Market Summary

By: Gregory Clay | Sun, Jul 12, 2015
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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.

YTD Performance

The S&P 500 Index monthly chart below is displaying a bullish technical signal. For the past three years, the 14 period EMA line has served as a reliable support where the S&P 500 bounces when it fall to that level. You can see the index is current set up to bounce of the EMA line, which confirms other signals indicating stocks should trend higher near term.

S&P500 Daily Chart

The updated chart below should be considered a strong near term bullish technical signal for the market as both the DOW Industrials and Transports are simultaneously bouncing off support. As discussed in the past when both the DOW Industrial Average and DOW Transport Index move in the same direction, technicians consider this confirmation of a trend. This chart suggests the DOW can be expected to move back toward recent highs.

Dow Daily Chart

U.S. Treasuries prices fell for the week as a second-day recovery in Chinese stock prices and hopes of a Greece debt deal reduced the safe-haven allure of U.S. government debt. Commodities are priced in dollars, so as the greenback moves higher, instruments like bonds and gold generally move lower, and the inverse applies due to the strong correlation in the moves. As seen in the updated chart below, the dollar recovered back to three-week highs and pressured gold and treasury bonds lower.

UUP Daily Chart

Market Outlook

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.

July Performance

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 confirms recent analysis is playing out as advertised "...The major indexes will probably trade range bound heading into quarterly earnings...all the technical signals point to neutral range-bound trading..."

MTUM Daily Chart

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 VIX higher. The overall stock market's recent daily triple-digit price moves is keeping the Volatility Index relatively elevated while the S&P attempts to recover from the recent price dip.

VIX Daily Chart

Earlier in the week the Put/Call ratio was excessively bearish, but as stocks recovered, traders backed sold off some puts and now they are invested in an equal number of calls and puts.

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 7/8/2015. The most recent AAII survey showed 42.90% of investors polled have a neutral outlook for the market for the next six months, while 27.90% are bullish and 29.20% bearish. Retail investors appear to be buying the current market price dip as they are becoming more bullish at the expense of the bearish number. As we mentioned recently, as a contra indictor the current chart signals stocks should move back to recent highs.

AAII 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 bars depict 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. The current survey result is for the week ending 7/8/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 54.84%, and the current week's exposure is 54.99%. Money Managers are still extremely nervous and are backing off significant equity exposure until there are clear signs of a plan to resolve some of the current global economic crisis.

NAAIM Exposure %

Trading Strategy

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.

S&P Sector 30-Day 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
Easy Money Options Income

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