Market Summary

By: Gregory Clay | Sun, May 17, 2015
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S&P 500 edging up to a record high for a second straight session on low volume after a ream of weak economic data. That followed a more substantial 1.08 percent jump on Thursday that fueled speculation the benchmark index might trend higher after having oscillated in a range for much of the past three months. Even with the gains, analysts said market sentiment remained subdued. The S&P 500 is only a hair above the 2,080-2,120 range it has held for most of the last three months. "We're range-bound, we just happen to be ending the week on the higher end of that range," said Art Hogan, chief market strategist at Wunderlich Securities. "Clearly if this new higher range were to be a breakout we'd see a follow-through, and there really hasn't been any follow-through." Hogan said US stocks received some support from a pullback in US Treasury yields and a retreat in the dollar, which traded against the euro Friday at the lowest level in more than three months.

For the week, the S&P was up marginally at .3 percent, the Nasdaq is down incrementally at .9 percent and the Dow rose .4 percent. About 5.7 billion shares changed hands on U.S. exchanges, below the 6.2 billion average for the last five sessions, according to BATS Global Markets.

YTD Performance

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 S&P 500 Index reached new highs at the end of the week. However, the S&P 500 Bullish Percentage Index chart does not confirm a bullish move. This is disconcerting because it indicates the S&P 500 Index is making nominal highs while the BPSPX is in a strong downtrend. Until the BPSPX downtrend is reversed don't expect the S&P 500 Index to break out much higher.

S&P500 Bullish percent Index Chart

In the updated chart below we note how the NYSE Bullish Percent Index bottomed out at a firm support line that was established at the end of March. The BPNYA appears to be settling into a tight trading range before it breaks out into the next trend up or down.

NYSE Bullish Percent Index Chart

Gold hit a five-week high on Thursday as the dollar remained under pressure following sluggish US data that pushed back expectations of when interest rates in the world's largest economy will rise. In the updated chart below you can see how treasury's rose and the dollar eased on Friday following stabilization in European government bonds and another batch of weak U.S. data that raised expectations the Federal Reserve will need to wait longer to hike interest rates. The dollar index, a measure of the greenback against major currencies, was down 0.2 percent and fell for a fifth straight week, the longest stretch of declines in four years, while gold held near three-month highs as the dollar eased and lower bond yields revived some appeal of holding the precious metal.

UUP Power Shares Daily Chart


Market Outlook

In this pre-election year, the market is making a run at new all-time highs. But for all the attempts this year, no confirmed breakout. At Friday's close DJIA was up just 2% year-to-date and S&P 500 was a little better at 2.50%. According to the Trader's Almanac this performance is well below the average pre-election year performance. Typically, by mid-May of a pre-election year, DJIA and S&P 500 would be showing gains of approximately 9%. Some of this year's laggard performance is likely due to the above-average performance of post-election-year 2013 and midterm-year 2014. Sluggish Q1 growth, perhaps due to harsh winter weather, has weighed on corporate earnings causing valuations to drift away from neutral toward a bit rich. "Sell in May" seasonality is also a headwind as many traders and investors are reluctant to put new money to work at the start of a seasonally weak period, especially with the market struggling to breakout. Considering the time the market has been stuck in a range, the direction of the move out is likely to be course of the market for summer and early fall. "The market is basically convinced that the Fed is not going to do anything until the consumer shows some strength," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. Traders are watching U.S. economic data closely for signs of when the Fed will hike interest rates from rock-bottom levels, which is expected to boost the dollar by driving investment flows into the United States.

Oil prices posting their first weekly loss in a month did not prevent energy stocks from continuing to outperform the other major asset classes after gaining 20 percent in April. Oil posted its best monthly gain in six years. The weaker dollar helped U.S. crude oil prices hit fresh 2015 highs by making oil less expensive for holders of other currencies.

Performance since April 1

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.

In the updated chart below we note how new bullish momentum is developing. The Momentum Factor needs to break through the top of the current trading range to confirm a bullish move.

MTUM Daily Chart

Recent VIX analysis opined, "...The obvious question is whether the S&P 500 index will finally break out past the high established in early march..." The S&P 500 index finally hit new highs at the end of the week and as seen in the updated chart, the Volatility index responded by crashing.

VIX Daily Chart

The Put/Call ratio indicates traders remain bullish about the near term market direction as they use calls to bet on higher stock prices.

Total Put/Call Ratio

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 5/13/2015. For the past six week the AAII neutral reading has remained elevated near historically high levels. Retail investors are cautious about whether stocks will go much higher and leery of abandoning the market and missing out on possible future gains. This supports the current range-bound trading environment.

AAII Sentiment Survey

Weekly Sentiment

The Nation Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue line depicts a two-week moving average of the NAAIM managers' responses. NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. 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. First-quarter NAAIM exposure index averaged 83.02%. Last week the NAAIM exposure index was 80.23%, and the current week's exposure is 60.38%. Money managers have been cashing in gains as quarterly earnings season winds down and investors start "going away in May".

NAAIM Number Chart

NAAIM Number Table


Trading Strategy

Utilities stocks were among the biggest gainers last week as investors weighed a mix of U.S. economic data and corporate earnings news. The price of U.S. oil fell slightly, ending a second week in a row nearly flat just under $60 a barrel.

30-Day S&P Sector Performance

Feel free to contact me with questions,

 


 

Gregory Clay

Author: Gregory Clay

Gregory Clay
Option Strategist
High Value Option Trader
Weekly Income Credit Spreads
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