November Is Usually A Good Months For Stocks

Market Summary

Investors cautiousness heading into the presidential election have got November off to a dismal start for the stock market. However stocks reversed course and is on pace to maintain November's historically positive performance. Jeff Hirsh in the Stock Trader’s Almanac talks about how November begins the “Best Six Months” for the DJIA and S&P 500, and the “Best Eight Months” for NASDAQ. Small cap stocks start percolating in November but don’t usually take off until the end of the year. November is the number-three DJIA and number-two S&P 500 month since 1950. Since 1971, November ranks third for NASDAQ. November is also a very strong month for the Russell 2000. November maintains its status among the top performing months as fourth-quarter cash inflows from institutional investors drive November to lead the best consecutive three-month span November-January. In the updated S&P sector graph below, stocks in the Financial sector are soaring the past month. A combination of an anticipated December Fed rate hike and expected Republican evisceration of Dodd-Frank regulations are driving investors to bid up financial shares. The next best performer is the Industrial sector which is expected to benefit from Trump administration stimulus spending.

By Gregory Clay

Investment Strategist

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Market Pullback Might Have Legs

Market Summary

Recently we have been recommending hedging long-term bullish positions to protect gains in the event of a market pullback like we have now. The updated chart below shows 9 out of the 10 S&P sectors are in negative territory over the past month. The width of the current pullback signals it has legs and might continue for a while. Investors are nervous about whether the Fed will raise interest rates. Also giving them reason to be cautious, are global economic uncertainty and disappointment with corporate earnings growth.

  

The CBOE Volatility Index (VIX) is known as the market’s “fear gauge” because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends the VIX higher. Implied volatility on Wall Street, as measured by the CBOE Volatility index on Friday, soared 30% to 16.35, the steepest increase since June 24, the day Britain voted to leave the European Union, in a referendum dubbed Brexit. Investors tend to be more fretful of VIX readings of 20 or above, but Friday’s jump was significant for the so-called fear gauge for Wall Street, considering that it has remained around 12 for a sustained period. Also note the last time the S&P 500 index dropped this hard was during the Brexit fallout.

By Gregory Clay

Investment Strategist

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How Investors Are Hedging The Fed

Market Summary

Investors appear to be hedging against a Fed rate policy decision by focusing on domestic growth stocks. In the updated perf graph below, the Russell 2000 index (RUT) small capitalization index is clearly outperforming the larger cap indexes after the Brexit vote. The Russell 2000 index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 is comprised of a specific diversified category of small-cap domestic stocks.

Stocks in the larger capitalization indexes have more exposure to overseas economies and are further impacted by volatile energy pricing. Higher interest rates are generally presumed to adversely impact large multinational companies more dependent on the global economy. Higher rates should strengthen the U.S dollar and have a negative effect on companies attempting to convert foreign currencies into dollars. Also, a stronger dollar puts U.S. companies at a competitive price disadvantage when exporting to overseas markets.

You can see in the graph how investors are buying smaller capitalization index stocks at the expense of large cap shares.  Investors concern about higher rates is also reflected in the relative under-performance of treasury bonds and gold stocks over the past few months.

By Gregory Clay

Investment Strategist

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Good Time To Hedge Bullish Positions

Market Summary

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. The updated chart below shows that, technically the stock market remains extremely overbought. It might be difficult for the major indexes to keep pushing higher until the overbought condition is absorbed. Also the chart highlights that the technical momentum indicator is stuck in neutral even as stocks continue climbing higher on a wall of worry. Putting hedges in place to protect long bullish positions is smart move in case the market follows through on the overbought technical signal.

Below is the S&P Sector ETF graph highlighting performance results over the last month. You can see in the graph below how technology shares have been the outstanding performer. The major concern is that the market advance is not broad-based. Tech shares leading the market higher are not dragging along the other S&P sectors which might indicate underlying market weakness. The smart move is hedge long-term bullish trades to protect gains in the event of a market pullback.

By Gregory Clay

Investment Strategist

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Stocks Are Only Game In Town

Market Summary

On the heels of a tepid second-quarter growth report, the jobs data painted a rosier picture of the economy. Anything that really would suggest that the consumer is starting to step up and pick up a little bit more of the load would give you some optimism that maybe we can get an earnings break-out at some point," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio. "The consumer, in our mind, is a lever that could cause equities to trend higher," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis. "The most important takeaway from the positive jobs report is an indication of a sustained growth in the US economy." Stocks head into next week on a positive note, with the S&P 500 rising to a fresh intraday all-time high on Friday after two weeks of little change to the benchmark index.

Some market pundits are concerned about stock valuations and the crazy presidential election is having an impact, as well as headlines about the Dow Jones industrial average's recent seven-day drop. The S&P 500 is trading at 17.1 times earnings estimates of its component companies over the next 12 months, well above its average of 14.5 times over the past five years. Other analysts feel that the perceived lack of viable investment alternatives, economic growth and generally upward momentum in stock prices will result in higher stock prices over the next six months. "The US economy may not be going gangbusters but it remains the best equity alternative of any worldwide index," said Michael James, managing director of equity trading at Wedbush Securities. With about 85 percent of the overall S&P 500 already reported, second-quarter earnings are expected to have fallen 2.6 percent, not as dire as feared at the start of July. You can see in the graph below how technology shares continue to lead the charge higher. But also note the best trading opportunity might be financial stocks, which are surging on the expectation of a Fed rate increase.

By Gregory Clay

Investment Strategist

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What's Propping Up Stock Market

Market Summary

A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth” indicator used to gauge the internal strength/weakness of the market. Essentially it is the percentage of stocks that have buy signals. If the market is strong and moving up, the BPI should also be moving higher as more and more stocks are purchased. Nasdaq stocks are leading the market higher as quarterly earning numbers have enticed investors. Strength in technology and small cap stocks are primarily propping up the market. As long as the BPCOMPQ remains in an uptrend expect the overall stock market to remain near all-time highs.

 The Fed continues its Dovish outlook despite better economic data and a solid economy. You can see in the graph below how small and midcap stocks are holding up better than the large caps of the Dow and S&P 500 as group rotation into technology, health care and real estate continues to absorb any selling. The S&P 500 remains extended, and that’s one reason for the swap to the smaller cap and tech stocks.

By Gregory Clay

Investment Strategist

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Fed Inspired Risk On Trading

Market Summary

The rebound in stock prices and the new record highs set by the S&P 500 and the Dow Jones Industrials have had a positive impact on money managers. Other investors are encouraged by the sustained economic growth. A view that there is no viable alternative to stocks is contributing to the optimism. Giving reason for caution or pessimism is global economic uncertainty, the prevailing level of valuations and concern about corporate earnings growth. The presidential election and monetary policy are also impacting investor sentiment. Last week we reported "…The equity market is telling you the second quarter economy looks better than the first quarter," said Art Hogan, chief market strategist at Wunderlich Securities in New York. He said if earnings season, which begins in earnest next week, provides investors with a strong outlook; the S&P will likely break the record and has a chance at rallying from there. "The old high has been resistance and if you break it and see earnings growth and relatively good guidance, people will probably try to get in front of that," said Hogan…” In the 3^rd quarter graph below investors are trading “risk-on”, reversing the trend of buying safe-haven assets like gold and bonds and aggressively investing in all types of equities.

  

Trading Strategy

"The Fed is playing a huge part in this rally," says Sheraz Mian, head of research at Zacks Investment Research. Fears of a Brexit driven economic slowdown, which would put further pressure on earnings, have nevertheless (paradoxically) given investors a reason to buy stocks, Mian says. Investors would much rather buy high dividend paying stocks instead of continuing to hold U.S. government bonds paying historically-low interest rates. Over the next few weeks we will find out whether last week’s forecast comes to fruition when we stated “…According to the Stock Trader’s Almanac the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October…Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade…If this analysis plays out that might be another opportune time to bid on shares…” “We have had a really, really good week, and the market is getting tired,” said Mark Kepner, managing director of sales and trading at Themis Trading. “But bonds sold off a fair amount and the rally in stocks seems a bit long in the tooth. A pullback from here would not be surprising.”

By Gregory Clay

Trading Strategist

Why Stocks Are Due For A Pause

Market Summary

Earnings Season also unofficially begins with the release of Alcoa’s (AA) results on Monday. However some investors remained concerned about the effects of "Brexit" and the upcoming earnings season. Near record lows in 10- and 30-year U.S. government bond yields underscored those concerns. "I am maintaining a cautious outlook for the next couple of months," said Phil Orlando, chief equity market strategist at Federated Investors in New York, citing Brexit, uncertainty about rate hikes and the November U.S. presidential election. "I think investors are just whistling past the graveyard here; there is a lot of ugly stuff on the horizon that everyone is just sort of ignoring. It just strikes me there are just too many things that can go wrong over the next couple of months."

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. The updated chart below displays stocks recent uptrend. However the orange circles denote overbought levels where in the past the market advance consistently has stalled out. We recentlydiscussed how investors overreacted to the Brexit vote and oversold stocks and therefore the market was due for a robust bounce back from the Brexit selloff. Technically and fundamentally the major indexes are due for a pause. Stocks are overbought and buyers will probably sit tight ahead of quarterly earnings season that kicks into high gear in a few weeks. Usually price action is subdued at the start of earnings announcements, plus most investors don’t want to get overly aggressive until they can get a read on what the FOMC will decide at their next meeting in a few weeks.

Trading Strategy

According to the Stock Trader’s Almanac the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October. Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the fact” once the news hits the street. Our recently analysis was realized where we asked, “…Now the question is where will the market bottom out? The best bet is that investors overreacted to the Brexit vote and stocks will eventually bounce back, especially since some pundits believe there is a possibility the FOMC could lower rates at one of their upcoming meetings. If this prediction comes to fruition the current pullback might be great opportunity to bid on undervalued shares...If the market does pull back, that might be a good opportunity to “buy the dip” with shares in the leading sectors…” We discussed above our prognostication suggesting the market is due for a pause. If this analysis plays out that might be another opportune time to bid on shares in “risk-off” defensive stock groups such as Consumer Staples, Health Care and Utilities which have been leading the market higher over the past month.

By Gregory Clay

Investment Strategist

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Beware Of Brexit Vote Next Week

Market Summary

U.S. stocks finished out the week lower, as investors continued to fret over the possibility that the U.K. may leave the European Union on top of lingering concerns about the Federal Reserve’s reluctance to raise interest rates. Despite the end of the week sell-off, U.S. equities managed to ward off a major slide due to early week strength in the stock market. Next week could be interesting due to the Brexit vote and scheduled comments from Fed Chairperson Janet Yellen. A lot of individual investors are concerned about the slow pace of U.S. economic growth and uncertain pace of global economic growth, terrorism and global unrest, lackluster corporate earnings, the prevailing level of valuations, the forthcoming November elections and monetary policy. Conversely, sustained domestic economic growth, corporate earnings and the proximity of stock prices to their record highs encourage some market watchers. In the chart below “risk-off” asset classes that benefit from low interest rates are far and away the top performers for the second quarter. Uncertainty about the Fed and Brexit will cap upside movement until there is clarity on both,” said Uri Landesman, president of Platinum Partners. Investors are nervous so the market is likely to remain depressed for now, he added.

Trading Strategy

An article published in MarketWatch.com reported on how the long-anticipated “Brexit” referendum on the U.K.’s membership in the European Union is set for Thursday. Polls released in recent weeks showed gathering support for the “leave” vote—an outcome that many economists say would spark widespread turmoil in global markets and possibly sink the U.K. into a recession. Last week we discussed how the Stock Trader’s Almanac talked about how “… the week after Triple-Witching Day is horrendous. This week has experienced DJIA losses in 23 of the last 26 years with average losses of 1.1%. S&P 500 and NASDAQ have fared slightly better during the week after over the same 25 year span, declining 0.7% and 0.2% respectively on average…” We also said “…If the market does pull back, that might be a good opportunity to “buy the dip” with shares in the leading sectors displayed in the chart below…”

By Gregory Clay

Investment Strategist

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Why Investors Survey Signal New Market Highs

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 05/25/2016. The AAII reports that the percentage of individual investors optimistic about short-term gains occurring in the stock market is at its lowest level in 11 years. At the same time, the percentage of investors describing their outlook as neutral is at its highest level in 16 years, according to the latest AAII Sentiment Survey. Optimism is below 20% and neutral sentiment is above 50% on the same week, for just the sixth time in the survey’s history. Bullish sentiment, expectations that stock prices will rise over the next six months, declined 1.6 percentage points to 17.8%. This is the lowest level of optimism recorded by the survey since April 14, 2005 (16.5%). It is also the 29th consecutive week and the 62nd out of the past 64 weeks that bullish sentiment has been below its historical average of 39.0%. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 6.3 percentage points to 52.9%. Neutral sentiment was last higher on April 12, 1990 (56.0%). Neutral sentiment has now been above 40% for 12 consecutive weeks and above its historical average of 31% for 17 consecutive weeks, as well as for 69 out of the past 73 weeks. As a contrarian indicator the current AAII reading points to a continued short-term bounce toward the market highs.

 

The questions posed in an article published in the Reformed Broker is has the market corrected through time, rather than through price, enough to spark the next bull leg higher? Since the AAII Sentiment Survey started in June 1987, a neutral sentiment reading above 50% has only been recorded 28 times. Only six of those readings were recorded after 1989 (January 1991, July 1991, August 1994, February 2003, December 2015 and this week). The remaining 22 readings are all from the approximate two-year span of December 1987 through October 1989. On average, the S&P 500's 26- and 52-week returns following such occurrences were 8.4% and 20.5%, respectively. Even rarer is having bullish sentiment below 20% and neutral sentiment above 50% on the same week. This week is just the sixth time such a combination has happened. It previously occurred four times in 1988 and once in 1989. On average, the S&P 500's 26- and 52-week returns following those five occurrences were 11.2% and 25.7%, respectively.

By Gregory Clay

Investment Strategist

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Beware Of Stocks Worst Six Months

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

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Be Careful During May Expiration Week

Market Summary

First-quarter earnings season is almost over and generally financial results have not been quite as dismal as anticipated for the S&P 500. But for June-quarter earnings, for every company that has given an upbeat preannouncement, 2.3 others have sounded warnings, according to Thomson Reuters I/B/E/S. That has left the S&P 500 trading at about 16.5 times expected earnings, according to Thomson Reuters I/B/E/S. "It's hard to make a case that you're going to have stellar equity market performance. In the context of low interest rates, equity valuations look about right," said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management in Horsham, Pennsylvania. According to a J.P. Morgan report, bond yields’ staying low is actually now becoming the reason why stocks are struggling to perform. In other words, the same jitters about global economic slowdown that have pushed Treasury yields to multi-year lows are also preventing stocks from gaining substantial ground. In the chart below, energy shares exploded higher in the 2^nd quarter as oil and gas prices recovered from the recent bottom. The SPDR Gold Trust is by far the most popular of all ETFs in 2016, with new inflows of $7.6 billion to the $34.1 billion fund, according to FactSet.

  

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue bars depict a two-week moving average of the NAAIM managers’ responses. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The current survey result is for the week ending 05/11/2016. First-quarter NAAIM exposure index averaged 45.89%. Last week the NAAIM exposure index was 67.66%, and the current week’s exposure is 49.55%. Recent analysis is confirmed where we said “…Portfolio managers’ will probably cash in some profits as the market is stalling which should further reduce NAAIM exposure…” As quarterly earnings season winds down money managers have become disillusioned with lackluster results and are using market up days to dump shares. 

Trading Strategy

As reported by the Stock Trader’s Almanac, trading around May option expiration is mostly a mixed bag. Only the first day of the week has a solidly bullish bias over the past 34 years. However, trading the rest of the week into Friday, and next week has historically been choppy. DJIA has been down nineteen of the last thirty-four May expiration days. This full-week has a 50/50 record over the same years. More recently, DJIA and S&P 500 have suffered declines in five of the past seven expiration weeks.Projecting that bond yields will stay low, J.P. Morgan analysts also recommended selling cyclical stocks, as their prices are affected by ups and downs in the economy. As the following chart shows, stubbornly low Treasury yields suggest sluggish economic growth, which in turn hurts cyclicals.  In the current environment 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

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gregoryclay@nellaadvisors.com

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Why Stocks Should Breakout Higher

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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

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gregoryclay@nellaadvisors.com

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Why Stocks Are Due For A Pause

Market Summary

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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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Fed Still Feeding The Bulls

Market Summary

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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 11^th 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”.

Last week we mentioned “…As reported in the Stock Trader’s Almanac… March’s option expiration week…has a bullish bias…However, the week after tends to be bearish for DJIA and S&P 500…” The Trader’s Almanac also says next week is a shortened trading week due to Good Friday and Easter. The days before Good Friday are generally positive and the shortened week also has a bullish slant. Rallies by industrial, raw-material and energy stocks helped the equity indexes climb all the way back from losses that reached over 11% a little over month ago. The graph below confirms our recent trading suggestions are working out as we said “…all systems are on go as all the major S&P sectors are positive over the past 30 days. As recession talk subsides and potential Fed rate increases fall off the table investors are increasingly willing to take on more risk…the best performing sectors are considered the highest risk equity classes. 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…”

By Gregory Clay

Investment Strategist

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gregoryclay@nellaadvisers.com

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Stocks Have Running Room

Market Summary

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The S&P 500 has enjoyed a four-session winning streak for the first time since last October. And for the first time since early January, the Dow Jones industrial average rose above the 17,000 mark while the S&P 500 ended a fraction below 2,000, levels that some traders see as psychologically important. The S&P 500 has gained in 10 out of 15 sessions since its February low and closed above its 100-day moving average for first time this year. Half of 10 S&P sectors - including energy, which had been severely beaten down - are now positive for the year. For the week, the S&P 500 Index advanced 2.7% while the Blue Chip Dow Jones Industrial Average rose 2.2%. The Nasdaq added 2.8% while the small cap Russell 2000 led the major indices exploding 4.31% for the week. Treasury prices have flattened. As confirmed in the chart below gold stocks are going even higher following raw gold settlement prices at the highest level in a year.

  

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. The orange line in the updated chart below shows the uptrend continues with strong bullish momentum and plenty of space for the move to continue further.

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue bars depict a two-week moving average of the NAAIM managers’ responses. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The current survey result is for the week ending 03/02/2016. Fourth-quarter NAAIM exposure index averaged 44.61%. Last week the NAAIM exposure index was 31.65%, and the current week’s exposure is 54.44%. The current bullish move has inspired money managers to come off the sidelines. Professional traders lifted the NAAIM exposure index to the highest percentage of the year. Expect investors to continue increasing equity exposure, as they understand the upcoming months are historically the best for the stock market.

Trading Strategy

The bullish trend has been strong since the middle of February and strategists are cautiously optimistic the rebound will continue. Investors are counting on economic data continuing to support an improving economy, since upbeat reports in recent weeks have eased fears the United States may be headed for a recession. "If you were pricing this thing for a recession, you've got to take it back out," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. He added that the S&P 500 could test its high from May 2015, when it closed at a record 2,130. He and others are expecting data to continue to support the view that the United States will avoid a recession, though they said plenty could still derail the market.

"Expectations went too far on a recession expectation. That's why the market has rallied in the past two weeks. It's pricing out a chance of a recession,” said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. In the updated graph below “all systems are on go” as all the major S&P sectors are positive over the past 30 days. As recession talk subsides and potential Fed rate increases fall off the table investors are increasingly willing to take on more risk. In the graph below the best performing sectors are considered the highest risk equity classes. 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.

By Gregory Clay

Investment Strategist

Click here to Connect on LinkedIn

gregoryclay@theoptionplayer.com

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Investors Are Trading 'Risk On' Again

Market Summary

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An analysis by Bespoke Investment Group found that the stocks that have gained the most in this rally were the ones that had the most investors betting against them only a few days ago. Many hedge funds are pulling back from those gloomy bets. While there's a lot of momentum in the market, the global economy remains weak. The other damper on this rally is it's hard to sort out how many "real buyers" have been jumping back in versus hedge funds simply comvering their short postions. "So far the market's bouncing almost perfectly to work off the oversold conditions we saw last week. There's still a whole lot of overhead resistance," said Adam Sarhan, CEO of Sarhan Capital. "I think people feel the market's stabilizing to a certain extent," Peter Coleman, head trader at Convergex, noting the S&P 500 rallied more than 6% from its low last week to its recent high this week.

A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth” indicator used to gauge the internal strength/weakness of the market. It is the number of stocks in an index (or sector) that have point & figure buy signals relative to the total number of stocks that comprise the index (or sector). So essentially it is the percentage of stocks that have buy signals. Like many of the market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. If the market is strong and moving up, the BPI should also be moving higher as more and more stocks are purchased. The Nasdaq Composite Bullish Percentage Index (BPCOMPQ) chart below highlights a price uptrend line. Nasdaq stocks tend to lead the market and if recent behavior is a guide, investors bidding up Nasdaq stocks usually lead to higher near-term stock prices.

 

The CBOE Volatility Index (VIX) is known as the market’s “fear gauge” because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends the VIX higher. The hourly Volatility Index chart below indicates that over the past week or so traders are becoming less apprehensive about the stock market. You can see that after reaching its highest level in the middle of the month the VIX is in a downtrend which coincides with the surge in “risk-on” trading.

Trading Strategy

As reported by the Stock Traders Almanac, over the last 21 years, the market’s performance in February has improved when compared to the longer-term record since 1950. DJIA has advanced in 14 of the last 21 February’s with an average gain of 0.4%. S&P 500 has a similar record, up 13 of 21 with a slightly weaker average gain of 0.1%. NASDAQ is slightly weaker, up 11 times over the same period with just a 0.01% gain. The real star in February has been the Russell 2000 small-cap index, up 12 of 21 with a 0.8% average advance. This outperformance is mostly due to the lingering January Effect. The bulk of February’s strength is usually located around mid-month, followed by a bout of weakness, another modest bounce and finally weakness the last two days of the month. Recent strength was a few days late this year and of greater magnitude. Should this February track the pattern from the past 21 years, some strength is likely early this week before the market begins to fade later next week. The updated graph below indicates investors converted to “risk-on” trading over the past month. Defensive Utility stocks had been the only positive group, but Industrial, Materials and Energy S&P Sectors led the market the past month. Now might be a good to “nibble” at some of the shares on your stock watch list – but keep tight stops.

By Gregory Clay

Investment Strategist

Click here to Connect on LinkedIn

gregoryclay@nellaadvisers.com

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