Market Summary

By: Gregory Clay | Sun, Jan 25, 2015
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Strong growth in company earnings has underpinned a bullish run in stocks that has stretched almost six years. Earnings are still expected to keep rising, but the pace of growth is slowing, and investors are looking for signs that sales are up. Equities finished their first weekly gain of the year after the European Central Bank announced that it would buy 60 billion euros ($67 billion) of government and corporate bonds each month at least through September 2016. The 1.1 trillion euro program signals the willingness of the ECB to boost the economies in the 19-nation euro currency alliance. For the week, the S&P 500 edged up 1.6 percent while he Dow rose 0.9 percent.

As seen in the updated graph below, Gold Mining stocks are blasting off to start the year and Treasury Bonds continue to move higher as they have since the beginning of last year. Equity indexes are barely breaking even and how they end up at the end of January is considered a "barometer" of how they will end the year.

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.

In the updated chart below, the S&P 500 BPI is breaking above its downtrend line and starting a new uptrend. The market needs to finish the month on a high note to confirm a bullish breakout.

As circled in the updated chart below the dollar, treasuries and gold remain converged at high levels. Investors are expressing doubts about the global economy and are being cautious about overindulging in the stock market. This cautiousness is leading investors to park additional funds into commodity assets.


Market Outlook

Last week we said, "...Gold is coming on strong to start the first-quarter 2015. Gold's performance is surprising considering interest rates are expected to remain extremely low for the foreseeable future. The low rate environment is benefitting treasury Bonds and Real Estate which are the only other sectors in the black for the year..." Commodities continue to be the top performers in the first-quarter. Fourth-quarter revenue and earnings results have not impressed investors, which are suppressing the equity indexes.

Next week's performance is considered critical as a prognosticator of the market's expected 2015 performance. According to the Stock Trader's Almanac January has quite a legendary reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations typically propels stocks higher. It is the end of the best three-month span and possesses a full docket of indicators and seasonalities. The January Barometer simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20. The long-term record has been stupendous, an 89.1% accuracy rate (assuming something does not go disastrously wrong between now and December 31), with only seven major errors in 64 years. Major errors occurred in the secular bear market years of 1966, 1968, 1982, 2001, 2003, 2009, and 2010. The market's position on January 31 will give us a good read on the year to come. When all three of these indicators are in agreement it has been prudent to heed the call. No other month can match January's predictive prowess.

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend.

Last week's Momentum Factor ETF (MTUM) chart analysis said, "...we highlight stocks settling into a trading range with flat momentum..." In the updated chart below we highlight the new uptrend line that is breaking above the recent trading range. Also noted is momentum turning bullish for the first time this year. The current trend is pointing towards stock indexes moving back toward recent highs.

Last week's comments on the Volatility Index (VIX) "...volatility exploded higher last week as the S&P 500 index was down..." As observed in the in the updated chart below, the situation is totally reversed. Four consecutive days of market advances knocked the Volatility Index down to the lowest level of the year. If the VIX does not recover next week during the Federal Open Market Committee meetings plus quadruple option expiration, look for the index to sink a lot lower. Volatility is usually higher in this situation and if it does drop there is no support to keep it from falling further.

The updated Total Put/Call Ratio shows investors are worried about a market pullback and loaded up on put option contracts. The current ratio is excessively bearish and reflects money managers protecting their long positions in the event traders respond negatively to fourth-quarter earnings and revenue numbers.

The American Association of Individual Investor Survey (AAII) survey continues to prove that it is a reliable contra-indictor. Notice that as retail investors drastically reduced their future bullish outlook the stock market jumped higher last week. The current reading approximates long-term averages which signal the market should continue higher while individual investors are underinvested and will need to play catchup.

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by association members. The green line shows the close of the S&P 500 Total Return Index on the survey date. The purple line depicts 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. Fourth-quarter NAAIM exposure index averaged 67.77%. Last week the NAAIM exposure index was 87.13%, and the current week's exposure is 76.23%. Money managers reduced their equity exposure. They have gotten a little nervous about the economic expansion as energy prices have crashed and fourth-quarter earnings results have been less than spectacular.


Trading Strategy

Utilities, Healthcare and Consumer Staples continue to perform the best out of the 10 S&P Sectors. Financial stocks are the biggest loser in this group due to dismal fourth-quarter earnings reports results. Technical indicators are showing signs of the beginning of an uptrend. Therefore now might be an opportune time to bid on shares on your watch list in the event there is follow-through on the uptrend.

Feel free to contact me with questions,

 


 

Gregory Clay

Author: Gregory Clay

Gregory Clay
Option Strategist
High Value Option Trader
Weekly Income Credit Spreads
Easy Money Options Income

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