Market Summary
An analysis by Bespoke Investment Group found that the stocks that have gained the most in this rally were the ones that had the most investors betting against them only a few days ago. Many hedge funds are pulling back from those gloomy bets. While there's a lot of momentum in the market, the global economy remains weak. The other damper on this rally is it's hard to sort out how many "real buyers" have been jumping back in versus hedge funds simply comvering their short postions. "So far the market's bouncing almost perfectly to work off the oversold conditions we saw last week. There's still a whole lot of overhead resistance," said Adam Sarhan, CEO of Sarhan Capital. "I think people feel the market's stabilizing to a certain extent," Peter Coleman, head trader at Convergex, noting the S&P 500 rallied more than 6% from its low last week to its recent high this week.
A tool to help confirm the overall market trend is the
Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth”
indicator used to gauge the internal strength/weakness of the market. It is the
number of stocks in an index (or sector) that have point & figure buy
signals relative to the total number of stocks that comprise the index (or
sector). So essentially it is the percentage of stocks that have buy signals.
Like many of the market internal indicators, it is used both to confirm a move
in the market and as a non-confirmation and therefore divergence indication. If
the market is strong and moving up, the BPI should also be moving higher as
more and more stocks are purchased. The Nasdaq Composite Bullish Percentage
Index (BPCOMPQ) chart below highlights a price uptrend line. Nasdaq stocks tend
to lead the market and if recent behavior is a guide, investors bidding up
Nasdaq stocks usually lead to higher near-term stock prices.
The CBOE Volatility Index (VIX) is known as the market’s
“fear gauge” because it tracks the expected volatility priced into short-term
S&P 500 Index options. When stocks stumble, the uptick in volatility and
the demand for index put options tends to drive up the price of options
premiums and sends the VIX higher. The hourly Volatility Index chart below
indicates that over the past week or so traders are becoming less apprehensive
about the stock market. You can see that after reaching its highest level in
the middle of the month the VIX is in a downtrend which coincides with the
surge in “risk-on” trading.
Trading Strategy
As reported by the Stock Traders Almanac, over the last 21
years, the market’s performance in February has improved when compared to the
longer-term record since 1950. DJIA has advanced in 14 of the last 21
February’s with an average gain of 0.4%. S&P 500 has a similar record, up
13 of 21 with a slightly weaker average gain of 0.1%. NASDAQ is slightly
weaker, up 11 times over the same period with just a 0.01% gain. The real star
in February has been the Russell 2000 small-cap index, up 12 of 21 with a 0.8%
average advance. This outperformance is mostly due to the lingering January
Effect. The bulk of February’s strength is usually located around mid-month,
followed by a bout of weakness, another modest bounce and finally weakness the
last two days of the month. Recent strength was a few days late this year and
of greater magnitude. Should this February track the pattern from the past 21
years, some strength is likely early this week before the market begins to fade
later next week. The updated graph below indicates investors converted to
“risk-on” trading over the past month. Defensive Utility stocks had been the
only positive group, but Industrial, Materials and Energy S&P Sectors led
the market the past month. Now might be a good to “nibble” at some of the
shares on your stock watch list – but keep tight stops.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@nellaadvisers.com
P.S. click on http://www.theoptionplayer.com/
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