significantly weaken).  Seasonally, existing home sales tend to fall through the remainder of the year, into the month of January, as the colder fall and winter weather limits activity.

Existing Home Sales Seasonal Chart

Inventory of Existing Homes for Sale Seasonal Chart

Elsewhere in the economy, the Philadelphia Fed Business District released their gauge of activity in the region.  The headline print indicated that the general business conditions index increased to +22.9 in September from +11.9 previous.  The consensus estimate was for a print of +19.6.  Stripping out the seasonal adjustments, the gauge actually rose to +26.6, from +8.5 previous.  The average for this time of year is +18.4.  The result returns the gauge to an above average position following its brief drop below average last month, the first time it has been below average since the US presidential election.  Manufacturing gauges have begun to vary recently, perhaps a reaction to tariffs or the fact that inventory levels are rising above average.  The important spending period ahead will provide indication as to whether growing stockpiles are cause for concern, or whether is was appropriate preparation for upbeat demand through the months ahead.  Seasonally, the Philly Fed index tends to decline through the last quarter of the year as manufacturing activity tends to wane.

Sentiment on Thursday, as gauged by the put-call ratio, ended bullish at 0.89.

 

 

 

Seasonal charts of companies reporting earnings today:

  • No significant earnings scheduled for today

 

S&P 500 Index

 

 

TSE Composite