Market Summary
The economic data in the U.S. continues to gradually
improve, but this is having a limited effect on the stock market, as investors
are fixated on the Fed. Fed Chair Yellen hosted a historic meeting with her
three previous Fed chairs on Thursday and they reiterated little chance of a
recession. Minutes from the most recent Federal Reserve meeting suggested the
Fed was unlikely to raise interest rates before June. With quarterly earnings
season beginning next week, we could see volatility creep into the market.
Expectations for the upcoming quarterly earnings took a massive downgrade over
the last few months. Analysts are projecting a third straight quarterly decline
in earnings at S&P 500 companies, with a 7.6% year-over-year decline in profits
forecast, according to Thomson Reuters data. Some strategists, though, expect
more companies than usual to beat extremely low estimates, possibly helping
stocks gain in the short term. While economists and analysts lowered their
growth numbers, the economy actually expanded and the doomsday scenario has not
materialized. This could set up another broad-based beat for corporate results
as expectations are extremely low. Investor focus should shift next week
from oil and the Fed to quarterly reports, said Peter Kenny, senior market
strategist at Global Markets Advisory Group, in Berkeley Heights, New Jersey.
"The Street is not expecting much in Q1 earnings, but right now the market
is moving as a direct result of dovish commentary from the Fed and crude's
ability to rally. That is good news for investors but I'm not sure how long of
a shelf life that has," he said. The chart below displays the recovery
from the market bottom in February for major asset classes. Notice the even
though bonds and gold are the leading performers year-to-date, since the market
crash investors have been aggressively buying riskier equity assets. This trend
should continue if companies beat low quarterly earnings expectations and
future guidance is not too dismal.
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 we said, “…the
market is moving higher on weak momentum. This indicates that buyers may be
getting exhausted. The recent market surge has primarily been inspired by Fed
pronouncements and not necessarily because of strong economic data…” As
highlighted in the updated chart, the weak uptrend has converted into a trading
range. Also noted is momentum starting to turn negative which should help
resolve the overbought condition. Technical analysis rules say that stocks
usually continue in the direction of the prevailing trend when prices move out
of a trading range. Expect MTUM to break out of the current range to the upside
if the longer-term uptrend remains intact.
Trading Strategy
The Stock Trader’s Almanac reports that April option expiration is generally bullish across the board with solid gains on the last day of the week, the entire week and the week after. Since 1982, DJIA and S&P 500 have both advanced 23 times in 34 years on expiration day. Both the S&P 500 and DJIA have been up seven of the past ten expiration days. Expiration week as a whole has a slightly more bullish track record over the past 34 years to expiration day. Average weekly gains are in excess of 1% for DJIA and S&P 500. The bullish bias of April expiration also persists during the week after. DJIA has posted a full-week gain in ten of the last twelve weeks following expiration. Historically April is usually a positive month for the market. The S&P 500 has been positive in April 70% of the time since 1945, and in the past 10 years, April has been the top-performing month. As we have been recommending recently “… An ideal trading strategy is to use price dips as an opportunity to buy shares on your stock watch list. Prices are bit elevated, therefore using spread strategies will help mitigate the cost of entering a trade…all systems are on go as all the major S&P sectors are positive over the past 30 days... We are currently in the middle of what is considered the “best six months of the year” for the stock market. We like undervalued or oversold shares to bid on because the current bullish trend has more room to run…” The updated graph below confirms this analysis is still valid.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@nellaadvisors.com
P.S. click on http://www.theoptionplayer.com/
No comments:
Post a Comment