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Market Summary

By: Gregory Clay | Sunday, April 26, 2015

The Nasdaq composite index achieved a notable achievement on Thursday when it reached a new closing high for the first time since March 10, 2000. Back then, the Nasdaq swelled as investors were euphoric about the possibilities of many new tech companies that debuted on the public markets. The Nasdaq of today is very different animal compared to 2000. The tech firms are more established and better financed in 2015, and are some of the world's largest firms. "This chapter that the Nasdaq is writing is more suggestive that it's a market that, while still technology-weighted, is much more mature," said Steven Baffico, chief executive officer at Four Wood Capital Partners in New York. "The companies in it reflect that, companies like Cisco and Microsoft."

For the week, the S&P gained 1.8 percent, the Nasdaq gained 3.3 percent and the Dow added 1.4 percent.The Nasdaq Composite and S&P 500 both chalked up record high closes on Friday, propelled by strong results from tech behemoths Google, Amazon and Microsoft. The Nasdaq Composite added 0.71 percent to end at 5,092.09, its second straight record high close. The S&P 500 rose 0.23 percent to a record high close of 2,117.69 points, barely above its previous high of 2,117.39 set on March 2.

YTD Performance

The Dow Transportation index made a strong move higher last week, but could quite accelerate up to the Dow Jones Industrial Average. We are watching this chart because both indexes need to sync up to provide solid confirmation of the current trend.

Dow 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.

Despite headline results from tech stalwarts Netflix and Amazon the Nasdaq Composite BPI uptrend line flattened last week, as the recent uptrend line was broken. The index is consolidating at its high point and may simply be absorbing overbought conditions before moving higher.

NASDAQ Bullish Percent Index Daily Chart

Similar to the Nasdaq Composite BPI above the NYSE Bullish Percent Index chart below shows a broken uptrend line. The index is probably consolidating to absorb overbought conditions before the next up or down trend.

NYSE Bullish Percent Index Daily Chart

Recent analysis is still appropriate "...A negative for the overall stock market is the S&P 500 Bullish Percentage Index not being able to break out above the highs established at the beginning of March. Until the BPSPX breaks above the dotted line you can expect the stock market to continue trading range-bound..."

S&P500 Bullish Percent Index Daily Chart

The dollar has lost ground against foreign currencies the past few weeks, which typically boost commodity prices. But investors are putting their funds into equities and that is exerting downward price pressure on treasuries and gold. Investor reserves aren't available to bid up commodities as funds are being directed toward stocks during quarterly earnings season.

US Dollar Index Bullish Fund Daily Chart


Market Outlook

While markets are at record highs, March-quarter earnings of S&P 500 companies are expected to dip 1.3 percent, with revenues dropping 3.5 percent as the dollar hurts U.S. multinationals and low oil prices affect energy companies, according to Thomson Reuters data. For the start of the second quarter the graph below shows Energy stocks continuing to lead the other major asset classes. After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 20 percent in April. Explosive stock price moves from technology stocks like Amazon and Netflix has the Nasdaq sector soaring recently. Wall Street may get new clues on the timing of an interest rate hike when the Federal Reserve issues a statement following its two-day meeting on Wednesday.

April 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.

Recent analysis said "...If companies report better than expected results during earnings season look for the trend to approach the top of the trading range..." as highlighted in the updated chart below, solid quarterly numbers from technology companies jump started the market into a new uptrend with bullish momentum. If positive quarterly earning announcements continue, expect the trend to reach the March high.

MTUM Daily Chart

In the updated chart below you can see the Volatility Index has sunk to the lowest level since the end of last year. The obvious question is whether the S&P 500 index will finally break out past the high established in early march.

VIX Daily Chart

Each week the Put/Call ratio has been alternating between extreme bullishness and bearishness. The current Put/Call ratio is displaying excessive bullishness as traders are aggressively buying calls to position for the market moving higher, especially in the technology space. Trading options is a less expensive way to bet on companies that are scheduled to announce earnings.

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 4/22/2015. The AAII Neutral reading remains near historically high levels. This continues to reinforce the range-bound trading trend that has been in place the past few months.

AAII Bullish Percent Weekly

AAII Bullish, Bearish and Neutral Percent Weekly


Trading Strategy

Last week's analysis is still in play "... In the updated graph below energy stocks are blowing away the other main S&P sectors over the past month. Essentially, all the other sectors are basically breakeven the past 30 days with some groups moderately lower and others slightly higher. With the major S&P sectors struggling to gain traction and economic indicators sending mixed signals smart investors should continue maintaining both bullish and bearish positions. With this strategy you need a reasonable stop-loss plan to bail out of underperformers and ride winning trades..." The November to April best 6 months for stocks is coming to a close and that the old axiom about "Sell in May and Walk Away" is not far off.

S&P500 Sector Performance 30-Days

Feel free to contact me with questions,

 

Author: Gregory Clay

Gregory Clay
Option Strategist
High Value Option Trader
Weekly Income Credit Spreads
Easy Money Options Income

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