Getting Nervous Ahead Of Fed Meeting

By: Gregory Clay | Sun, Jun 12, 2016
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Market Summary

Despite the end of the week sell-off, U.S. equities managed to ward off a major slide due to early week strength in the stock market. Next week could be interesting due to the financial data and Central Bank news. For the week, the S&P 500 Index finished flat and the Blue Chip-heavy Dow Jones Industrial Average rose a modest 0.3%. The Nasdaq finished the week down 1% and led losses for the major indices while the small cap Russell 2000 was unchanged 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. Last week's analysis is validated where we said, "...The MTUM is threatening to break out above...the resistance level. If the breakout is confirmed this supports the contention that stocks are headed back toward all-time highs..." In the updated chart below the orange dotted line denotes the price uptrend as the S&P 500 reaches back toward all-time highs.

MTUM Daily Chart

Anything sounding vaguely hawkish in this week's FOMC statement could trigger a giant move out of Treasuries and a massive uptick in the dollar. Despite this potential scenario, global rates are falling to record levels as demand for the safety of Bonds accelerates. Gold extended its rally to a three-week high last week, supported by falling U.S. Treasury yields and world equity markets, and the outlook for U.S. interest rates. The precious metal held its momentum after surging 1.5% on Wednesday, following below-consensus U.S. payrolls data and comments from U.S. Federal Reserve Chair Janet Yellen, which dampened expectations of an imminent rate hike. Gold is highly sensitive to rising interest rates, which lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

UUP Daily Chart

Market Outlook

Giving individual investors cause for concern is the slow pace of U.S. economic growth and uncertain pace of global economic growth, terrorism and global unrest, lackluster corporate earnings, the prevailing level of valuations, the forthcoming election and monetary policy. Some investors are encouraged by sustained domestic economic growth, corporate earnings and still comparatively low energy prices. The S&P 500 came close to a record this week before falling back, investors will turn next week to a full slate of economic data and a Federal Reserve meeting in hope of fresh reasons whether to drive stocks to new highs. You can see in the graph below how the asset classes that benefit from depressed interest rates are the top performers for the quarter.

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 chart below confirms how option volatility jumped during the late week stock sell-off as the CBOE volatility index rose 26% for the week. The 'Fear Gauge' was at oversold levels so the massive percentage jump is not surprising. We may see some additional Risk-buying into the Fed announcement on Wednesday.

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 06/08/2016. Pessimism declined to a six-week low, while neutral sentiment remained above 40% for a 13th consecutive week. Neutral sentiment is higher, while optimism pulled back. Bullish sentiment, expectations that stock prices will rise over the next six months, pulled back by 2.3% points to 27.8%. The decline follows last week's 12.4% point jump to a six-week high of 30.2%. This week's decrease keeps optimism below its historical average of 38.5% for the 31st consecutive week and the 64th out of the past 66 weeks. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 3.6% points to 44.3%. This is the 13th consecutive weekly reading above 40% and the 19th consecutive week that neutral sentiment has been above its historical average of 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months, declined by 1.2% points to 27.8%. Pessimism was last lower on April 20, 2016 (23.9%). Bearish sentiment has been below its historical average of 30.5% for the 13 out of the past 15 weeks.

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 06/08/2016. First-quarter NAAIM exposure index averaged 45.89%. Last week the NAAIM exposure index was 68.94%, and the current week's exposure is 74.80%. Professional money managers appear to be anticipating dovish comments from the FOMC meeting next week and are increasing equity exposure.

NAAIM Exposure Percent

Trading Strategy

The Stock Traders' Almanac reports how the second Triple Witching Week of the year brings on some volatile trading with losses frequently exceeding gains. On Monday of Triple-Witching Week the DJIA has been down eleven of the last nineteen years. Triple-Witching Friday is better, up nine of the last thirteen years, but weaker over the past 23 years, up thirteen, down ten with an average loss of 0.2%. Full-week performance is choppy as well, littered with greater than 1% moves in both directions. The week after Triple-Witching Day is horrendous. This week has experienced DJIA losses in 23 of the last 26 years with average losses of 1.1%. S&P 500 and NASDAQ have fared slightly better during the week after over the same 25 year span, declining 0.7% and 0.2% respectively on average. If the market does pull back, that might be a good opportunity to "buy the dip" with shares in the leading sectors displayed in the chart below.

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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