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

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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Investors Lose Confidence

Market Summary

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Wall Street sold off for three consecutive sessions as the stock market ended its worst week in over three months. The three major U.S. indexes ended the week down more than 3%, firmly putting the brakes on a fast rally that began in October. The Dow lost 3.7% for the week, the S&P 500 shed 3.6% and the Nasdaq declined 4.3%. Up 4% year-to-date, Nasdaq is the only major index in the black for the year. Wall Street, which enjoyed its best October in four years and started off fast in November, reverted back to risk-off mode. Investors are finding more reasons to hold off on buying stocks, with worries ranging from overvalued stocks, higher interest rates, weak results from key retailers and ongoing angst over the impact of China's economic slowdown. If the Fed hikes rate in December it could mark an unprecedented conflict between a tightening cycle starting at the same time as earnings fall into recession. "We can't think of any instances when the Fed was hiking during an (earnings) recession," said Joseph Zidle, portfolio strategist at Richard Bernstein Advisors in New York. "In the last six months one can point at a lot of different things. But if you think about fundamentals, falling corporate profits and the threat of rising rates" are behind the market stalling, Zidle said.

Investors are grappling with uncertain market conditions due to the first Fed rate hike in nearly a decade, global economic worries, falling oil prices and fears of a weakening retail sector. S&P 500 earnings are on track to close their first reporting season of negative growth since the Great Recession and estimates call for sub-zero growth in the current quarter as well. As reported by Reuters, with more than 90% of S&P 500 components having reported, S&P 500 earnings are down 0.9 percent in the third quarter. Absent surprisingly high numbers from the companies left to report, it will be the first negative growth quarter since the third quarter of 2009. Fourth-quarter estimates are for a 2.4% earnings contraction, according to Thomson Reuters IBES data; that would set up the two quarters of declining earnings, required for a bona fide 'earnings recession.' That already occurred in the second and third quarters, according to FactSet Research Systems, which calculates its quarterly results slightly differently than does Thomson Reuters. Furthermore, the decline in revenue has been steeper than that in earnings, a bad sign for investors who like to put money into companies that are growing sales and not just cutting costs or buying back their own shares. Last quarter's sales are seen falling 4.3% and estimates for the current quarter are for a 2.7% decline. Last week was the first down week of the fourth-quarter. As seen in the graph below, quarterly results remain solid for equity indexes. Interest rate sensitive asset classes such as bonds and precious metals remain depressed ahead of the Feds December interest rate announcement.

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 “…a pending change in the market trend…indicators point to declining momentum while the trend has converted into a trading range. This supports our contention that the grossly overbought strength indicator needs to be resolved before the stocks move much higher…” This analysis is confirmed in the updated chart as investors aggressively selling off stocks have started a price downtrend. Momentum indicators have turned bearish to confirm the downtrend

Investment Analysis

The updated graph below reflects investors’ expectation of a December rate increase. The S&P Financial sector is soaring because financial institutions normally benefit from higher interest rates that they can pass on to their customers. Other S&P sectors are starting to wane ahead of the Feds December rate announcement. Utilities sectors is getting smashed because similar to bonds, these stocks perform better in a low rate environment. According to the Stock Trader’s Almanac, the week before Thanksgiving has an overall bullish history. The DOW was up 16 of the last 21 years the week before Thanksgiving with losses in 2003(-1.4%), 2004 (-0.8%), 2008 (-5.3%), 2011 (-2.9%) and 2012 (-1.8%). Next week is also an options expiration week. Monday of expiration week has been down 9 of the last 16 years for the DOW, but Friday is up 11 of the last 13 years with an average gain of 0.7%. S&P 500, NASDAQ and Russell 2000 have not been as bullish as the DOW around or on November option expiration. S&P 500 has advanced only 14 times during options expiration week while NASDAQ and Russell 2000 have climbed only 12 and 11 times respectively over the past 21 years. Any weakness next week could be a good entry point for new longs ahead of the usually bullish Thanksgiving holiday. There is usually solid strength during the week after options expiration since 2001. The worst blemish on the recent 14-year history is 2011.

By Gregory Clay

Investment Strategist

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Halloween Indicator Is Positive For Stocks

Market Summary

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The main indexes booked a fourth straight weekly gain with the majority of gains coming over the Thursday and Friday trading sessions after a surprise interest-rate cut from the People’s Bank of China and a string of better-than-expected earnings from heavyweight tech companies. The S&P 500 gained 2.1% over the week and finally turned positive for the year. The Dow Jones Industrial Average ended the week with a 2.5% gain. The Nasdaq Composite advanced 3% over the week, its strongest weekly advance since July. The small cap Russell 2000 index was actually flat for the week. Year-to-date, the S&P 500 index is now up .8%, the Dow is down 1%, and while the Nasdaq up 6.3%.

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 observed, “…the recent market uptrend is converting into a flat trading range…analysis suggesting a relatively narrow, trading range…” The updated chart below highlights the top of the current trading range. It appears the MTUM is setting up to break out of the range into a new uptrend.

 Investment Analysis

As reported by Mark Hulbert in MarketWatch, they anticipate that the Halloween Indicator will be especially kind to the stock market for the end of the year. The Halloween Indicator already carries decent odds of success. But since the stock market is on the uptrend heading into Halloween, including another 200+ point rally in the Dow Jones Industrial Average this past week, the odds become even better. The Halloween Indicator refers to the stock market’s seasonal tendency to produce its best returns between Halloween and May Day (the so-called “winter” months). This indicator is also known as “Sell in May and Go Away,” since those who mechanically follow it invests in to cash during the “summer” months (from May Day until the subsequent Halloween). Notice from the chart below that the Indicator worked like a charm over the last year. Over the seasonally favorable six-month period that began on Halloween 2014, the Dow gained 2.6% versus a loss of 2.6% in the unfavorable summer months that began last May Day. In fact, this tendency has been stronger over the last 15 years than it was before. These impressive statistical odds become even better when the stock market is able to buck the seasonal odds and eke out a gain over the September-October period, the last two months of the seasonally unfavorable summer period. That’s exactly what’s happened this year, with the Dow currently 5% higher than where it stood at the end of August.

Last week we noted “…this is the S&P 500’s best October start since 2011 and good enough to be the eighth best start since 1950. Historically when the first nine trading days of October produced a gain, full month October finished with a gain 78.5% of the time…” This analysis is playing out as advertised as this October is on track for one of the historically best performing months for the stock market. In the updated graph below, over the past month, 9 of the 10 major S&P sectors exploded higher. Healthcare remains the only lagging group. We expect the a bullish trend to continue for the rest year so that continuing to moderately increase bullish bets makes the most sense to us. Especially as quarterly earnings season progresses, solid numbers should continue to boost stocks. Michael Arone, chief investment strategist for State Street Global Advisors’ U.S. intermediary business, said “it is encouraging to see solid earnings results from tech, consumer discretionary and health-care companies,”

By Gregory Clay

Investment Strategist

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Dollar Rises As Stocks Stall

Market Summary

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Investors continue to search for clues on when the Federal Reserve will raise interest rates. San Francisco Fed President John Williams said the Fed would likely hike federal funds rate later this year. He reiterated Fed Chairwoman Janet Yellen's views that the central bank may raise interest rates this year as she believes soft economic data will not have a lasting effect on the economy. St. Louis Fed President James Bullard said that he wants "confirmation" that the economy is rebounding before hiking interest rates. Additionally, Minneapolis Fed President Narayana Kocherlakota said: "It follows that monetary policy makers should be extraordinarily patient about reducing the level of monetary accommodation."

The major indexes scored a second consecutive month of gains. The benchmark S&P 500 index and Dow Jones industrial Average each gained about 1% in May, while the tech-heavy Nasdaq Composite gained 2.6%. The S&P 500 index shed 0.9% over the past week and Dow Jones Industrial lost 1.2%. Following three weeks of gains it was the first weekly decline for the S&P 500. The Nasdaq ended the week 0.4% lower. Year-to-date Treasury bonds are the only major asset class in the red.

  

Investment Analysis

The dollar rally reasserted itself in May, after the buck snapped a nine-month winning streak by finishing lower against the euro in April. Commodities are priced in U.S. dollars, so as the greenback moves higher, instruments like oil and gold generally move lower, and the inverse applies due to the strong correlation in the moves. In the beginning of the week, the U.S. dollar moved higher on a Durable Goods Report suggesting business investment is slowly starting to pick up following stronger-than-expected Consumer Prices last week. Treasury prices finished the week higher, driving yields down to their lowest level in a month, on a report that showed that the U.S. economy contracted in the first three months of the year. Bad news has been a boon to the bond market because it usually compels investors to shed riskier assets in favor of safe havens, like Treasury's. A meaningful recovery in U.S. economic data, beginning with the nonfarm payrolls report for April, coupled with a reassuring statement from Yellen saying implying that the Fed intends to raise rates this year dispelled worries that the central bank might wait until 2016. Higher interest rates typically draw foreign flows into a given currency, helping it strengthen against its rivals, by increasing the yield on deposits held in that currency.

By Gregory Clay

Investment Strategist

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Grinding Higher on Low Volume & Low Volatility

Market Summary

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Deutsche Bank is out with a piece of research this weekend mentioning the fact that the S&P 500 has just broken a record high thanks to a median trailing PE ratio of over 18 – the highest we’ve seen since 2010. They note that this PE ratio is 12% above the long-term average going back to 1960. The forward PE of 17.3 times earnings expectations over the coming four quarters is 22% above the historical median. David Bianco attributes this, as almost all of us do, to the incredibly low yields on bonds and their effect on the equity risk premium. More interestingly, Bianco includes an acknowledgement that it has now been 916 days since the last 10% correction for the index, or 3.6 years (last October’s Ebola /ISIS sell-off was 9-and-change percent intra-day). We’ve not had even a 5% correction so far in 2015 despite a spate of elevated volatility earlier in the year.

$20 Billion in withdrawals from equity funds last month was the most since December of 2012. Both the Dow and the S&P hit new records this week, although they have traded in a narrow range and volumes have been subdued. Friday's dip left the Dow in the red. For the week, the Dow ended 0.2 percent lower and the S&P rose 0.20 percent. The Nasdaq added 0.8 percent for the week. Volume on U.S. stock markets has been below the month-to-date average for several sessions. On Friday, ahead of the Memorial Day long weekend, about 4.9 billion shares changed hands on U.S. exchanges, below the 6.2 billion average this month, according to BATS Global Markets.

Investment Analysis

Investors have enjoyed an extended period of low volatility and steady gains, but with the Fed on track to raise rates this year and major indexes near records, the market could get a bit choppier in coming weeks. “I think what Janet Yellen and all of the Fed officials have been doing is very carefully choreographing their move. I think this is probably the most telegraphed Fed liftoff in some time," said Bruce Zaro, chief technical strategist at Bolton Global Asset Management, "they're concerned about the markets' reaction."

In a thin volume-trading environment it’s safest to keep your own trading light, since even in a slow grind you can get some unpredictable moves. You don’t want to get caught on the wrong side. Knowing when not to trade is as important as knowing when to trade. In the chart below you can see how Technology, Materials and Financial stocks led the way the past month. These are large capitalization sectors that are benefiting from the weakened dollar. If you believe the dollar will remain subdued, bidding on strong stocks in these sectors is the way to go.

By Gregory Clay

Investment Strategist

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gregoryclay@theoptionplayer.com

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Market Stalls on Weak Economic Signs

Market Summary

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Wall Street stocks ended the day higher this past Friday, snapping a four-day losing streak as traders shrugged off weaker-than-expected US economic growth in the fourth quarter. US stocks fell the first four days of the week on worries about the crisis in Yemen and excessive equity valuations. "We had so many down days that the market is due for some sort of a pause, but there is nothing really positive or encouraging to help push prices meaningfully higher," said Sam Stovall, chief investment strategist at S&P Capital IQ.

Stocks fell most of the week due to a combination of weaker-than-expected economic data and concerns that the rapid rise of the dollar may crimp U.S. corporate earnings. Companies start releasing their first-quarter results next month. The four consecutive days of losses made last week the second-worst week for the market so far this year. The Dow Jones industrial average remains down slightly for 2015, and the S&P 500 index is essentially flat.

Treasury bonds continue to trend bullish, even with a pullback over the past few days. With recent geopolitical events reminding everyone that everyplace in the world is not safe and economic growth is tepid at best; Treasuries should eventually continue to rally. The dollar has pulled back following its huge rally, but similar to treasuries; this pullback is most likely due to profit taking. Nothing has changed so dramatically as to fundamentally alter the bullish trends in treasury bonds and the dollar. Commodities continue to struggle, even with recent strength in gold the past few days, which is most likely due to geopolitics, not to a change in the global economic outlook. Economic indicators are showing the U.S. economy to be on pace for its poorest showing since 2008. Going forward, profits and growth will probably be the investors’ chief concerns.

Investment Analysis

The question is whether the U.S. economy is really slowing down or whether the phenomenon can be blamed on the nasty winter weather. In addition to first-quarter earnings reports, investors will also be watching the Labor Department's monthly job markets survey, due out April 3, for insight into how the economy is doing. "I'm trying to be as forward-looking as possible here. Clearly the weather had some sort of impact this quarter, but I still believe U.S. economic growth is strong," said Scott Wren, a global equity strategist at Wells Fargo Advisors.

With the major stock indexes falling to neutral readings and economic indicators struggling, options traders should continue to evenly weight between bullish and bearish positions. Fed-generated momentum could continue to push stocks higher, but slowing growth and geopolitical events could cause the market to do an about-face very quickly.

As evidenced in the graph below, the past month has been a wholesale slaughter for most of the S&P sectors. The only group to barely survive the onslaught is the Healthcare sector. Right now money managers are implementing the end-of-quarter sector rotation to position their portfolios for what they perceive will be the best performing investments over the next six months. Healthcare has been a leading S&P sector the past few months and right now is the only group in positive territory over the past month. You want to have some exposure to healthcare, plus financial and cyclical stocks as well. It is probably a good time to consider bidding on shares you have on your watch lists that are now reasonably prices.

By Gregory Clay

Investment Strategist

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gregoryclay@theoptionplayer.com

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What Do You Need to Become a Successful Investor

Reported by Simi Afroza Mira

If you’d hired Warren Buffet ten years ago to manage your money, how would your life be different today? Forbes picked “6 Top Money Managers,” five of which outperformed Warren Buffet—and the top mutual fund manager for the past ten years. Each of them presents their top pick for 2015, and there are three lessons we can take away from this.

Here are Forbes’ top picks, their top picks, and their 10 year average:
Kai Petainen – 14% – Acco Brands, Spirit Aerosystems
Nate Pile – 18% – Mannkind
Marcus Eder – 19% – ITT, Mallinckrodt
Tony Mitchell – 28% – Toyota
Jerry Pettit – 16% – Maiden Holdings, BBVA Banco Frances, Alaska Air
Aaron Hillegass – 16% – Vanguard Mid-Gap Value, Vanguard FTSE

No One is a Natural Investor
It doesn’t matter who you are or where you come from. There is not one person that is born a natural investor. Any money manager that you talk to will tell you that it is not possible to make a profit on every single investment made. If you want to be a great investor, you have to be willing to admit when you make a mistake. Don’t go into investing thinking every pick is going to be a winner.

A Great Education Doesn't Make You a Great Investor
While a top education is key, an MBA doesn’t guarantee that anyone will be a great investor. Having a superb MBA is great, but having hands-on experience in the industry is just as valuable. Most of the people on Wall Street begin a career straight out of school and have no experience. Those that have been working, producing, selling, and buying have a much better understanding of investments.

Know Your Expertise
If you are making investments to increase your net worth, then make sure you know the area you are best at investing in. You can gather all the data you want, but if you don’t understand the data it will do you no good. You are not expected to know everything because you can’t, but do know that every decision in investing is 20% a leap of faith? If you are great at picking stocks that involve the medical field, don’t try to start picking stocks in the fruit field.

Just the Average Joe
The take on this whole article should be that it doesn’t matter where you graduated from or how many mistakes you have made; those are what we learn from. What is important is that knowledge and understanding are key elements and you don’t need an MBA from an Ivy League school to manage money.