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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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 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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Why Stocks Are Due For A Pause

Market Summary

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Stocks stalled this week after comments by U.S. Federal Reserve officials, who raised expectations for more interest rate hikes in coming months than investors expected. St. Louis Fed President James Bullard was the latest to join a chorus of officials who highlighted the chance of multiple rate increases this year. The deadly bombing attacks in Brussels on Tuesday added to investors' uncertainty this week along with a strengthening dollar that weighed on commodity-related shares. "After the run that we've had ... I think it's natural for folks to take a deep breath and take some chips off the table," said Jeff Buetow, president of BFRC Services in Charlottesville, Virginia. MKM Partners’ technical analyst Jon Krinsky published a report saying that since last July, the market has been trending for 25-30 days before pausing, and then switching directions. Over the last 26 trading days, the SPX has rallied 13%, bringing it just shy of the late December high (2081). This is almost an identical move in magnitude and duration to the September to November rally. If recent history is any guide, at a minimum, we should see a pause here.

Trading Strategy

The Stock Trader’s Almanac reports that over the past 26 years the DJIA and S&P 500 have declined 17 times and advanced 9 with an average loss approaching 1.0% near the end of March. Excluding advancing years, the average decline is right around 1.6% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third. As mentioned above, the market is probably due for a pause to absorb oversold conditions. We advise making sure a stop-loss strategy is in place for all open positions in case the pause turns into a significant pullback. Feb. 11th was the 2016 low for the stock market. As evidenced in the chart below, since the market low point, stocks have exploded higher. The rally is being led by higher risk stock sectors such as energy, materials, industrials, etc. Defensive sectors such as consumer staples, healthcare and utilities are lagging which confirms investors’ confidence in the current bullish move.

By Gregory Clay

Investment Strategist

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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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Why Stock Market Is Ready To Bounce

Market Summary

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The stock market is reacting to the four "black swan" events since the year started (the heated Iran/Saudi Arabia conflict, China's stock market drop, North Korea's bomb testing and China's Yuan devaluation). The S&P 500 posted a weekly loss of 6% and the Dow Jones Industrial Average dropped 6.2%. It was the worst weekly percentage loss for stocks since September 23^rd, 2011. This also marks the worst opening week of the year in history for both the S&P 500 and the Dow. Meanwhile, the Nasdaq Composite ended down 7.3% over the week. The chart below indicates stocks have actually been in the crapper the past six months. During this time the major equity indexes have only briefly been above water before the bottom really fell out the past few weeks. Treasury bonds are the only asset class to hold up consistently.

  

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. Taking a look at the weekly MTUM chart shows the price is at the 50-week moving average support level. As highlighted in the chart, this support has held firm for several years and the MTUM usually recovers higher the week after falling to this point.

  

The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 01/06/2016. The most recent AAII survey showed 22.20% are Bullish and 38.30% Bearish, while 39.60% of investors polled have a Neutral outlook for the market for the next six months. Individual investors have been turning extremely negative as the market moves into correction territory. As a reliable contra indicator the current AAII survey signals a short-term counter trend bounce based on retail investors’ overly bearish sentiment.

  

Investment Analysis

If there is any consolation to the miserable start to the New Year, it may be that the sizable selloff has triggered a “buy” signal from a technical perspective with 88% of all global equity markets trading below their 200-day moving average and 50-day moving average according Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch. There hasn't been a bear market in the U.S. since the Great Recession. And even after the atrocious start to the current year, Wall Street still is not approaching a bear market. The major indexes have to plunge 20% below their previous high to be in bear market territory. The S&P 500 is down about 9% from its record highs of last year. The Dow and Nasdaq ended the week down 10%, officially falling into correction mode. But lurking beneath the surface, the outlook appears a lot worse. As of Friday almost half of the stocks in the S&P 500 have crumbled at least 20% below their 52-week highs, according to FactSet data. Small-cap stocks are considered more risky than large caps and are getting hit a lot harder. The average small-cap stock is now down nearly 30% from its peak, putting it firmly in bear-market status. "So many things are breaking down that the chance of the overall market breaking down is higher than at any time in several years," said Ryan Detrick, an independent market strategist. "I don't see another bear market. The true bear markets happen when the economy goes into recession. This economy is not falling off a cliff," said Detrick.

As mentioned previously, some technical indicators are signaling an imminent countertrend recovery bounce and there is still a lot of time for the market to rebound and finish January with a gain. A positive January Barometer reading improves the full-year outlook, especially with the recent penchant for the market to rebound just as sharply as it sells off. In the graph below the only winning S&P 500 sector over the past month is Utilities. Similar to Treasury bonds, investors are putting funds into Utility company stocks as a safe-haven during the current market turmoil. FANG stocks (Facebook, Amazon, Netflix and Google) are holding up better than the rest of the market. These stocks might be the best bet for investors looking to trade a countertrend bounce because they will probably lead the recovery. Also, the Dollar was the top-performing asset last year excluding dividends, so sitting on cash is always a sound investment during market uncertainty.

  

By Gregory Clay

Investment Strategist

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Santa Claus Rally

Market Summary

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Sellers took vacation last week and the program driven “short squeeze” rally triggered three consecutive days of triple-digit gains in the DOW Industrials. As seen in the updated chart below, the surge in equities boosted the S&P 500 index into positive territory for the year. The Nasdaq index has been in the black since September, but the other major indexes are still in the red year-to-date. Precious metals remain the biggest loser with gold in bear market territory down 22% for the year. For the week, the Benchmark S&P 500 Index and Blue Chip Dow Jones Industrial Average jumped 2.90% and 2.80% respectively. The Nasdaq rose 2.50% for the week and Russell 2000 gained 2.7%

Last week’s analysis mentioned “…With traders starting to take holiday sabbaticals the next few weeks trading volume should be lighter than normal. This provides an opportunity for the stock market to recover as it normally does going into year-end because market moves can be exaggerated on lighter volume…” While many traders started vacationing last week, algorithmic trading kicked in to start the “Santa Claus” rally during the abbreviated trading week. After the melodrama about whether the Fed would raise interest ended, the net result is that interest rates are still near historically low levels. Low rates are typically bullish for the stock market and as we head into “the best six months of the year” for stocks, there is no reason this trend won’t hold up. The U.S. economy continues to chug along and stocks remain the best game in town. You can see in the graph below how the major equity indexes have had a scorching fourth-quarter. The biggest near term threat to the stock market will be quarterly earnings results when they are reported early next year. If fourth-quarter earnings disappoint, this might panic investors into believing the economy is weaker than they thought and spark the next market sell off.

Investment Analysis

Last week we noted “…the week after December triple-witching option expiration, which has a historically bullish record…” As reported by Jeff Hirsh in the Almanac Trader,the three trading days following the Christmas holiday break, also has a bullish track record over the past 31 years. These three days also rank near the top when compared to all other market holidays. Average and median gains across DJIA, S&P 500, NASDAQ and Russell 2000 are fairly stable and consistent on each of the days following the Christmas holiday. We have been on the sidelines the past few weeks waiting to see how traders responded to the recent Fed rate decision. Our preference is to try avoiding unnecessary risks when setting up trades and it was important to let the market provide direction after the first rate increase in almost a decade. Yearend tax loss selling appears to be over where investors sell off losing positions to offset stock gains and other income, which is why the market is moving higher on lower volume. In the graph below, Consumer Staples and Health Care are the best performing sectors over the past month and these groups can be expected to be among the leaders going into the New Year. Bidding on stocks in the leading groups should be a good bet to start the year.

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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Market Is Set Up For A Bounce

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It has already been reported how investors experienced the first 10% correction in the major stock indexes since 2011 as worries of an economic slowdown in China and angst over interest rate policy and when the Federal Reserve will hike rates has taken a toll. Add to those concerns, a meltdown in the commodities markets and growing fears that stocks have climbed to unsustainable valuations, and the net result is a high volatility market. Those worries have sparked a big selloff that has knocked more than half of the stocks in the S&P 500 down more than 20%, which puts those stocks in bear market territory. Investors sought bargains among beaten-down stocks and the recently battered biotechnology index bounced back on the last day of Wall Street's worst quarter since 2011. For much of the third quarter, global markets were rocked by fears of slowing growth in China and uncertainty over timing for a U.S. Federal Reserve hike of interest rates. Biotech had a seven-day selloff kicked off by drug price regulation worries. For the quarter, the Dow fell 7.6%, the S&P lost 6.9% and Nasdaq fell 7.4%. For September, the Dow fell 1.5% while the S&P dropped 2.6% and Nasdaq fell 3.3%. For the week, the Dow and S&P gained 1% while the Nasdaq ended basically flat gaining .5%.

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. We note in the updated MTUM chart below how stocks are bouncing off support. Also noted is downward momentum is dissipating and trying to turn higher while strength indicators are signaling an oversold bounce.

Investment Analysis

No one knows for sure where the S&P is heading, but as the markets move into the best 6 months for stocks in November, a lot of market watchers are going with the yearend statistics that say the markets will move back up at year end. There have been way too many times that stocks sold off in September and October, and followed with a sharp rally. Some analyst refer to October as the “spooky” month, and while there are some historical declines in October, it also known as the “bear killer”. More bottoms are made in October than any other month, and while it has a negative stigma, the month overall is solidly bullish on the historical calendar. Furthermore, the final quarter of the year is historically the best performing period.

According the Stock Traders’ Almanac, October’s typical performance appears in the above chart over the recent 21-year span 1994 to 2014. On average, early month weakness has proven to be an excellent buying opportunity, especially for NASDAQ (purple line) as early losses were quickly recouped leading to an average gain of over 3% from early month lows to the close. In the last couple of years, after September 19th, the S&P traded lower into month’s end and made a bottom sometime in the early part of October, and in turn rallied into years end. That’s exactly what we could see this year as fund managers have seen their year-end bonus disappear with the selloff. They got too short after the initial low was made, and now need to markup stocks with a yearend rally to restore their positive performance.

By Gregory Clay

Investment Strategist

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Buying The Dip

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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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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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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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The Market's Next Move

Market Outlook

http://www.safehaven.com/article/35350/market-summary

September began in typical fashion this year, early strength that lead to mid-month new market highs and it also finished rather typically. The week after September options expiration week was down and then end-of-third-quarter window dressing saw major averages decline even further. The S&P 500 enjoyed its biggest one-day gain in nearly two months, while the Dow Jones Industrial Average tallied its biggest gain in seven months, thanks in large part to a stronger-than-expected jobs report that delivered a dose of confidence to investors. Friday’s rebound put a dent in weekly losses, but the main benchmarks still finished the week modestly lower marking the second weekly decline in a row for major indexes.

Previous Weekly Setup commentary mentioned “…We expect volatility to increase over the next two months from the current historical lows including another price pullback…Don’t be surprised if September starts strong…But the market begins to fade as money managers’ start selling off losers and repositioning assets for the end of the third quarter window dressing…This prognostication is playing out as advertised^…” 

We pointed out recently “…the Russell 2000 index dropping into negative territory for the year.  You would prefer to see all the major indexes breaking out to new highs to have confidence in a bullish move. Small caps underperformance is an indication of investors wanting to avoid riskier trades at stocks current frothy levels…The updated graph below supports our previous analysis as last week all the major stock indexes followed the Russell 2000 lower…” The obvious question at this point is whether the market will follow through on Friday’s price recovery. As you can see in the updated chart below the Dow Jones Industrial Average is in danger of following the Russell 2000 index into negative territory for the year.

The Stock Traders’ Almanac reported that a mid-September breakout failed rather quickly and DJIA, S&P 500 and NASDAQ are once again trading in a choppy sideways pattern. All three indices are currently trading around their respective 50-day moving averages. The Russell 2000 is having the hardest time. Its 50-day moving average has crossed below its 200-day moving average, the dreaded “death cross” and it is currently flirting with its early August intraday lows. Since Russell 2000 does have a tendency to lead on the way up and the way down, its technical picture warrants attention, however it is behaving in typical seasonal fashion by underperforming through the third quarter. If seasonal trends hold for Russell 2000, a bottom sometime in October is anticipated.  October is the last month of the “Worst Six Months” for DJIA and S&P 500 and the last month of NASDAQ’s “Worst Four Months”. Frightful history of market crashes aside, October has been stellar in midterm years, number one month for DJIA, S&P 500, NASDAQ and Russell 1K, number two for Russell 2K. Keep an eye out for the Official MACD Seasonal Buy Signal. It can trigger anytime on or after October 1.

Investor Analysis

Next week aluminum maker Alcoa kicks off the unofficial start to corporate earnings season. It is reasonable to expect the next few weeks will probably be similar to early April and July when price pullbacks were a prelude to a pickup in quarterly earnings announcements where investors bid stock prices back up. We have saying recently “…the Worst Six Months, May through October have only averaged a 0.3% DJIA gain since 1950 versus a 7.6% average gain during the “Best Six Months”, November to April. For S&P 500 the gain is slightly better at 1.3% during the “Worst” and 7.1% in the “Best” over the same time period… before the Best Months begin the market still has to navigate weak end-of-Q3 seasonal factors and the frequently troublesome month of October. With solid fundamental data and an accommodative Fed at its back, any market dips between now and the end of October are likely to be a great entry point for the next “Best Six Months” cycle…”

Earlier in the week, investors were rattled by a sharp drop in small-company stocks, pro-democracy protests in Hong Kong, and falling oil prices that hurt energy companies, big components in stock indexes. The worst performing market sectors for the third quarter in the graph below have been hurt by the exceptionally strong dollar and investors becoming more risk adverse. Treasury bonds and financials are benefiting from Federal Reserve’s low interest rate environment and technology stocks remain strong based on investors’ future growth expectations.

By Gregory Clay

Investment Strategist

http://www.safehaven.com/article/35350/market-summary

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