Sunday, February 19, 2017

Weekly Stock Market Outlook 2/19/2017

U.S. stock indexes took a modest step back Friday, though they remain close to their record highs. Bank stocks fell more than the rest of the market as bond yields eased.

U.S. Economy – Leading indicators are coming to life, rising a sharp 0.6 percent in January on top of a 0.5 percent gain in December. Strength has been broad based with factory data giving the index a special lift.  The results are pointing to building strength for the first-half economy. The coincident index, however, is still very soft at only plus 0.1 percent.
The main report this week is FOMC from the FED. While no rate hike is expected, we may see volatility ahead of the renouncement. Keep in mind, there’s a 3-week lag in the data from the FED, but nonetheless, the minutes provide investors some degree of direction based on the medium term time frame.

Quarterly Earnings – The bulk of the Q4 earnings season is now behind us, with results from only about 18% of the S&P 500 members still awaited.  The Retail sector is the only one at this stage that has a sizable number of reports still to come, particularly from the traditional retailers like Wal-Mart, Macy’s and Nordstrom that are on deck to report results this week.  With another 49 index members reporting results this week, the Q4 earnings season will have come to an end for 92% of S&P 500 members by the end of this week.

As we have been saying for the last few weeks, the Q4 earnings season has turned out to be a good one. Not only is growth on track to be the highest in two years, but total earnings for the quarter are also on track to be a new quarterly record.  The overall tally of Q4 earnings for the S&P 500 index is on track to reach an all-time record for the index, surpassing the previous record achieved in 2014 Q4.

For Q4 as a whole, combining the actual results from the 411 S&P 500 members that have reported with estimates for the still-to-come 89 companies, total earnings are expected to be up +7.4% from the same period last year on +3.9% higher revenues.  This would follow the +3.7% growth in Q3 earnings on +2.2% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines.

Market Sentiment – Thirty-year Treasury bond futures are higher as a result of lower stock index futures and mostly weaker industrial commodities.  In addition, there was some support on news that China snapped a six-month streak of selling U.S. Treasuries in December, even though its holdings for the year declined by the most on record.  China’s holdings of U.S. Treasuries increased by $9.1 billion in December to $1.06 trillion. This was the first monthly increase since May.
There was also support due to lessened prospects of tighter credit policies from the FOMC.  The probability that the Federal Open Market Committee will increase its fed funds rate at its March 15 policy meeting is 18%, when 22%was predicted yesterday.  The probability of a rate hike at its May 3 meeting is 44%, which compares to 49% yesterday and the probability of a rate increase at the June 14 meeting is 70%, when 75% was expected on Thursday.
Stock Market Analysis – Stocks are losing directional bias and upside has been limited over the past 3 trading sessions. Most key indices are overbought with RSI moving into the 80th level. Historically, stocks tend to fizzle out and revert back to the downside after RSI reaches these levels and I’m expecting corrective pressure to begin moving into the market in the short term.

                          
                         

While stocks remain near all-time highs, the percentage of stocks trading above the 50-day line is not increasing, which tells me the buying we are seeing is not originating from large mutual funds.  The reason we know this is because large institutional funds accumulate baskets of stocks via program buying and that causes momentum levels to spike sharply, since multiple stocks are being bought at the same time.  When we see price moving higher but the percentage of stocks causing the upside to decline, even though price is moving higher, it means that accumulation is triggered by retail traders, which don’t have the power to continuously drive stocks higher, unlike institutional traders, which cause increase in momentum AND in price simultaneously.


                           

Lastly, I wanted to take a look at the financial sector, which has been extremely strong in the near term in anticipation of higher rates. Notice that RSI is above 70 and divergence between price and RSI began right around the November Presidential election.


                           

Till the divergence is resolved, price will not be able to generate substantial upside momentum, till we see minor corrective pressure, which should eliminate the divergence and give the financials enough balance to begin moving directionally once again, but currently this particular sector is getting a bit ahead of itself and the most likely scenario is a pullback to the 50-day line or 200 day line to the download over the near term time frame.



Complements of Market Geeks

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