Market Summary
Feb. 11th was the 2016 low for the stock market. Since then easing concerns about slowing growth in China, as well as a possible U.S. recession, have triggered an explosive rally that in five weeks wiped out Wall Street's worst start ever to a year. After a sixth straight winning week the Dow Jones industrial average staged its biggest comeback from a deficit during a quarter since 1933. U.S. stocks erased losses for the year as the Federal Reserve's scaled-back path for interest-rate increases sparked demand for riskier assets. Crain’s reported that actions by central banks to stimulate growth have fueled a rebound in risk assets from equities to raw-material prices, after almost $9 trillion was erased from global stocks at the start of the year. The Fed's updated projections indicate two quarter-point increases this year, down from four forecast in December. “Never underestimate the power of the Fed to impact the markets. The doves are clearly winning the argument resulting in yesterday’s dovish announcement, which dragged the Fed back far more in line with market views on the potential for rate hikes in 2016,” said Richard Perry, analyst at Hantec Markets, in a note. For the week, the S&P 500 Index advanced 1.4% while the Blue Chip Dow Jones Industrial Average rose 2.2%. The Nasdaq added 1.0% while the small cap Russell 2000 crawled up 1.3% for the week. As confirmed in the chart below, the Fed’s dovish interest rate comments have stabilized treasury prices and continue to catapult gold stocks. 
A standard chart that we use to help confirm the overall
market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of
an index composed of U.S. large- and mid-capitalization stocks exhibiting
relatively higher price momentum. This type of momentum fund is considered a
reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum
Factor ETF. Heikin-Ashi candlestick
charts are designed to filter out volatility in an effort to better capture the
true trend. Last week’s analysis played out as advertised as we opined “…Next week is critical for determining the
market trend…stocks are in a trading range. Most market technicians believe the
most likely scenario is the MTUM will break out and continue higher in the
direction of the current trend…” Technical analysis suggests there is still
plenty of room for the uptrend to continue.
Trading Strategy
A few weeks ago we discussed the relationship between stocks
and energy price when we said “…equity and energy prices have been trading in lock step all year. Market pundits have offered various analyses on why this
is happening. There is usually unique asset classes associated with the
movement of stock prices, e.g. dollar, bonds, interest rates, etc. Until this
relationship is broken, some investors are observing energy prices as a clue to
stock movement, especially for day trading…” Regardless of the driver, the
oil rebound is putting Wall Street in a buying mood. The oil crash was viewed
by many as a sign of impending economic collapse, causing the stock market to
tank at the beginning of the year. But now the Dow has recouped all of its
losses for the year, up from a stunning loss of nearly 2,000 points at one
point. As mentioned previously, February 11th was the market low and
the graph below displays asset performance since. In the graph you can see the
results since the February correction are equivalent to more than an entire
year of gains. What’s notable is that the smaller cap higher risk stocks are
leading the way, which confirms investors are committed to trading “risk-on”.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@nellaadvisers.com
P.S. click on http://www.theoptionplayer.com/
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