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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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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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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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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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

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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

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Buyers Remained Sidelined

Market Summary

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U.S. stocks closed out the week with a whimper, turning big opening gains in the S&P 500 and Nasdaq Composite into losses by Friday’s close. A sharp selloff in biotech and health-care stocks spread to broader markets, weighing on sentiment. “A selloff in biotechs took the wind out of the rally. And in this low-volume environment traders are selling first and asking questions later,” said Ryan Larson, head of equity trading, U.S. RBC Global. The main indexes declined in six of the past seven trading days, since the Federal Reserve left its key borrowing rate unchanged on Sept 17, citing concerns over slowing global growth. The Dow remained in correction territory, or more than 10% away from its 52-week high. The Nasdaq also fell back into correction mode, while the S&P 500 was about 9.5% away from its 52-week high. The S&P 500 is on course for its first back-to-back losing August and September since 2011. As seen in the graph below, the Dow is now down 9% on the year, while the S&P 500 and Russell 2000 are both off 7%. Biotech stocks crashed this week to help drop the Nasdaq down 1% this year. For the week, the Dow shed 0.3%, the S&P fell 1.4% and the Nasdaq fell 2.9%.

Investment Analysis

"The shutdown in Washington could roil markets next week," reports Kate Warne. "People are putting that off because they don't know whether we know what will happen until the last minute. I think this time we know it's going to go down to the wire.(Boehner's resignation makes it more likely). With Boehner resigning, although not until next month, it clearly reflects on lack of Republican (consensus) in the House. It makes it more likely that there's a temporary government shutdown… and it would tend to trigger a negative market reaction but fortunately that doesn't tend to last very long." Lance Roberts, head of Streettalklive.com, said a key focus is "the posturing and threats from the Administration will likely cause additional market angst given an already weak market. This was the same backdrop as 2011 when we debated over the debt ceiling then."

Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon. Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realized, already costly stocks could become pricier and equity investors could become even more skittish. Forecasts for third-quarter S&P 500 earnings now call for a 3.9 percent decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong U.S. dollar and weak global demand. The weak forecasts have some strategists talking about an "earnings recession," meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters. As the stock market is goes through the end of quarter rebalancing you can see Treasuries are the only asset class with a quarterly gain as investors dump shift funds from equities to treasuries.

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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Investors Eyeing FMOC's Next Move

Market Summary

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The Nasdaq composite index achieved a notable achievement on Thursday when it reached a new closing high for the first time since March 10, 2000. Back then, the Nasdaq swelled as investors were euphoric about the possibilities of many new tech companies that debuted on the public markets. The Nasdaq of today is very different animal compared to 2000. The tech firms are more established and better financed in 2015, and are some of the world's largest firms. “This chapter that the Nasdaq is writing is more suggestive that it's a market that, while still technology-weighted, is much more mature," said Steven Baffico, chief executive officer at Four Wood Capital Partners in New York. "The companies in it reflect that, companies like Cisco and Microsoft.”

For the week, the S&P gained 1.8 percent, the Nasdaq gained 3.3 percent and the Dow added 1.4 percent.The Nasdaq Composite and S&P 500 both chalked up record high closes on Friday, propelled by strong results from tech behemoths Google, Amazon and Microsoft. The Nasdaq Composite added 0.71 percent to end at 5,092.09, its second straight record high close. The S&P 500 rose 0.23 percent to a record high close of 2,117.69 points, barely above its previous high of 2,117.39 set on March 2.

Investment Analysis

While markets are at record highs, March-quarter earnings of S&P 500 companies are expected to dip 1.3 percent, with revenues dropping 3.5 percent as the dollar hurts U.S. multinationals and low oil prices affect energy companies, according to Thomson Reuters data. For the start of the second quarter the graph below shows Energy stocks continuing to lead the other major asset classes. After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 20 percent in April. Explosive stock price moves from technology stocks like Amazon and Netflix has the Nasdaq sector soaring recently. Wall Street may get new clues on the timing of an interest rate hike when the Federal Reserve issues a statement following its two-day meeting on Wednesday.

Last week’s analysis is still in play “… In the updated graph below energy stocks are blowing away the other main S&P sectors over the past month. Essentially, all the other sectors are basically breakeven the past 30 days with some groups moderately lower and others slightly higher. With the major S&P sectors struggling to gain traction and economic indicators sending mixed signals smart investors should continue maintaining both bullish and bearish positions. With this strategy you need a reasonable stop-loss plan to bail out of underperformers and ride winning trades…”The November to April best 6 months for stocks is coming to a close and that the old axiom about “Sell in May and Walk Away” is not far off.

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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Stocks Are Primed To Move Higher

Market Summary

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Equities rallied this week after a ceasefire agreement between Ukraine and Russia and apparent progress toward a deal on Greek debt. The S&P 500 index closed at a record high on Friday, as energy shares gained with oil prices, while the Nasdaq composite index hit a 15-year high helped by technology stocks. The Russell 2000 index of small-cap shares also finished at a record high. The S&P MidCap 400 Index made a new all-time high a few weeks ago. For the week, the Dow rose 1.1 percent, the S&P 500 gained 2 percent and the Nasdaq added 3.2 percent.

Equity indexes are starting to bust a move with the MidCaps making the biggest surge. The Nasdaq and Russell 2000 indexes are putting in a nice rallies after strong gains in 2013. These two indexes tend to be leading in nature (both to the upside and downside) and could see continued upside. In addition, all the major indexes are having HUGE volume accumulation, which is considered a sign of institutional buying. All the major equity indexes are in the black for the first time this year. Gold continues to be the best performing asset for the year. The biggest change over the past few weeks is the Treasury bond crash.

  

Investment Analysis

Of the 391 S&P 500 companies that have reported earnings, about 71.1 percent have topped profit expectations, according to Thomson Reuters data, while 57.5 percent have beaten on revenue. The earnings growth rate for the quarter is 6.6 percent, down from the 11.2 percent expected on Oct. 1, but up from 4.2 percent expected on Jan. 1.

So far in the first quarter of the year, Real Estate stocks are the clear leader. After being depressed for most of the past few months, Energy and Gold shares are coming on strong. The leading equity class for the quarter is Mid-Capitalization stocks that are benefitting from a strong domestic economy. The companies that compose the Mid-Cap index have less exposure to overseas markets compared to the larger indexes and their fortunes are more directly tied to what happens in the U.S. You can see in the 30-day S&P sector graph below how Energy has been far and away the top performing sector the past thirty days. This supports the contention that the recent crash in energy stocks has bottomed out and is poised to move higher. For most of the past few months Utilities were the best sector but you can see this group has converted to the biggest loser. Investors were buying utility stocks for their yield during global economic uncertainty. Now investors are leaving safe-haven utilities stocks as they anticipate U.S. Federal Reserve interest rate increases later this year. Global uncertainty has stabilized and investors are selling utility shares to bid on energy and material stocks.

By Gregory Clay

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