Market Summary
The Dow and S&P 500 have not hit new all-time highs
since this time a year ago. The major indexes are still about 5% below these
peaks. Many market pundits believe that there are no compelling reasons for
stocks to hit new records anytime soon. Investors should prepare for daily
triple digit price moves. "Investors had gotten used to a low volatility
environment but they have been rudely awakened. This could be the beginning of
a multi-year period of volatility," said David Jilek, chief investment
strategist at Gateway Investment Advisers.
“The markets are just treading water here. Normally markets
rally on strong earnings and we've seen lackluster corporate earnings,"
said Stephen Kalayjian, chief market strategist of KnowVera. "A lot of
companies are also talking about cost cutting and that usually means
layoffs," he added. U. S. equities are at a critical juncture. May is the
first month of the Worst Six Months for the stock market. Stocks made a brief
high 4/20, then technical signals began to deteriorate. Weekly advancing
issues on the NYSE have been falling the four weeks while declining issues have
been on the rise and greater than advancers the past 2 weeks. New 52-week highs
have expanded the past three weeks, but so have new lows, albeit not by
much.
The Ned Davis definition of a bear market requires a
peak to trough decline of 13% or more after 145 calendar days. The 364
days since the last all-time-closing high is an issue. History shows that
similar gaps between market peaks tend to bode poorly for the stock market's
direction. "The longer the S&P 500 goes without registering a new
high, the more likely that it is a bear market," Michael O'Rourke, chief
market strategist at Jones Trading in Greenwich, Connecticut said in a May 16
note to clients. Starting with the S&P 500 closing all-time highs since
1929, finds 13 previous times where S&P 500 spent more than 1-year before
closing at a new all-time high. With the exception of 1994, there was always a
bear market. Using a 20% decline, S&P 500 avoided a bear market just 3
times out of 13. In other words, there is a 76.9% chance that the current
all-time-high dry spell will not end before there is a 20% or greater S&P
500 decline.
Trading Strategy
The release of the FOMC minutes from the last meeting on April 27 suggested that a rate hike in June is quite possible. Inflation, retail sales, disposable income and the dollar index are on the rise in conjunction with a firm labor market. The Stock Barometer says the word June was used 8 times in the minutes in close proximity to the increased possibility of a rate increase, leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting. It also mentioned,
Perhaps a surprise hike from the Fed in June might be the straw that will
knock the market down. As we suggested last week, it is critical to honor
stop-loss plans and don’t be afraid to convert to a high cash position.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@nellaadvisors.com
P.S. click on http://www.theoptionplayer.com/
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