This Might Be A Dead Cat Bounce

Market Summary

http://www.theoptionplayer.com/

U.S. stocks ended the week with a massive rally, which helped generate the second consecutive week of gains. Oil recovered last week and Federal Reserve comments provided the fuel for a counter-trend bounce. The Bank of Japan also helped rally global stocks after unexpectedly adopting a negative interest rate policy for the first time. Even though the Dow surged 397 points on Friday, it still lost 5.5% of its value in January. That is the deepest monthly decline since the market correct last August. The Nasdaq fared even worse, sinking nearly 8%, its worst month since May 2010 when the infamous flash crash spooked investors. January got off to a terrible start, with panic about the slowdown in China and crashing oil prices sending the Dow to its worst 10-day start to a year on record going back to 1897. For the week, the S&P 500 Index jumped 1.7% while the Blue Chip-heavy Dow Jones Industrial Average’s lead the major indices by rising 2.3%. The Nasdaq finished the week flat up a minimal 0.03% while the small cap Russell 2000 rose 1.5% for the week. As seen in the chart below, the major equity indexes finished January in a deep hole as investors sold off equities and deposited the funds into safe-haven assets like Treasuries and Gold.

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 stated “…the stock market is setting up for a “dead cat” bounce… equities are excessively oversold and displayed a bullish reversal sign at weeks end. As noted, downward momentum is dissipating which supports a short-term recovery…” This playing out as predicted with the updated chart below highlighting additional bullish reversal signs from the oversold bounce. More definitive is the momentum change from bearish to bullish.

The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 01/27/2016. The most recent AAII survey showed 29.80% are Bullish and 40.00% Bearish, while 30.30% of investors polled have a Neutral outlook for the market for the next six months. Last week’s comment is coming to fruition”… The current AAII survey signals a short-term counter trend bounce is overdue based on retail investors’ extremely bearish sentiment…” The bearish reading dropped last week and the bullish number rose, but they signal a follow-through on the current counter-trend bounce.

 

   

Investment Analysis

As reported by The Stock Trader Almanac, the January Barometer has only been wrong eight times since 1950 for an 87.9% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year and including the eight flat years yields a .758 batting average. Following the Santa Claus rally’s “no-show,” January’s First Five Days were the worst on record. The Dow Jones Industrial Average violated its December closing low of 17128.55 on the third trading day and today the January Barometer is officially negative. The January indicator trifecta is negative across the board. Since 1950, this is only the eighth time that all three indicators were negative and the DOW’s December closing low was violated. Of the previous seven occasions, February was up just twice with an average loss in all seven of 1.9% for S&P 500. However, the next 11 months and full-year S&P 500 was mixed, up four and down three albeit with a negative average performance. The graph below confirms investors trading “risk off” since the start of the year, as the only profitable asset classes are bonds and gold.

By Gregory Clay

Investment Strategist

Click here to Connect on LinkedIn

gregoryclay@theoptionplayer.com

P.S. click on http://www.theoptionplayer.com/ to sign up for a free trading newsletter