Sunday, April 30, 2017

Weekly Stock Market Outlook 5/1/2017

The major U.S. stock indexes were mixed Friday as investors sized up the latest batch of company earnings. Real estate stocks lagged the most, while energy companies led the gainers as the price of crude oil headed higher. Several technology companies were moving higher after reporting solid results.

Global Economy – Gains were limited on lingering geopolitical concerns after President Trump warned that a “major conflict” with North Korea was possible if diplomatic solutions fail.

Negatives for European stocks include weaker-than-expected UK Q1 GDP and rising inflation pressures after the Eurozone Apr core CPI rose a more-than-expected +1.2% y/y, the biggest increase in 3-3/4 years.

Asian market settled mixed as uncertainty surrounding the Trump administration’s trade plans and North Korean concerns limited the upside in stock prices.

U.S. Stock Market – The U.S. economy turned in the weakest performance in three years in the January-March quarter as consumers sharply slowed their spending. The result underscores the challenge facing President Donald Trump in achieving his ambitious economic growth targets.
The gross domestic product, the total output of goods and services, grew by just 0.7 percent in the first quarter following a gain of 2.1 percent in the fourth quarter, the Commerce Department reported Friday.  The slowdown primarily reflected slower consumer spending, which grew by just 0.3 percent after a 3.5 percent gain in the fourth quarter. It was the poorest showing in more than seven years.  Economists attributed the sharp slowdown in consumer spending to shrinking utility bills due to warmer weather, a drop-off in auto sales and a delay in sending out tax refund checks by the IRS, which also dampened spending.

Market Sentiment – Weaker than expected GDP data didn’t prevent bonds from breaking the recent lows. Typically, weaker than expected GDP data implies potential weakness in the economy, which typically causes FED to pause raising rates.  The negative GDP data should have caused bonds to spike higher. Instead bonds broke the recent low Friday morning and showed very little upside. This tells me that bonds are weaker than anticipated and the most likely scenario will be more downside, which implies higher rates, even though economy is lagging behind expectations once again.

                           
Expect more weakness and inevitably price reverting lower or continuing to stagnate for the remainder of the month.  The probability of a rate hike at the Federal Open Market Committee’s May 3 policy meeting is 5%, which compares to 3% on Thursday and the probability of a rate increase at the June 14 meeting is 75%, when 70% was predicted yesterday.

Stock Market Analysis – Stocks are showing very little directional bias, especially in light of weaker than expected GDP and renewed Global Friction. Major indices are stagnating after rallying sharply during the first half of the week but now appear to be looking for directional bias.  I’m anticipating price to revert lower and test the 50 day line over the next few weeks, which will undo the upside over the past few sessions and take stocks lower once again.

                            april28spy
The fact that SP 500 failed to make new highs and weaker than expected FED data is going to cause institutional traders to pause aggressive accumulation, till stocks reach oversold price levels, which should happen once we break through the downside of the 50 day line once again.  To confirm my analysis we have to focus on the tech sector, which till now has been giving SP 500 stocks a strong boost. At the present time, the Tech sector is overbought and price is diverging strongly from the 10 day RSI Oscillator, which tells me that tech is overbought as well.  Expect minor downside to develop over the next few weeks across most sectors, as markets begin to regain balance once again.

Volatility is near historic lows, even though Global tension is on the rise, which tells me that major corrective pressure is more than likely not going to happen and we should expect more or less lack of direction in the coming days.  Earnings season is heating up and I believe we will see some increase in volatility in the near term as a result, especially with stocks becoming stagnate once again.




Courtesy of Market Geeks


Sunday, April 16, 2017

Weekly Stock Market Outlook 4/16/2017

U.S. stocks are mixed as investors sized up earnings from several major banks and new data on inflation. Financial stocks led the gainers, followed by technology companies. Utilities were down the most. Trading was light ahead of the long Easter holiday weekend.

Global Economy – Geopolitical concerns from North Korea, Syria and the French presidential elections have all increased uncertainty in global markets and pushed the VIX volatility index up to a 5-month high, which is weighing on stocks.

Comments from President Trump have pushed the dollar index down to a 2-month low and the 10-year T-note yield down to a 4-3/4 month low when he said, “the dollar is too strong” and that he likes “a low interest rate policy.” The increase in volatility along with the weak dollar has bolstered demand for gold with Jun COMEX gold up +0.88% at a 5-month high. Trading activity was subdued ahead of the Easter holiday.

China’s Shanghai Composite eked out a gain on signs of strength in the Chinese economy after China Mar exports and imports both rose more than expected. Japan’s Nikkei Stock Index tumbled to a 4-month low after a fall in USD/JPY to a 4-3/4 month low fueled a sell-off in exporter stocks as the stronger yen undercuts the earnings prospects of Japanese exporters. The China Mar trade balance was in surplus by +$23.93 billion, wider than expectations of +$12.5 billion. Mar exports jumped +22.3% y/y, stronger than expectations of +8.0% y/y and the largest increase in 2-years. Mar imports surged +26.3% y/y, stronger than expectations of +15.0% y/y.

U.S. Economy – Fewer Americans sought unemployment benefits last week, which is evidence of a stable job market and greater security for workers. Weekly applications for jobless aid dipped 1,000 to a seasonally adjusted 234,000, the Labor Department said Thursday. Requests for benefits in the prior week were revised up 1,000 to 235,000. The four-week average, a less volatile measure, fell to 247,250 from 250,250. Over the past year, the number of people collecting unemployment benefits has fallen 6.9 percent to 2 million.

Applications are a proxy for layoffs. They have stayed below 300,000, a level linked with broader job growth, for 110 weeks. That’s the longest period at such a low level since 1970, when the U.S. population was much smaller.

Inflation at the wholesale level slid last month, pulled down by plummeting energy prices.
The Labor Department said Thursday that its producer price index, which measures inflation pressures before they reach consumers, fell 0.1 percent in March, the first drop since August. Wholesale prices rose 0.3 percent in February and 0.6 percent in January. Producer prices were up 2.3 percent in March from a year earlier, the sharpest annual increase in five years.

Energy prices tumbled 2.9 percent, including an 8.3 percent drop in gasoline. But excluding volatile food and energy prices, so-called core wholesale inflation was unchanged in March and is up just 1.6 percent over the past year.

Market Sentiment – Futures firmed yesterday afternoon with follow through today after President Donald Trump on Wednesday said he would prefer the Federal Reserve keep interest rates low.
The probability of a rate hike at the Federal Open Market Committee’s May 3 policy meeting is 4%, which is unchanged from Wednesday and the probability of a rate increase at the June 14 meeting is 57%, which is also unchanged from yesterday.

Technically, bonds are breaking higher instead of lower as many investors anticipated earlier in the year. Over the past 4 months, we’ve been looking for higher bond prices and finally we have a breakout above 4 month price highs. I’m not expecting price to trade too much higher at this time, but I am anticipating congestion to develop near the current price level before price reverts back down into the trading range.  Eventually, price will revert lower since interest rates are going to move higher in the medium term time period, but at the present time expect lack of directional bias and lack of trend, till Global conflict is resolved and U.S. economy becomes more stable.


                           april13bonds

The current rate of interest rate increases is priced into the overall market structure and with equities trading lower, it’s hard to imagine that bonds will trade lower in the short term. The odds are strong that bonds will NOT continue trading higher but will begin congesting near the current price level and then revert back down into their range. Expect more congestion and sideways action from bonds in the short term time period.

Stock Market Analysis –  Broader market is being pushed lower by global discord. Meanwhile NASDAQ is now violating the 50 day line to the downside and increasing pressure on the broader market.  Tech has been leading ahead of blue chips, since there’s less Geo political risk with tech than with industrial and financial stocks, which are directly impacted by Global events.  However, lack of institutional accumulation ahead of Easter weekend has decreased level of accumulation and caused the majority of institutional traders to sit on the sidelines for the time being.


                            april13tech

Blue chips are weaker than the tech sector and are now headed for the 90 day line to the downside. I’m expecting blue chips to move down to November price levels and violate the 200 day line to the downside, before we see minor consolidation develop in the market.  Such corrective pressure will cause price to decline further till the post election rally caused by Presidential election completely erased and stocks begin trading near fair value.


                            

Based on my analysis, the market should begin consolidating right around the highs reached mid November. Once we reach those price levels, we will see individual sectors reach some degree of balance, which will help drive prices higher once again, but not till we see reasonable correction, which is needed since stocks remain overbought at current price level.

Expect less volume moving into the market as a result of large institutional traders sitting on the sideline, till we see VIX Index move away from 5 month highs and Global drama surrounding North Korea and Syria is diffused.



Complements of Market Geeks

Sunday, April 9, 2017

Weekly Stock Market Outlook 4/9/2017

U.S. stocks were wobbling Friday morning as the combination of a weak jobs report and U.S. missile strikes against Syria have investors on edge.

Investors are buying bonds, gold, and high-dividend stocks as they look for safe venues to put their money. Bond yields are down, and banks are skidding. Defense contractors are trading higher. The Labor Department said hiring slowed down in March.

Global Economy – The German Feb trade balance increased to a surplus of +19.9 billion euros, wider than expectations of +17.7 billion euros. Feb exports unexpectedly rose +0.8% m/m, stronger than expectations of -0.5% m/m. Feb imports fell -1.6% m/m, weaker than expectations of +0.2% m/m and the biggest decline in 11 months.

German Feb industrial production unexpectedly rose +2.2% m/m, stronger than expectations of -0.2% m/m.  European stocks are down after the U.S. launched cruise missiles against Syrian airfields in retaliation from Syrian President Bashar al-Assad’s alleged poison gas attacks on civilians.
President Putin of Russia, a Syrian ally, condemned the U.S. attack as an “act of aggression against a sovereign state” and suspended an accord with the U.S. designed to avoid incidents in Syrian airspace.

Jun COMEX gold surged  to a 4-3/4 month high on increased safe-haven demand, while government bond markets rallied as the U.S. 10-year T-note yield fell to a 4-1/2 month low.

Asian shrugged off the U.S. missile strike on Syria as the rally in crude oil to a 4-week high boosted energy producing stocks and pushed China’s Shanghai Composite up to a 4-1/4 month high.

U.S. Economy – U.S. employers added just 98,000 jobs in March, the fewest in a year, though the unemployment rate fell to a nearly 10-year low of 4.5 percent.  Last month’s weakness in hiring may point to sluggishness in the economy, but unusual weather might also have been a factor.  Job gains in January and February had averaged a robust 218,000, fueled partly by strong hiring in construction, which occurred because of unseasonably warm winter weather.  As a result, economists had expected a falloff in hiring in March. Still, the drop last month was worse than expected.
It its jobs report Friday, the government also revised down the job growth for January and February by a combined 38,000. And it reported that average hourly earnings rose 0.2 percent in March from February and have risen 2.7 percent over the past 12 months.

The unemployment rate fell because nearly a half-million more Americans reported finding jobs, the Labor Department said.

Earnings Watch – Total Q1 earnings for the S&P 500 index are expected to be up +6.5% from the same period last year on +6.3% higher revenues. Q1 estimates came down as the quarter got underway, with the current +6.5% down from +10.4% in late December.

We have Q1 results from 23 S&P 500 members already (fiscal quarters ending in February). Total earnings for these 23 index members are up +14.5% and their revenues are up +5.1% from the comparable period last year.  The Q1 earnings season has gotten underway already, but it will really get going with the Thursday, April 13th reports from the big banks.  While total earnings for the quarter are expected to be up +6.5% from the same period last year, total revenues are expected to be up +6.3%. As we know, actual growth will be higher than this, which could be as high as the +10.4% growth pace that was expected at year-end 2016.

Market Sentiment –The U.S. missile strike on Syria caused flight to quality buying to come into the market yesterday evening. Futures were also supported by the slower pace of hiring in the U.S.

The probability of a rate hike at the Federal Open Market Committee’s May 3 policy meeting is 4%, which compares to 6% on Thursday and the probability of a rate increase at the June 14 meeting is 66%, which compares to 67% yesterday.

Stock Market Analysis – The SP 500 is violating the 50 day moving average and continues to develop descending triangle pattern, which appears to be ready to break further to the downside.


                          april7spy

Expect to see more downside in the broader market as volatility to the downside develops further. There’s very little in the way of catalyst to bring the market higher at this time and with increased sectors trading below the 50 day line, the odds are strong that overall market will continue declining further in the near term.

Another major factor is the tech sector, which has been outperforming the broader market and remains above the 50 day line at this time. The problem with the overall tech sector is the long term momentum levels, which reached above 80th percentile last week.

If you look at the chart below, you will see the 10 year momentum chart, which represents the percentage of stocks trading above the 200 day line in the NASDAQ 100, which tracks the top 100 biggest tech and growth stocks. While this graph goes back 10 years, the 20 or 30 year graph appears to be remarkably similar, which is why I didn’t go back further.


                           april7momentum

Notice that each time over 80% of stocks trade above the 200 day line, we see major selling pressure develop in the tech sector and this time is not going to be different.  Since techs are one of the only remaining indices that are holding lending strength to the overall market, the odds are strong that once tech gives us the fight and drops below the 50 day line, the overall market will become increasingly weaker and will gravitate towards the 90 day line in the near term.

All in all, I believe the weaknes in the broader market taken together with the upcoming weakness in tech is going to push the overall market lower in the near term.  I do believe that stocks will find support at the 200 day line and will begin trending higher, but with the current overbought momentum levels, I’m seeing more downside ahead, especially as tech becomes increasingly weaker in the short term.



Courtesy of Market Geeks

Sunday, April 2, 2017

Weekly Stock Market Outlook 4/2/2017

U.S. stock indexes wavered between small gains and losses on Friday as investors weighed several corporate deals and new economic data on consumer spending and prices. Financial stocks were down the most, while utilities posted the biggest gains.


Global Economy – The Eurozone Mar CPI estimate rise +1.5% y/y, weaker than expectations of +1.8% y/y. Mar core CPI rose +0.7% y/y, weaker than expectations of +0.8% y/y and the slowest pace of increase in 11-months. ECB Executive Board member Coeure said that recent Eurozone economic data have pointed to robust growth, “but at the same time, measures of underlying inflation remain subdued.”

German Mar unemployment fell -30,000 to 2.6 million, stronger than expectations of -10,000. The Mar unemployment rate unexpectedly fell -0.1 to 5.8%, stronger than expectations of no change at 5.09% and a record low since the reunification of Germany in 1990.

The China Mar manufacturing PMI rose +0.2 to 51.8, stronger than expectations of +0.1 to 51.7 and the fastest pace of expansion in 4-3/4 years.

Japan Feb industrial production rose +2.0% m/m, stronger than expectations of +1.2% m/m and the biggest increase in 8-months. The Japan Feb jobless rate unexpectedly fell -0.2 to 2.8%, stronger than expectations of no change at 3.0% and the lowest in 23-years.

Japan Feb overall household spending fell -3.8% y/y, weaker than expectations of -1.7% y/y and the biggest decline in 6-months.


U.S. Economy – Consumer spending edged up 0.1 percent in February following a similarly sluggish 0.2 percent increase in January, the Commerce Department reported Friday. The small gains suggest that overall economic growth likely slowed in the first quarter.

Incomes, however, were up a solid 0.4 percent in February, offering hope for stronger consumer spending in the months ahead.

Meanwhile, an inflation gauge closely watched by the Federal Reserve increased 2.1 percent in February compared to a year ago. It is the sharpest 12-month rise since March 2012 and slightly above the Fed’s 2 percent inflation target.

The Fed raised a key interest rate in March, just three months after a hike in December. Officials have sent signals that the pace of rate hikes will accelerate this year after seven years of stagnant rates at a record low near zero. In the last two years, the Fed nudged rates up just one time in each of those years.

The overall economy grew at a 2.1 percent rate in the October-December quarter, supported by a strong gain in consumer spending.  But with the recent weakness in spending, which accounts for 70 percent of economic activity, many analysts believe growth in the January-March quarter could slow to a rate of 1.5 percent or less.

The consumer sentiment index eased 7 tenths lower in the final half of March to 96.9, below Econoday’s consensus but still making for a 6 tenths gain from February’s 96.3. The component for current conditions rose 1.7 points in the month to 113.2 which is a positive indication for March consumer spending. Expectations, which pivot on the outlook for jobs, held unchanged at 86.5.

A puzzle in the report is a noticeable decline in inflation expectations, down 2 tenths for the 1-year outlook to 2.5 percent and down 1 tenth to 2.4 percent for the 5-year outlook. The declines aren’t due to gasoline prices which have been edging higher, not lower, and raise questions over consumer’s outlook for wages and general economic strength.

One signpost for March was the Trump administration’s unsuccessful bid to repeal Obamacare in a reminder that politics are heavily at play right now in consumer psychology. The report once again notes the deep polarization between Democrats, who see a recession and inflation ahead, and Republicans who see the opposite.

Outsized strength in confidence is the unusual feature of the economic data right now, strength that only marginally, if at all, is beginning to help actual growth.

Earnings Outlook – The Q1 earnings season has gotten underway with earnings reports from 17 S&P 500 members already out. All of these initial Q1 earnings reports are from companies that have their fiscal quarters ending in February, which form part of our Q1 earnings tally.  The results thus far are tracking better than what we have been seeing from this same group of 17 index members, but it’s premature to draw any firm conclusions from the unrepresentative sample at this stage.

Total Q1 earnings are expected to be up +6.5% from the same period last year on +6.4% higher revenues. This would follow +7.4% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years.\  Estimates for Q1 have come down as the quarter has unfolded, with the current +6.5% growth down from +10.4% at the end of December. Earnings backdrop has not changed in any meaningful way since the November elections, notwithstanding the market’s strong gains since then.

The only exception to this comment is the Finance sector whose earnings outlook has improved as a result of the uptrend in interest rates since November 8th.  It is reasonable to expect that earnings estimates will move favorably once the new administration’s growth-friendly policies get enacted. For now, however, estimates are following the long-established trend of coming down.

Market Sentiment – The probability of a rate hike at the Federal Open Market Committee’s May 3 policy meeting is 6%, which compares to 4% on Thursday and the probability of a rate increase at the June 14 meeting is 63%, which compares to 53% yesterday.  One factor that may keep price firm is the potential change in sentiment change in the stock market, which is slowly declining and weakening. Stocks and bonds trade inverse to each other and stocks are strongly overbought in the short term. Minor selling pressure in stocks will cause investors to rotate into the bond market in the short term.

Stock Market Analysis – Stocks are trading above the 50 day line but medium term momentum levels continue declining, which tells me that stocks are increasingly becoming vulnerable in the short term.  If you take a look at the medium term momentum levels in the tech sector, which remains the strongest sector at this time, you will notice that close to 90% of top 100 NASDAQ stocks traded above the 50 day moving average.

                           march30momentum
Take a look at the chart below that demonstrates over 3 years of momentum data. You can clearly see that each time over 80% of stocks trade above the 50 day moving average, the percentage of stocks trading above the 50 day line declines back down to neutral territory or lower.  And I can assure you that going back to 10, 20 and 30 years, would show the exact same type of behavior in the overall stock market.

Lastly, take a look at consumer staples, this sector has major influence over the broader market. The last swing higher did not surpass the previous peak and more importantly, price has violated the neckline on the double top to the downside.

                           march30consumer
I’m expecting consumer stocks to violate the 50 day line over the near term and cause more downside for the broader market.  With tech and consumer stocks starting to weaken, the overall should begin weakening and seeing more downside volatility develop in the near term.  I'd say be prepared for selling pressure in U.S. stocks ahead.





Courtesy of Market Geeks