by Don Vialoux, Timingthemarket.ca
Editor’s Note: Next Tech Talk report is tentatively scheduled on Tuesday May 31st
Economic News This Week
April New Home Sales to be released at 10:00 AM EDT on Tuesday are expected to increase to 521,000 from 511,000 in March.
The Bank of Canada’s Policy Statement to be released at 10:00 AM EDT on Wednesday is expected to maintain the Overnight Lending Rate at 0.5%.
Weekly Initial Jobless Claims to be released at 8:30 AM EDT on Thursday are expected to slip to 275,000 from 278,000 last week
April Durable Goods Orders to be released at 8:30 AM EDT on Thursday are expected to increase 0.6% versus a gain of 0.8% in March. Excluding transportation, April Durable Goods Orders are expected to increase 0.5% versus a decline of 0.2% in March
Second estimate of first quarter real GDP to be released at 8:30 AM EDT on Friday are expected to increase to 0.9% versus the first estimate of up 0.5%
May Michigan Sentiment Index to be released at 10:00 AM EDT on Friday is expected to slip to 95.5 from 95.8 in April
Earnings News This Week
The Bottom Line
The short term oversold level by U.S. equity markets (4% drop by the S&P 500 Index and Dow Jones Industrial Average since mid-April), a positive bias for equity markets just before and after the U.S. Memorial Day holiday and a history during Presidential Election Years of a recovery from late May to August suggest that a short term recovery bounce in U.S. equity markets is likely. The TSX Composite is in better shape technically and has a high probability of moving to a six month high this week. However, lots of rotation is happening by sectors. Economic sensitive sectors other than Technology have turned neutral/negative relative to the S&P 500 Index. The period of seasonal strength by the S&P 500 Index , Dow Jones Industrial Average and TSX Composite Index based on data for the past 20 years peaks on average at the end of the first week in June. Accordingly, the recovery during the next two weeks probably will be short lived.
Observations
U.S. economic focus this week is on second estimate of first quarter GDP to be reported on Friday. Recent data releases suggest that the first estimate was too low. Better than average weather for the eastern part of North America also helped.
Canadian economic focus is on the Bank of Canada’s policy statement on Wednesday. No change in the Overnight Lending Rate is anticipated, but the statement could indicate a change in trend. Canada’s economy has struggled during the second quarter, partially due to the Fort McMurray tragedy.
First quarter reports by S&P 500 companies are beginning to wind down: 95% have reported to date. 13 more companies are scheduled to release results this week. Blended earnings on a year-over year basis reported to date were down 6.8% and blended revenues were down 1.5%.
According to FactSet, S&P 500 companies are expected to drop 4.7% on a year-over-year basis while revenues are expected to slip 1.2%. 73 S&P 500 companies have issued negative earnings guidance for the second quarter and 30 companies have issued positive guidance. Earnings and revenues are expected to turn positive in the second half of 2016. FactSet projects a 1.3% increase in earnings in the third quarter and a 7.5% increase in the fourth quarter. Revenues are expected to increase 1.8% in third quarter and 4.6% in the fourth quarter.
Canadian earnings focus is Canada’s banks. Consensus shows earnings gains averaging 3% on a year-over-year basis. Banks that are expected to increase their quarterly dividend include Bank of Montreal, Commerce Bank and National Bank. Focus is on potential write downs related to the energy sector.
Technical action by individual S&P 500 stocks remained bearish: 43 stocks broke support and 21 broke resistance. Prominent on the list of stocks breaking resistance were technology stocks. Prominent on the list of stocks breaking support were utility and consumer discretionary stocks.
Intermediate technical indicators (Bullish Percent Index and Barometer) generally are overbought and trending down.
Short term momentum indicators for most equity indices and sector (Notable exception: TSX Composite) are trending down, but are oversold and showing early signs of bottoming.
On the international front, Greece is a focus. Will it reach a re-financing agreement with the ECB? Technical action by the Greek ETF suggests that an agreement will be reached.
Seasonal influences for commodities and commodity related sectors frequently turn neutral/negative at this time of year. Favourable seasonal influences for the Technology sector between mid-April to mid-July finally clicked in. Seasonal influences for the S&P 500, Dow Jones Industrial Average and TSX Composite remain positive until the first week in June.
The VIX Index became slightly elevated last Thursday, but quickly backed down to a sideways trend. Typically at this time of year, changes in the VIX Index are relatively quiet until the end of June. Most volatility spikes during the past decade have occurred from the beginning of July to the middle of October.
The Dow Jones Industrial Average during a U.S. Presidential Election year has a history of moving higher between now and the end of August. The final two candidates reveal encouraging election platforms and try to consolidate party support. Note that the Average has a history of moving significantly lower during a volatility spike from the end of August to just before Election Day (November 8th this year). History is repeating.
FOMC meeting minutes released last Wednesday gave a clear indication of a second increase in the Fed Fund rate at the next FOMC meeting on June 15th. Comments by Janet Yellen on June 6th may provide additional clues on timing. Treasury bond prices dropped significantly following release of meeting minutes, not good news for bond or equity prices
Holidays will impact volumes this week. Historically, North American equity market volumes have declined as the Memorial Day holiday approaches (May 30th this year).
U.S. equity markets have a history of moving higher during the week before the Memorial Day holiday and the first two trading days after the holiday. Given the short term oversold level of the S&P 500 Index and Dow Jones Industrial Average, chances are high that the Memorial Day trade will work this year.
Equity Indices and Related ETFs
Daily Seasonal/Technical Equity Trends for May 20th 2016
Green: Increase from previous day
Red: Decrease from previous day
Calculating Technical Scores
Technical scores are calculated as follows:
Intermediate Uptrend based on at least 20 trading days: Score 2
Higher highs and higher lows
Intermediate Neutral trend: Score 0
Not up or down
Intermediate Downtrend: Score -2
Lower highs and lower lows
Outperformance relative to the S&P 500 Index: Score: 2
Neutral Performance relative to the S&P 500 Index: 0
Underperformance relative to the S&P 500 Index: Score –2
Above 20 day moving average: Score 1
At 20 day moving average: Score: 0
Below 20 day moving average: –1
Up trending momentum indicators (Daily Stochastics, RSI and MACD): 1
Mixed momentum indicators: 0
Down trending momentum indicators: –1
Technical scores range from -6 to +6. Technical buy signals based on the above guidelines start when a security advances to at least 0.0, but preferably 2.0 or higher. Technical sell/short signals start when a security descends to 0, but preferably -2.0 or lower.
Long positions require maintaining a technical score of -2.0 or higher. Conversely, a short position requires maintaining a technical score of +2.0 or lower.
The S&P 500 Index gained 5.71 points (0.28%) last week. Intermediate trend changed to down from up on a move below 2,039. Short term momentum indicators are trending down. The Index remained below its 20 day moving average.
Percent of S&P 500 stocks trading above their 50 day moving average (Also known as the S&P 500 Momentum Barometer) dropped last week to 48.00 from 51.80. Percent remains in an intermediate downtrend, but already is slightly oversold. However, significant signs of a bottom have yet to appear
Percent of S&P 500 stocks trading above their 50 day moving average increased last week to 68.80% from 64.00%. Percent remains in an intermediate downtrend.
Bullish Percent Index for S&P 500 stocks slipped last week to 67.00% from 69.80% and remained below its 20 day moving average. The Index remains intermediate overbought and trending down.
Bullish Percent Index for TSX Composite stocks increased last week to 74.48% from73.22% and remained above its 20 day moving average. The Index remains intermediate overbought.
The TSX Composite Index gained 171.00 points (1.24%) last week. Intermediate uptrend was extended when the Index moved above 13,972.62 (Score: 2). Strength relative to the S&P 500 Index changed to Positive from Neutral (Score: 2). The Index moved back above its 20 day moving average (Score: 1). Short term momentum indicators are trending up (Score: 1). Technical score increased last week to 6 from 2.
Percent of TSX stocks trading above their 20 day moving average (Also known as the TSX Momentum Barometer) increased last week to 70.21% from 64.96%. Percent remains intermediate overbought
Percent of TSX stocks trading above their 200 day moving average increased last week to 72.77% from 69.23%. Percent remains intermediate overbought.
The Dow Jones Industrial Average slipped 34.38 points (0.20%) last week. Intermediate trend changed to down from up on a move below 17,580.38. Strength relative to the S&P 500 Index remained negative. The Average remained below its 20 day moving average. Short term momentum indicators are trending down. Technical score dropped last week to -6 from 2.
Bullish Percent Index for Dow Jones Industrial Average stocks was unchanged last week at 86.67% and remained below its 20 day moving average. The Index remains intermediate overbought and rolling over.
Bullish Percent Index for NASDAQ Composite stocks slipped last week to 49.00% from 49.63% and remained below its 20 day moving average. The Index has trended down to a neutral level.
The NASDAQ Composite Index added 51.88 points (1.10%) last week. Intermediate trend remains Neutral. Strength relative to the S&P 500 Index changed on Friday to Positive from Neutral. The Index moved above its 20 day moving average on Friday. Short term momentum indicators are trending up. Technical score improved last week to 4 from -4.
The Russell 2000 Index gained 9.84 points (0.89%) last week. Intermediate trend remains neutral. Strength relative to the S&P 500 Index remained neutral last week. The Index remains below its 20 day moving average. Short term momentum indicators have started to turn higher. Technical score improved last week to 0 from -4.
The Dow Jones Transportation Average added 164.58 points (2.19%) last week. Intermediate change remained neutral. Strength relative to the S&P 500 Index remained negative. The Average remained below its 20 day moving average. Short term momentum indicators turned higher on Friday.
The Australia All Ordinaries Composite Index slipped 10.70 points (0.20%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained Positive. The Index remained above its 20 day moving average. Short term momentum indicators are mixed. Technical score remained last week at 5.
The Nikkei Average gained 234.45 points (1.43%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained neutral. The Average remained below its 20 day moving average. Short term momentum indicators are mixed. Technical score last week remained at 1.
Europe iShares added $0.35 (0.90%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained negative. Units remained below their 20 day moving average. Short term momentum indicators are mixed. Technical score remained at -1
The Shanghai Composite Index dropped 1.63 points (0.06%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained negative. The Index remained below its 20 day moving average. Short term momentum indicators are trending down. Technical score remained last week at -2.
Emerging Markets iShares slipped $0.06 (0.19%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained negative. Units remained below their 20 day moving average. Short term momentum indicators continued to trend down. Technical score remained last week at -2.
Currencies
The U.S. Dollar Index added another 0.77 (0.81%) last week on growing expectation for an increase in the Fed Fund rate on June 15th. Intermediate trend remains down. The Index remained above its 20 day moving average. Short term momentum indicators are trending up.
The Euro dropped 0.88 (0.78%) last week. Intermediate trend remains up. The Euro remained below its 20 day moving average. Short term momentum indicators are trending down.
The Canadian Dollar dropped US 1.08 cents (1.40%) last week. Intermediate trend remains up. The Canuck Buck remained below its 20 day moving average. Short term momentum indicators are trending down.
The Japanese Yen dropped 1.25 (1.36%) last week. Intermediate trend remains up. The Yen remained below its 20 day moving average. Short term momentum indicators are trending down.
Commodities
Daily Seasonal/Technical Commodities Trends for May 20th 2016
Green: Increase from previous day
Red: Decrease from previous day
The CRB Index added 1.33 points (0.73%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remains positive. The Index remained above its 20 day moving average. Short term momentum indicators are mixed. Technical score improved last week to 5 from 4.
Gasoline added $0.04 per gallon (2.50%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained positive. Gas remained above its 20 day moving average. Short term momentum indicators are trending up. Technical score last week remained at 6.
Crude Oil gained another $1.38 per barrel (2.93%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remains positive. Crude remains above its 20 day moving average. Short term momentum indicators are trending up. Technical score remained last week at 6.
Natural Gas slipped $0.03 per MBtu (1.44%) last week. Intermediate trend changed to down from up on a move below $2.026. Strength relative to the S&P 500 Index changed to neutral from positive. “Natty” remained below its 20 day moving average. Short term momentum indicators are trending down. Technical score dropped last week to -4 from 3.
The S&P Energy Index added 7.35 points (1.51%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained neutral. The Index remained below its 20 day moving average. Short term momentum indicators are mixed. Technical score remained last week at 1.
The Philadelphia Oil Services Index added 3.23 points (2.04%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained negative. The Index remained below its 20 day moving average. Short term momentum indicators have turned mixed from down.
Gold fell $21.40 per ounce (1.50%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index changed to neutral from positive. Gold fell below its 20 day moving average. Short term momentum indicators are trending down. Technical score fell last week to 0 from 4.
Silver dropped $0.60 per ounce (3.50%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index turned negative from neutral. Silver remained below its 20 day moving average. Short term momentum indicators are trending down. Technical score slipped last week to -2 from 0. Strength relative to Gold has turned negative.
The AMEX Gold Bug Index dropped 4.96 points (2.24%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained positive. The Index dropped below its 20 day moving average. Short term momentum indicators are trending down. Technical score slipped last week to 2 from 4.
Platinum dropped $30.70 (2.91%) last week. Intermediate trend remains up. Relative strength dropped to neutral. Fell below its 20 day MA. Momentum: down. Score: 0, down from 4
Palladium fell $34.20 per ounce (5.77%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index turned negative. PALL remains below its 20 day moving average.
Short term momentum indicators are trending down. Technical score dropped to -2 from 0.
Copper fell 2.2 cents per lb (1.06%) last week. Intermediate trend remained down. Strength relative to the S&P 500 Index remains negative. Copper remains below its 20 day moving average. Short term momentum indicators are trending down. Technical score remained at -6.
The TSX Metals & Mining Index gained 13.60 points (2.76%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained neutral. The Index remained below its 20 day moving average. Short term momentum indicators are mixed. Technical score improved to 1 from 0.
Lumber dropped $12.79 (3.88%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index: positive. Fell below its 20 day MA on Friday. Momentum: trending down.
The Grain ETN added $0.18 (0.54%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remained positive. Units remained above their 20 day moving average. Short term momentum indicators are trending up. Technical score remained at 6.
The Agriculture ETF added $0.14 (0.29%) last week. Intermediate trend remains up. Strength relative to the S&P 500 Index remains positive. Units remained below their 20 day moving average. Short term momentum indicators are mixed. Technical score remained last week at 3.
Interest Rates
Yield on 10 year Treasuries increased 14.4 basis points (8.45%) last week on news that the Fed is considering an increase in the Fed Fund rate on June 15th. Yield moved above its 20 day moving average. Short term momentum indicators are trending up.
Conversely, price of the long term Treasury ETF fell $2.13 (1.61%) last week. Price remained above its 20 day moving average.
Volatility
The VIX Index added 0.17 (0.47%) last week. Trend changed to up on a move on Thursday above 17%. The Index remained above its 20 day moving average.
Daily Seasonal/Technical Sector Trends for March May 20th 2016
Green: Increase from previous day
Red: Decrease from previous day
StockTwits Released on Friday
So many widely followed bearish set ups, but is the market setting up for a bear trap?
Encouraging breakout by $AMAT above $21.67 to extend an uptrend! Supports seasonal trade for technology to mid-July.
Nice breakout by another semiconductor related stock! $QCOM broke above $53.62 to extend uptrend.
‘Tis the season for $QCOM to move higher!
Technical action by S&P 500 stocks to 10:15: Bullish. Breakouts: $WMT, $AMAT, $WFM, $HBAN,$QCOM, $BK.
Editor’s Note: After 10:15 AM EDT, Cognizant Technology broke resistance while Campbell Soup and Yum Brands broke support.
Nice breakout by Encana $ECA.CA above resistance at $9.98 to extend an intermediate uptrend!
Nice breakout by $BCE.CA above resistance at $60.39 to reach an all-time high.
‘Tis the season for $BCE.CA to move higher until mid-July!
Nice breakout by $COW.CA above $31.77 extending an uptrend! Higher grain prices are helping.
Special Free Services available through www.equityclock.com
Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices. To login, simply go to http://www.equityclock.com/charts/ Following is an example:
Accountability Report
A sell/short sell comment was offered for ITB (Home Building ETF) on April 30th at $26.79. Current price is $26.66. Strength relative to the S&P 500 Index and short term momentum indicators have turned higher. Accordingly, the seasonal trade no longer is supported.
A sell/short sell comment was offered by StockTwits for IYT (Dow Jones Transportation Average ETF) on May 6th with units trading at $136.83. Current price is $137.80. Strength relative to the S&P 500 Index has turned positive and short term momentum indicators have turned higher. Accordingly, the seasonal trade no longer is supported.
Disclaimer: Seasonality and technical ratings offered in this report by www.timingthemarket.ca and www.equityclock.com are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed
Copyright © DV Tech Talk, Timingthemarket.ca