Market Summary

By: Gregory Clay | Sun, Jul 19, 2015
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As the Greek and Chinese issues have stabilized the SPX has rallied back from its very brief dip below its 200-day SMA with gains in 6 of the last 7 sessions. These gains were so strong that they have lifted the index above the 200, 100 and even the 50-day SMA in record time. Combine that with optimism related to the pending nuclear deal with Iran and this past week has begun a trend that looks similar to how the market rebounded the first week in October after the Ebola scare. The SPX is near its all-time high, which is impressive when you consider little more than a week ago, it was at a net loss YTD. Equally impressive is the rebound in the NASDAQ index. This week the NASDAQ has rocketed back to an all-time high again, and pushed even higher by quarterly results from Google and Netflix.

The NASDAQ Index rose 4.25% for the week while the S&P 500 gained 2.4% over the week, its first weekly gain in a month. The Dow Jones Industrial Average booked a 1.8% weekly gain.

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.

NASDAQ companies have started earnings season with outstanding results. On Thursday, Netflix stock just outright exploded after the company announced quarterly results. As highlighted in the chart below, NASDAQ stocks are bouncing off recent lows into an uptrend.

NASDAQ Daily Chart

In the chart below you can see the S&P 500 index is leading equity markets higher. The market's current upward move probably will not stall out until the S&P's advance decelerates.

SPX Daily Chart

Last week we said "...the DOW can be expected to move back toward recent highs..." In the updated chart below, the DOW Transports did not keep up with the Dow Industrials recent move. This suggests the large cap index might continue to lag behind the smaller indexes

Dow Daily Chart

The U.S. dollar index, which measures the greenback against a basket of six major currencies, notched its strongest weekly gain since May, of about 2%. Spot gold prices fell more than 1% to their lowest since April 2010, pressured by the strong dollar and increasing bets that the Fed will hike rates. The U.S. Federal Reserve's reiteration that interest rates were likely to rise this year pushed the dollar index to a six-week high and keeps a lid on Treasury securities.

UUP Daily Chart


Market Outlook

Investors were encouraged from two days of congressional testimony from Federal Reserve Chair Janet Yellen, who gave a generally upbeat appraisal of the US economy as she stuck to her forecast for an increase in the Fed's key interest rate later this year. "It was actually a terrific week," said Chris Low, chief economist at FTN Financial. "We're actually trading on fundamentals this week," Low said, adding that bank earnings were generally "really terrific." Investors were relieved to hear Greek Prime Minister Alexis Tsipras agreed to tough reforms required by creditors as a condition for beginning formal bailout talks. Worries about China were also put on the back burner as the Shanghai Index put in a second straight weekly gain following big drops the prior three weeks that rattled global markets. But as with Greece, analysts are not convinced that China is completely out of the woods. The pullback in Chinese stocks has raised worries about slowing growth in the broader Chinese economy.

In the quarterly chart below, NASDAQ is the runaway sector leader after Netflix shares vaulted 18% on Thursday to lift the NASDAQ to a record close. On Friday, Google lifted the NASDAQ Index to a second straight record after a blowout earnings report pushed the stock up 16% to an all-time high. Next week's earnings calendar includes results from numerous heavyweights, including Apple, Microsoft, Boeing and General Motors. The schedule also includes June sales of new homes and existing homes.

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.

As highlighted chart below, the Momentum Factor ETF has broken out of the recent trading into a strong uptrend. Also, momentum has gotten extremely bullish which suggest the current move has more room to run.

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 VIX has fallen sharply back to support low for the year after hitting a 5-month high and spending 2 full weeks in the 16 to 20 range. In the past 5 trading sessions, the closing level on the VIX has dropped 7.86 points (-39.4%) and closed at a YTD low. In fact, the market's reaction to the Greece, China and Iran news has culminated in the sharpest 5-day drop (on a percentage basis) in the 22 year history of the VIX since it was created in 1993. Since the VIX can become a contra-indicator when it gets too high or too low, the geopolitical risks may be under-represented in the VIX at the moment.

VIX Daily Chart

The current Put/Call ratio indicates traders are buying calls to bet on the upward market move.

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 7/15/2015. The most recent AAII survey showed 30.80% are bullish and 23.20% bearish while 45.90% of investors polled have a neutral outlook for the market for the next six months. Our recent analysis is confirmed when we said "...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 a contra indictor the current chart signals stocks should move back to recent highs..." It is reasonable to expect stocks to continue higher at least until the bullish percent reaches the long-term average.

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. 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 7/15/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 54.99%, and the current week's exposure is 52.24%. Professional money managers have not yet gone "all in" on the current bullish market move. If stocks continue accelerating, money managers might be forced to chase prices even higher.

NAAIM Exposure Percent


Trading Strategy

According to the Stock Trader's Almanac, such a big deal is made of the "summer rally" that one might get the impression the market puts on its best performance in the summertime. Nothing could be further from the truth! Not only does the market "rally" in every season of the year, but it does so with more gusto in the winter, spring, and fall than in the summer. From its June 29, closing low of 17596.35, DJIA has rallied 3% as of the close on July 16. Winters in 52 years averaged a 12.9% gain as measured from the low in November or December to the first quarter closing high. Spring rose 11.3% followed by fall with 10.9%. Last and least was the average 9.2% "summer rally." Even 2009's impressive 19.7% "summer rally" was outmatched by spring. So beware the summer rally hype as it is usually the smallest of the year and can fade just as quickly as it began.

In the updated chart below you can see the Energy, Materials and Industrial sectors are not participating in the current price recovery. Obviously these are the groups to hold off making new stock investments. As the U.S. economy improves Consumer Staples appear to be main the beneficiary. Healthcare and Cyclical stocks have also been strong for most of the year.

S&P500 30-Day 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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