Stocks Settle Into Trading Range

By: Gregory Clay | Sun, Feb 28, 2016
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Market Summary

For the week, the S&P 500 Index advanced 1.6% while the Blue Chip-heavy Dow Jones Industrial Average rose 1.5%. The Nasdaq added 1.9% while the small cap Russell 2000 led the major indices up 2.69% for the week. Treasury prices remain elevated. As confirmed in the chart below, shares of gold-mining companies are surging, with Barrick Gold Corp. trading near its highest price since September 2014.

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. As we have been saying recently, until there is a confirmed break out of the trading range (as identified by the orange rectangle) the best bet is to expect daily up and down stock price fluctuations.

MTUM Weekly 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. Last week's analysis is playing out as advertised, "...The Nasdaq Composite Bullish Percentage Index (BPCOMPQ) chart below highlights a price uptrend line. Nasdaq stocks tend to lead the market and if recent behavior is a guide, investors bidding up Nasdaq stocks usually lead to higher near-term stock prices..." In the chart below the orange line continues trending higher.

NASDAQ Bullish Percent Index Daily Chart

In the chart below you can see the dollar bounced off multiyear lows as the volatility that has recently gripped global markets is fading. Treasury prices fell, pushing yields higher, for a second consecutive week as increased appetite for riskier assets like oil and stocks over the period stemmed the flight to quality seen earlier in the month. An upward revision to the fourth-quarter economic growth rate and stronger-than-expected personal income data helped push treasury prices lower. Gold prices remain elevated at the highest level since February 2015. Bloomberg Business reports that investors are falling back in love with gold thanks to the woman who came between them in the first place: Janet Yellen. A rally in prices this month has the precious metal nearing a bull market for the first time since 2013 amid mounting expectations that Federal Reserve Chair Yellen won't follow through on her forecast for raising U.S. interest rates further this year. The prospect of lower-than-expected borrowing costs, along with weakening equity and currency markets is reviving gold's appeal as a store of value.

UUP Daily Chart


Market Outlook

Following a January market crash and a rebound over the past two weeks, the S&P 500 is finally above its 50-daymoving average, which some traders believe is a sign of improving sentiment. But investors, shell-shocked by months of volatility, remained cautious, with bear market oil prices, rate hikes and a potential slowdown in China's economy still very much in play. "I think we're near the top of the roller coaster again. All of the things that made the market go wild in January are still up in the air," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago. Bloomberg Business says that after shunning gold for three straight years investors are coming back in droves - as evidenced in the chart below. Inflows into U.S. listed exchange-traded funds tracking precious metals are heading for the biggest monthly increase since 2011, data compiled by Bloomberg show. Prices have rebounded as much as 21% since touching a five-year low in December, when the Fed boosted interest rates for the first time in almost a decade and signaled that the central bank planned further increases throughout 2016. "We're positioned for a bull market in gold," said Jeff Sica, who helps oversee $1.5 billion as founder and president of Circle Squared Alternative Investments in Morristown, New Jersey. "With the amount of volatility in the market, there's going to be continued strength in gold," Sica said in a telephone interview. "It's obvious that even if the interest rates do move, they're not going to move up quickly, and there's greater likelihood that they may even stay the same or decline."

Performance since December 15

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 the VIX higher. VIX is currently near its low year-to-date, which is noteworthy as equity markets began the year trading with extended volatility. Last week's comment "... over the past week or so traders are becoming less apprehensive about the stock market. You can see that after reaching its highest level in the middle of the month the VIX is in a downtrend which coincides with the surge in "risk-on" trading..." In the updated chart below you can see the S&P 500 cross above the VIX for the first time since the beginning of the year. If investors continue "risk-on" trading expect the Volatility number to keep falling lower.

VIX Daily Chart

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 02/24/2016. The most recent AAII survey showed 31.20% are Bullish and 31.40% Bearish, while 37.40% of investors polled have a Neutral outlook for the market for the next six months. Last week's analysis is coming to fruition "...The stock market is showing signs of bottom and retail investors are getting more optimistic as the bullish percentage jumped last week. As a reliable contra-indicator the current AAII survey signals continued follow through on a countertrend bounce..." The latest AAII survey signals the current bullish trend has more room to run.

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 02/24/2016. Fourth-quarter NAAIM exposure index averaged 44.61%. Last week the NAAIM exposure index was 41.05%, and the current week's exposure is 31.65%. Professional traders remain cautious as they continue to maintain a low equity exposure as they have all year.

NAAIM Exposure Percent


Trading Strategy

Last week's analysis stated "...Should this February track the pattern from the past 21 years...the market begins to fade later next week...investors converted to "risk-on" trading over the past month...Industrial, Materials and Energy S&P Sectors led the market the past month..." Our recent trading recommendation is still appropriate "... Now might be a good to "nibble" at some of the shares on your stock watch list - but keep tight stops..."

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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