Market Summary
Stocks stalled this week after comments by U.S. Federal Reserve officials, who raised expectations for more interest rate hikes in coming months than investors expected. St. Louis Fed President James Bullard was the latest to join a chorus of officials who highlighted the chance of multiple rate increases this year. The deadly bombing attacks in Brussels on Tuesday added to investors' uncertainty this week along with a strengthening dollar that weighed on commodity-related shares. "After the run that we've had ... I think it's natural for folks to take a deep breath and take some chips off the table," said Jeff Buetow, president of BFRC Services in Charlottesville, Virginia. MKM Partners’ technical analyst Jon Krinsky published a report saying that since last July, the market has been trending for 25-30 days before pausing, and then switching directions. Over the last 26 trading days, the SPX has rallied 13%, bringing it just shy of the late December high (2081). This is almost an identical move in magnitude and duration to the September to November rally. If recent history is any guide, at a minimum, we should see a pause here.
Trading Strategy
The Stock Trader’s Almanac reports that over the past 26 years the DJIA and S&P 500 have declined 17 times and advanced 9 with an average loss approaching 1.0% near the end of March. Excluding advancing years, the average decline is right around 1.6% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third. As mentioned above, the market is probably due for a pause to absorb oversold conditions. We advise making sure a stop-loss strategy is in place for all open positions in case the pause turns into a significant pullback. Feb. 11th was the 2016 low for the stock market. As evidenced in the chart below, since the market low point, stocks have exploded higher. The rally is being led by higher risk stock sectors such as energy, materials, industrials, etc. Defensive sectors such as consumer staples, healthcare and utilities are lagging which confirms investors’ confidence in the current bullish move.
By Gregory Clay
Investment Strategist
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gregoryclay@theoptionplayer.com
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