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Stock Market Outlook for December 19, 2016

S&P 500 Index charts a weekly doji candlestick at trendline resistance.

 

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:

Black Diamond Group Ltd. (TSE:BDI) Seasonal Chart

Papa John’s Int’l, Inc. (NASDAQ:PZZA) Seasonal Chart

CVS Caremark Corporation (NYSE:CVS) Seasonal Chart

AAON, Inc. (NASDAQ:AAON) Seasonal Chart

 

 

The Markets

Stocks pulled back slightly on Friday as investors rebalanced portfolios following the recent market advance.  The rumour across trading desks is that pension funds and managed client portfolios need to rebalance positions by selling equities and buying bonds in order to bring portfolio weights back to mandated targets.  The ratio of the S&P 500 ETF relative to the iShares US Aggregate Bond ETF helps to put things in context.  The ratio, broke out from a massive period of consolidation that spanned the past couple of years, advancing to all time highs.  The ratio is now over 6% above its breakout point, inevitably increasing the relative weight of the equity component of portfolios relative to the fixed income weight.  In order for fund managers to maintain their strategic asset allocation in client portfolios, they will have to sell some of their winners and buy some of their losers before the end of the quarter/calendar year.  It is likely that some investment managers may have a conversation with clients in the new year to suggest an altered allocation given that the fundamental justification to hold bonds has changed with yields breaking long-term declining trends, but, until then, this mean reversion trade could cap stocks over the near-term.  The reweighting is likely to be complete before portfolio managers start to take holidays by the end of the week, then leading to the notorious Santa Claus rally, where low trading volumes and upbeat investor sentiment typically supports stocks through to the start of the new year.

Turning to the weekly look at the S&P 500 Index, the large-cap index ended marginally lower last week, charting a doji (indecision) candlestick.  The candlestick pattern shows a reaction to trendline resistance that spans the peaks of each of the weekly highs dating back to the spring.  Major moving averages on the weekly chart are all pointing higher, providing support to the intermediate upward bias in equity prices.  From a trading perspective, profit-taking around the upper limit of the rising range may be appropriate with a view to repurchase closer to the lower limit of the span.  Keep in mind, however, that price could scrape along the upper bound for some time before losing momentum and retracing back to trendline support.  Further monitoring of this emerging trend is warranted.

On the economic front, a report on housing starts disappointed investors.  The headline print indicated that starts decreased last month by 18.7% to a seasonally adjusted annual rate of 1.09 million.  Analysts had expected a print of 1.23 million.  Stripping out the seasonal adjustments, housing starts actually decreased by 28.4% versus the month prior, much more than the average decline for November of 15.9%.  Following a significant jump above the average trend in October, the year-to-date change has fallen back below average, suggesting October read may have been an anomaly.  But the report wasn’t completely negative.  Housing units completed showed a very rare gain in this second to last month of the year, increasing by 4.1% versus the average decline for November of 7.9%.  Completions, which have been trending inline with the historical average change through the the first three quarters is now showing a year-to-date change that is firmly above the norm.  Homebuilding stocks closed mildly higher following the result.  Seasonally, the homebuilding industry tends to gain between October and February as investors anticipate an upbeat spring home-buying season.  The rise in mortgage rates over the past month remains a headwind.  The 30-year fixed mortgage rate in the US recently broke above declining trendline resistance as a double bottom pattern from the lows around 3.5%  becomes confirmed.

Sentiment on Friday, as gauged by the put-call ratio, ended bullish at 0.91.

 

 

Sectors and Industries entering their period of seasonal strength:

^RUT Relative to the S&P 500

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite