No Seller in 'Thin to Win' Stock Market

By: Gregory Clay | Sun, Jan 8, 2017
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Market Summary

As seen in the 2016 chart below, despite the fourth-quarter crash, gold stocks were far and away the best performer up 60%. For the major equity classes midcap shares like the MidCap 400 and Russell 2000 led the way up approximately 20% for the year. The Blue Chip-heavy Dow Jones Industrial Average and S&P 500 Index gained 13.50% and 9.6% respectively. The worst performer of the major asset classes was treasury bonds which basically finished flat.

2016 Index 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 or sell 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 weak and heading down, the BPI should also be moving lower as more and more stocks are sold off.

Nasdaq stocks led the stock market for the past year. As evidenced in the chart below, the Nasdaq Composite Bullish Percentage Index (BPCOMPQ) is breaking out into a new uptrend. Shares are overbought, but stocks can remain overbought indefinitely. If recent history holds true to form, the Nasdaq Composite Bullish Percentage Index is signaling new all-time highs for the major indexes.

Nasdaq Bullish Percent Indx Daily Chart

In the chart below the dollar is trying to rebound turning higher as the latest reading on the labor market underscored the belief that inflation could be poised to return to the market. The dollar has seen particular strength since the Nov. 8 election in the U.S., with investors betting that President-elect Donald Trump will push for policies that both accelerate economic growth and stoke inflation. Conversely, gold and treasury bonds moved lower as strength in the U.S. dollar and equities in the wake of the monthly domestic jobs report dulled investment demand for precious metals and bonds. A stronger buck makes assets priced in the currency more expensive to buyers

UUP Daily Chart


Market Outlook

Jeff Hirsh in the Almanac Trader says that although the market's rally since Election Day has largely been attributed to Donald Trump's victory, it could actually be called “The-election-is-finally-over rally.” Historically the S&P 500 has rallied after Presidential Election Day passes. Since 1952, the S&P 500 has advanced 68.8% of the time from the day after the election to the end of November and through the end of December. Expanding beyond yearend until Inauguration Day, S&P 500 has advanced 75% of the time. The current rally has been solid, but there have been better. History also suggests that the S&P 500 will continue to rally through President Trump's first 100 days in office as six of the last nine (66.7%) newly elected Presidents were greeted with S&P 500 gains.

The updated graph below displays fourth quarter performance for the major asset classes. The Dow Jones Industrial Average did well basically powered only by a few stocks. Smaller capitalization stocks like those included in the MidCap 400 and Russell 2000 tend to perform well at year end and going into the New Year. The biggest underperformers are gold, bonds and real estate which are expected to suffer from higher interest rates.

2016 Final Quarter Index 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. In the weekly chart below the Volatility Index remains near all-time lows. With trading volume on the thin side and sellers virtually vacant, investors are extremely optimistic as quarterly earnings announcements begin.

VIX Weekly 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 01/04/2017. Optimism among individual investors is starting 2017 at a six-week high, according to the latest AAII Sentiment Survey. Bullish sentiment, expectations that stock prices will rise over the next six months, is up to 46.2%. Optimism was last higher on November 23, 2016 (49.9%). The rise keeps bullish sentiment above 40% for an eighth consecutive week and above its historical average of 38.5% for a ninth consecutive week. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months is down to 28.6%. This is the fifth consecutive week and the seventh time in eight weeks that neutral sentiment is below its historical average of 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months fell to 25.2%. This is a five-week low; pessimism was last lower on November 30, 2016 (25.1%). The decline also keeps bearish sentiment below its historical average of 30.5% for the eighth time in nine weeks. All three sentiment measures are starting the New Year within their typical historical ranges. The optimism shared by many, but not all, investors extends a shift in expectations that started the week of the November election.

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 01/04/2017. Fourth-quarter NAAIM exposure index averaged 84.15%. Last week the NAAIM exposure index was 100.60%, and the current week's exposure is 99.43%. The NAAIM Exposure Index remains at extremely high levels as the equity indexes keep pressing against all-time highs. Sellers have virtually disappeared and with earnings season about to begin it is reasonable to expect NAAIM exposure to remain elevated.

NAAIM Exposure Percent


Trading Strategy

The current market rally has been churning higher due to a combination of sellers sitting on the sidelines, institutional cash buying, and algorithmic traders buy programs. This combination equals a 'perfect storm' to the upside, with little to no sustained pull back. According to Investors Intelligence, the numbers show a high level of bulls, now being above 60%. The last time bullish sentiment was so high was mid-2014. The overall market is trying to break through resistance near all-time highs. Now might be the opportunity to consider bidding on stocks on your watch list as we head into quarterly earnings. This is a “thin to win” market scenario, with stocks going higher on light trading volume and lack of sellers. In the graph below, the Utilities sector was the best performer the past month followed by Technology shares. What is notable is that all the major S&P sectors are positive which confirms the strength of the current rally.

S&P Sector ETF 30-Day Performance

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Gregory Clay

Author: Gregory Clay

Gregory Clay,
http://www.theoptionplayer.com/

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