Buying The Dip

Market Summary

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A volatile week saw Greece's banks remain shut after the country voted in a referendum to reject previous bailout terms, raising chances of a "Grexit" from the European Union. The updated Greek plan is by no means a done deal. Greece's parliament still needs to throw its weight behind the proposals and trust with creditors needs to be rebuilt. But investors saw the latest news as reason to be upbeat. China was Wall Street's other main preoccupation, with plunges in the Chinese stock market on Tuesday and Wednesday pressuring US stocks as well on worries of a deeper slowdown in the world's second biggest economy. Similar to Greece, the view of China improved by the week's end after rescue measures undertaken by the Chinese government sparked a strong rally in Shanghai.

The stock market swung violently at times only to finish flat. U.S. stocks best day in two months Friday pushed the S&P 500 back into positive territory for the year. The DOW Jones Industrial Average is the only major index still under water year-to-date. For the week, the Dow and the S&P ended flat while the Nasdaq ended down 0.23 percent in its third straight weekly decline. Equities were pressured earlier this week by a slowdown in China, weak commodity prices and uncertainty over the Greek debt crisis.

Investment Analysis

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. Investors start focusing on second-quarter earnings next week as the pace of company reporting picks up. Companies in the S&P 500 are forecast to report that earnings shrank by 4.5 percent on average. While that would be the first contraction in earnings in almost six years, a big drop in energy company earnings following the collapse in the oil price last year distorts the figures.

Ari Wald (Oppenheimer Asset Management) has an interesting take on the “feel” of the market versus the objective reality. While Wald maintains an overall bullish bent, he notes that identifying winners and losers has been more important this year given the trendless nature of the S&P 500. High dispersion and flat indices make for a frustrated investor class, despite our proximity to the all-time highs. If the alternative is a bearish view, he believes a bullish S&P 500 outlook remains warranted. However, reality is probably somewhere in the middle as stock-level trends vary considerably. At last week’s low, the S&P 500 was down 3.6% from its all-time high, but the market environment feels worse than this is because the dispersion of performance has widened sharply. For instance, the spread between the best (Health Care, +24%) and worst (Energy, -24%) performing S&P 500 sectors over the last 52 weeks is the widest since February 2010. This is a reason we continue to place greater emphasis on our sector and stock calls than our market one. Per the Stock Trader’s Almanac, July is a good month to get long natural gas ahead of its best five months, August through December. Mild winter weather and ample supplies have led to a glut in natural gas in recent years resulting in losses for this trade in seven of the last nine years. Approach this trade with caution.

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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gregoryclay@theoptionplayer.com

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Looking For The Bounce

Market Outlook

It took Friday’s best one-day performance for the Dow Jones Industrial Average and S&P 500 index since March 4^th to spur the indexes to their modest gains for the week. Obama’s targeted air strikes in Iraq this week intensified the risk in one of the world’s biggest oil-producing nations jolted the energy markets, sending crude prices higher. The updated graph shows the Nasdaq 100 and S&P 500 indexes up year-to-date, while the Dow Jones Industrial Average and Russell 2000 down for the year.

Buying stock market dips has been a very profitable strategy this year. Declines in the S&P 500 index have lasted an average 1.5 days…using dips to get better prices on stocks you have been eyeing has generally paid off…the S&P 500 index has recovered its losses from each price pullback…Investors found little reason to move money into stocks, faced with the growing geopolitical concerns in Israel and Ukraine, as well as banking problems in Europe…investors moved funds out of equities and invested in treasury bonds and gold as these assets prices moved higher… The updated chart shows as market volatility edges up, investors park funds into treasuries and gold on days they are selling equities and pulling money out the next day to bid equities higher.

The late July stock market decline turned the month into a loss and snapped the consecutive five-month winning streak for the Dow Jones Industrial Average and S&P 500 indexes. And of course, the NASDAQ and Russell 2000 ended down as well, with the Russell losing a whopping 6.1%. This was the worst month for the Russell 2000 since May 2012. Market weakness was broad based with 27 of the 29 S&P sectors tracked posting declines last month. For the current quarter investors are playing it safe by investing in safe-haven assets. Equities have experienced selling pressure the past few weeks as investors have been cautious about high stock valuations and worried about geopolitical crisis in Ukraine and Middle East. Bonds and gold are the primary ‘risk off’ assets investors are using at the expense of equity investments.

  

Investor Analysis

According to the Stock Trader’s Almanac Next week is options expiration week and mid-August is often better performing than the beginning and the end of the month. This strength is punctuated with a four-day string of bullish days that wrap the weekend from August 14 to 19. A bullish day is defined as a trading day in which the S&P 500 has risen greater than or equal to 60% of the time over the past 21 years. Unfortunately, this bullish cluster has not always resulted in full-week gains during option expiration. Both DJIA and S&P 500 have suffered a weekly loss in three of the last four August expiration weeks. Historically speaking, the consumer sector tends to begin its favorable period near the end of September and typically remains strong until the beginning of June in the following year. Back-to-school and holiday spending combined with the effects of the “Best Six Months” is the most likely driving force behind this seasonality.

As displayed in the updated graph below, over the past 90 days the biggest winners in the equity market have been technology and healthcare stocks. The technology sector has been booming primarily because it consists of a lot of high beta stocks that recovered sharply from the tech crash that happened earlier this year. Healthcare stocks are benefiting from the Affordable Care Act (also known as Obamacare). Also, some of the healthcare shares belong to pharmaceutical companies that are considered high beta stocks. The current price pullback might be a good opportunity to purchase some of these hi flyers at a cheaper price before the market surges higher again.

These recent trading strategy suggestions are still valid "...options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be correct and economic uncertainty translates into equity weakness…” The updated graph below confirms recent weakness in equity shares, especially cyclicals. Those investors who took our advice and executed bearish positions to hedge long trades should still be showing a net gain. And of course when the market does bounce back, the long positions should sustain profits… we consider the current market action to be a ‘trader’s market’ with triple-digit daily up and down price moves. Traders can get short-term profits from bearish positions on down days, and gain from bullish plays on price recoveries…”

By Gregory Clay

Investment Strategist

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Let The Technology ETF (QQQ) Lead To Stock Gains

Market Summary

The stock market maintains the long term bullish trend starting from the bottom of the market crash in 2009. Investors are satisfied that employment is growing at a decent pace in the private sector and the economy is actually gradually improving. What investors like even more are the Federal Reserve Quantitative Easing (QE) programs. The various iterations of QE began in November 2008 and essentially provide free money to financial firms which they are using to drive the stock market higher. Stocks are still the best investment opportunity compared to other asset classes (bonds, precious metals, etc.). Retail investors are slowly getting back into buying stocks but institutional investors are using the easy money provided by the Fed to take stocks to all-time highs.

Investor Analysis

Many investors are expecting the so called "Santa Claus" rally to push stocks higher into year-end. The technology sector has led the market for most of the year and this group has been hot over the past month. Until we get a confirmed stock market correction betting on the market leaders is considered a solid strategy for generating profits. The chart below displays how technology stocks have moved to all time highs.

Possible Strategy

Invest in the QQQ ETF (NasdaqGM: QQQ) to take advantage of the hottest stock market sector. The QQQ is an exchange-traded fund (ETF) "is an exchange-traded fund based on the Nasdaq-100 Index®. The Fund will, under most circumstances, consists of all of stocks in the Index. The Index includes 100 of the largest domestic and international non financial companies listed on the Nasdaq Stock Market based on market capitalization. By trading like a stock, the QQQ has continuous liquidity, can be short sold, bought on margin, provide regular dividend payments and incur regular brokerage commissions when traded. The QQQ is used by large institutions and traders as bets on the direction of technology stocks. They are also used by individual investors who believe in passive management (index investing). In this respect, spiders compete directly with Nasdaq 100 index funds.

By Gregory Clay