Be Very Careful During May Expiration Week

By: Gregory Clay | Sun, May 15, 2016
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Market Summary

Amid a world of negative interest rates and slow growth, investors have stepped up demand for gold in record-breaking fashion. Gold demand surged 21% in the first quarter of 2016, which is the fastest pace on record, according to a World Gold Council report, which said the rise came even as central bank buying dipped and demand for jewelry slowed as well. You've probably noticed that stocks haven't moved very much in a while. The S&P 500 is unchanged over the last 371 days, which has happened just 119 times since 1928, culminating in the S&P 500 being flat year-to-date 2016. The Dow Industrials and the S&P 500 posted their third straight week of losses, which last happened in early February while the Nasdaq recorded a fourth straight negative week. For the week, the S&P 500 Index finished down .5% and the Blue Chip-heavy Dow Jones Industrial Average fell 1.2%. The Nasdaq was also flat lower by .4% while the small cap Russell 2000 again was the biggest loser down 1.1% for the week.

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 MTUM peeped above the top of the trading range marked by the orange line in the chart below. A breakout above the trading range was not confirmed since the price immediately fell back. Until there is a confirmed move out of the trading range the trend remains neutral.

MTUM Daily Chart

The dollar strengthened for a second straight week. Its gains have come as Fed officials have indicated that two interest-rate hikes are still on the table for 2016, as long as U.S. economic data remain robust. Several market strategists, including Vasileios Gkionakis, head of global currency strategy at UniCredit Bank, have said the dollar's rebound will be short-lived because it hasn't been tied to a more aggressive Federal Reserve. Gold is up more than 20% year to date and rose nearly 16% in the first quarter alone. It was the strongest price performance in nearly three decades. Treasury prices spiked last week ending at the highest level in more than a month.

UUP Daily Chart

Market Outlook

First-quarter earnings season is almost over and generally financial results have not been quite as dismal as anticipated for the S&P 500. But for June-quarter earnings, for every company that has given an upbeat preannouncement, 2.3 others have sounded warnings, according to Thomson Reuters I/B/E/S. That has left the S&P 500 trading at about 16.5 times expected earnings, according to Thomson Reuters I/B/E/S. "It's hard to make a case that you're going to have stellar equity market performance. In the context of low interest rates, equity valuations look about right," said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management in Horsham, Pennsylvania. According to a J.P. Morgan report, bond yields' staying low is actually now becoming the reason why stocks are struggling to perform. In other words, the same jitters about global economic slowdown that have pushed Treasury yields to multi-year lows are also preventing stocks from gaining substantial ground. In the chart below, energy shares exploded higher in the 2nd quarter as oil and gas prices recovered from the recent bottom. The SPDR Gold Trust is by far the most popular of all ETFs in 2016, with new inflows of $7.6 billion to the $34.1 billion fund, according to FactSet.

Quarterly Performance

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. The orange box in the chart below denotes the Volatility Index continues trading range-bound. Stable domestic economic data offsets tepid quarterly results to minimize investor nervousness.

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 05/11/2016. The most recent AAII survey showed 20.40% are Bullish and 31.30% Bearish, while 48.30% of investors polled have a Neutral outlook for the market for the next six months. The AAII survey points toward a continued neutral trend.

AAII Sentiment

The National 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 05/11/2016. First-quarter NAAIM exposure index averaged 45.89%. Last week the NAAIM exposure index was 67.66%, and the current week's exposure is 49.55%. Recent analysis is confirmed where we said "...Portfolio managers' will probably cash in some profits as the market is stalling which should further reduce NAAIM exposure..." As quarterly earnings season winds down money managers have become disillusioned with lackluster results and are using market up days to dump shares.

NAAIM Exposure %

Trading Strategy

As reported by the Stock Trader's Almanac, trading around May option expiration is mostly a mixed bag. Only the first day of the week has a solidly bullish bias over the past 34 years. However, trading the rest of the week into Friday, and next week has historically been choppy. DJIA has been down nineteen of the last thirty-four May expiration days. This full-week has a 50/50 record over the same years. More recently, DJIA and S&P 500 have suffered declines in five of the past seven expiration weeks. Projecting that bond yields will stay low, J.P. Morgan analysts also recommended selling cyclical stocks, as their prices are affected by ups and downs in the economy. As the following chart shows, stubbornly low Treasury yields suggest sluggish economic growth, which in turn hurts cyclicals. In the current environment it is critical to honor stop-loss plans and don't be afraid to convert to a high cash position.

S&P Sector ETF 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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