Market Summary

By: Gregory Clay | Sun, Dec 6, 2015
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After all is said and done, with daily up and down triple-digit moves, culminating in Friday's massive largest one-day gain in three months, basically the major indexes ended the week where they began. The S&P 500 and DOW Industrial indexes closed the week flat once again, while the Nasdaq was up slightly. The Russell 2000 small cap index was the worst performer for the week, falling 1.50% primarily due to falling energy prices. In the updated chart below you see that most of the major indexes are struggling to finish the year above water. Observe how gold stocks started the year roaring but now are mired in a dismal bear market crash. The tech heavy Nasdaq stocks took over market leadership during the summer and is the only clear winner heading into the year end.

YTD 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 current MTUM chart demonstrates how after recovering from the market bottom to start the fourth-quarter, the overall stock market has been contained inside a trading range. The other technical indicators confirm the range-bound trend as momentum is flat and strength indicators are neutral. Expect this trend to continue until after the Federal Reserve interest rate decision in a few weeks.

MTUM Daily Chart

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 Nasdaq Composite Bullish Percentage Index (BPCOMPQ) chart below confirms the range-bound market trend. Nasdaq stocks have been the market leader for most of the year. In the chart below, the orange rectangle displays the BPCOMQ contained in a relatively tight trading range. The market leader(s) not being able to attain new highs suggests the overall stock market will remain restrained near-term.

NASDAQ Bullish Percent Index Chart

We like to compare the DOW Industrials and Transports to confirm the current market trend. In the chart below, the DOW Transports have diverged away from the DOW Industrials. This indicates weakness in the current uptrend and unless both indexes converge higher, it will be difficult for the DOW Industrials to continue going up.

Dow daily Chart

As seen in the chart below, the U.S. dollar surged to a 13-year high this week, as robust employment data and comments from Fed Reserve Chairwoman Janet Yellen boosted speculation that a rate increase could take place this month. Gold futures rallied on Friday to the first weekly gain in seven weeks, as monthly data on U.S. employment remained strong. As investors are anticipating the first Federal Reserve interest rate in a decade and inflation has remained basically nonexistent, the dollar recently has shown a strong adverse relationship to precious metals. But Adam Koos, president of Libertas Wealth Management says that "Part of the reason for the gold rally is the inability of European Central Bank President Mario Draghi's continued stimulus plan to curb the drop in European equity prices". The chart also shows Treasury bonds finishing the week with their largest single-week decrease in a month after the strong jobs report was seen as keeping the Federal Reserve on track to raise interest rates later this month. Bond prices have an adverse relationship to yields; higher rates generally depress bond prices.

US Dollar Bullish Fund Daily Chart


Market Outlook

Year-to-date, most of the major asset classes are basically flat, but the graph below suggest a stellar fourth-quarter performance for the equity indexes. The market has basically decided that the Fed will moderately raise interest rates at the FOMC meeting in a few weeks and have priced that expectation into stock valuations. Keep in mind the reason this quarter's performance appears so strong is that stock prices had bottomed out to start the quarter and the market recovery accentuated the quarterly gain. Note, that even after the strong bullish move from the market crash, the major indexes have yet to attain their highs for the year. The graph also confirms the FOMC rate increase expectation is depressing interest rate sensitive asset classes such as bonds and precious metals.

We are betting that most of the major indexes end the year marginally higher based on December being one of the strongest months for average performance and frequency of gains. After the melodrama over the FOMC increasing interest rates for the first time in a decade subsides in a few weeks, stocks are setup to finish strong going into year-end. If the Fed does as everyone expects and moderately raises rates, the removal of uncertainty should catapult stock prices higher. Remember that investors disdain uncertainty and that has been holding back stock prices. Investors are currently ignoring global geopolitical events and unless there is some unexpected major economic crisis, expect stocks to move back toward yearly highs before the end of the month.

Quarterly Performance

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. The current ratio indicates traders are moderately bullish as they are buying more calls to bet on higher stock prices. Stock prices will probably strengthen after the December 16th Fed meeting and acquiring calls allows traders to make bullish bets and minimize risks with a limited capital outlay.

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 12/02/2015. The most recent AAII survey showed 29.50% are Bullish and 21.20% Bearish, while 49.30% of investors polled have a Neutral outlook for the market for the next six months. The AAII survey continues to support the current trading environment where there are daily up and down triple-digit price moves. We expect this trend to sustain at least until the December 16th FOMC interest rate decision.

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 12/02/2015. Third-quarter NAAIM exposure index averaged 56.15%. Last week the NAAIM exposure index was 70.45%, and the current week's exposure is 68.12%. Professional money manager's equity exposure should remain relatively elevated as they rotate out of poor performing sectors into winning stock groups to display on their books for year-end window dressing. However, the equity exposure percentage will be contained because investment managers are also selling off losers for tax reasons.

NAAIM Exposure Index


Trading Strategy

In the weekly S&P 500 Index weekly chart below the green rectangle highlights the fall 2014 market crash and year-end price recovery. We are betting on similar behavior this year. You can see in the chart how this fall's chart pattern is eerily similar to last year. Stocks began the fourth-quarter in a swoon, but have been trending higher after bottoming out in September. Investors are showing solid gains for the quarter and appear to be cashing in profits by selling into strength (which helps explains the recent triple-digit daily price moves). As evidenced in the chart below, the recent rally will probably soften over the next few weeks until the Fed announces its interest rate decision on December 16th and tax-loss selling starts slowing down. Similar to last year, the stock market is setting up for a strong year-end move as traders perform sector rotation and balance sheet "window dressing".

SPX Weekly Chart

The updated graph below supports the historical trend for the market to fade after the thanksgiving holiday as money managers go through year-end sector rotation and tax selling. You can see that after a strong fourth-quarter start, all of the major S&P sectors have pulled back over the past month. The energy sector is the biggest loser and it is probably a good idea to bail out of these stocks until prices stabilize. We believe now is a good time to identify entry opportunities for stocks on your watch list. As recently discussed in the Almanac Trader, pre-election Decembers have been stronger than average with the S&P up 3.2% and NASDAQ up 4.9% in Decembers in the third year of the 4-year cycle. Also, December is usually up sharply in the seventh year of a two-term president's reign and after a strong October performance like we had this year.

S&P Sector ETFs 30-Day Chart

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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