Market Summary

By: Gregory Clay | Sun, Aug 16, 2015
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Stocks fluctuated wildly up and down due to geopolitical and currency concerns. While low inflation concerns may be a thorn in the Fed's side, the domestic economy continues to chug along at a moderate pace. The Central Bank of China attempted to roil markets by devaluing their currency three times this week but the damage was limited. For the week, the Dow and S&P both gained .6%. The NASDAQ ended flat while the Russell 2000 gained a paltry .3%. After hitting a record high in May, the S&P 500 is now up about 1% for the year, while the DJIA and Treasuries are barely underwater and Gold has sunk into a correction.

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.

After leading the market higher for most of this year, the Nasdaq Bullish Percent Index is in a strong downtrend. Don't expect the major indexes to reach new highs until the BPCOMPQ downtrend is broken.

NASDAQ Bullish percent Index Daily Chart

As highlighted below the S&P 500 Bullish Percent Index has converted into a neutral trend. The trend needs to break out above this range to certify the longer term downtrend has bottomed out

S&P500 Bullish percent Index Daily Chart

Similar to the S&P above, the NYSE Bullish Percent Index also has converted into a neutral trend. A break above the range will certify the longer term downtrend has bottomed out.

NYSE Bullish percent Index Daily Chart

The DOW Industrials and Transports need to continue rising above the 17900 level to indicate the current move is not simply another countertrend bounce.

Dow and Transports Daily Chart

The dollar index shed 1.6% of its value between Monday and Wednesday before turning higher during Thursday's session higher as investors' appetite for risk returned. The shock of China's devaluation of the yuan had scared some investors into unwinding bets on emerging-markets currencies. That supported the euro and yen at the expense of the dollar as traders bought back both those currencies after using them to fund their emerging-markets bets. Treasury yields finished the week slightly higher, after falling to their lowest point in over two months in the middle of the week, as upbeat economic data increased speculation about a rate increase by the Federal Reserve as early as September. Gold posted its largest weekly gain in nearly a month on the back of turmoil caused by China earlier in the week. Gold enjoyed a bounce from haven demand after China's move to devalue the yuan.

US Dollar Index Daily Chart


Market Outlook

The major financial news this week was not surprising, but it certainly shocked markets. China devalued their currency, which essentially is a game breaker for U.S. companies that export overseas. It makes U.S. goods more expensive and will eventually increase the value of the dollar. As a result, China will enjoy a trade advantage. China has devalued their currency before as a way to stimulate their economy. It is debatable whether playing games with your currency actually works, but now the markets are in a precarious position.

It was another bad week for Oil as it hit its lowest level since early 2009 during the Recession. Crude dumped another 3.5% this past week and looks to be making a run at breaking $40 a barrel to the downside. The U.S. oil benchmark posted a seventh consecutive weekly loss on escalating concerns about demand from China and continued worries about a domestic and global supply glut. Oil bulls did receive a modicum of positive news: the U.S. Commerce Department has quietly informed members of Congress that it intends to allow oil companies to sell U.S. crude to Mexico, in a further weakening of the country's four-decade ban on crude-oil exports.

It's a light schedule for data next week but one that has significant implications. Housing is the week's theme led off Monday by the home builders' housing market index which, at a 10-year high, is expected to extend gains. But less is expected for housing starts & permits on Tuesday and existing homes on Thursday where very strong gains in June are expected to take the edge off July's comparisons. Consumer prices on Wednesday aren't expected to show increasing pressure which, combined with ongoing declines in commodity prices, would point to less pressure on the doves to give into the hawks at the FOMC. Minutes from last month's FOMC will be posted Wednesday afternoon. Earnings season is winding down as only the major retailers will be watched this week.

Performance since July 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. The Momentum Factor ETF needs to break above the downtrend line to confirm a neutral trend.

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. Last week we pointed out "...solidly in the middle of its 6-month trading range, the SPX remains above the 200, 100 and even the 50-day SMA (simple moving average). Technical resistance is still around 2120, with support around the year's starting point of 2058...until a breakout occurs, this well-defined range and moderate volatility might provide some opportunities for short-term traders..." Option Volatility rose sharply early in the week but the momentum was not sustained. The CBOE Volatility Index (VIX) finished the week near support of $12 as investors continue to show limited concern for downside risk. Option traders have been relying on a 'Buy the Dip' scenario but the bounces higher have become thinner, which may be signaling a market top.

VIX Daily Chart

Put/Call Ratio is the ratio of trading volume of put options to call options. The Put/Call Ratio has long been viewed as an indicator of investor sentiment in the markets. Times where the number of traded call options outpaces the number of traded put options would signal a bullish sentiment, and vice versa. Technical traders have used the Put/Call Ratio for years as an indicator of the market. Most importantly, changes or swings in the ratio are seen as instances of great importance as this is commonly viewed as a change in the tide of overall market sentiment. Last week we mentioned "...The current Put/Call Ratio is extremely bearish as over the past week traders have invested heavily in put contracts to play the current market downtrend..." You can see the updated ratio is equal puts and calls which indicates traders expect a range-bound trend.

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 8/12/2015. The most recent AAII survey showed 30.50% are Bullish and 36.10% Bearish while 33.40% of investors polled have a Neutral outlook for the market for the next six months. Last week we said "...Individual Investors are not excessively bearish, which suggest range-bound trading..." The current survey shows individual investors got more bearish as the market sets up for range-bound trading.

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 8/12/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 61.17%, and the current week's exposure is 48.08%. The current low equity exposure confirms Money Managers are on vacation this time of year. They have taken their profits and are sitting on the sidelines during this slowest trading period of the year.

NAAIM Exposure Percent


Trading Strategy

Friday's release of several positive economic reports paints the U.S. economy in a strong, albeit not spectacular, light, which has left some investors struggling to determine the direction for stocks. We reported last week "... S&P 500 is locked in a 100 point trading range (2040-2140) since March because of a serious split in sector performance. At less than 5% this is the narrowest range in several years. A volatility expansion often follows a volatility contraction. Therefore, don't be surprised if there is a significant move in the coming weeks or months...According the Stock Trader's Almanac, seasonally, there is a strong price period for gold from late August until late September or early October as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India and also, when investors return from summer vacations. Entering long positions on or about August 26 and holding until October 1 has worked 13 times in the last 18 years..." Gold posted its largest weekly gain in nearly a month. Gold enjoyed a bounce from safe haven demand after China's move to devalue its currency.

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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