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Financial Sector Reports Record Profits

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Market Summary

U.S. stocks fell on Friday following a two-day rally as December's jobs report gave a mixed view of the economy, with financial shares leading the market lower. For the week, the Dow and Nasdaq were down 0.5 percent, while the S&P 500 lost 0.6 percent as all three major indexes fell back into negative territory for 2015. Friday's decline followed two days of more than 1 percent gains for the market, a rally fueled in part by minutes from the last Federal Reserve meeting, which reassured investors the central bank was in no hurry to start raising interest rates.

As seen in the graph below, over the last six months Treasury Bonds are outperforming all the major equity indexes. Conversely, Gold Mining stocks are in deep bear market territory as the bottom has fallen out recently.

6-Month Sector 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 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 up as more and more stocks make the "buy list." As seen in the chart below, the S&P 500 BPI has been flat for the past month, which confirms the index's range bound trend.

The updated chart below attest to our recent analysis stating "......the trend is probably converting into sideways action because prices should consolidate going into year-end.... prices have converted to a flat trend with neutral momentum......"

S&P Bullish Percent Daily Chart

Federal Reserve Board members recent comments substantiated signals indicating interest rates will remain low for the foreseeable future and contributed to the upward move in treasuries and the dollar. What is unique about the current situation is precious metals are holding up even as the dollar strengthens.

US Dollar Daily Chart


Market Outlook

U.S. stocks posting a third straight year of 10%-plus gains is the first time it has scored a performance hat trick of that magnitude since the last great bull market in the late 1990s and just the fourth time in 84 years. According to the Stock Traders' Almanac, in all past occurrences the year after the third year of double-digit gains was also up double-digits for an average gain of 23.1%. In 84 years, the S&P 500 has advanced 56 times or 66.7%. Of those 56 advancing years, 43 were up double-digits or 76.8%. Double-digit annual gains are actually rather common. However, consecutive streaks of double-digit gains are not. When they occurred in the past, they were confirmation of solid economic growth. The most recent streak has not been accompanied by the robust growth of the past. Instead, growth has been relatively tepid and monetary policy has been enormously accommodative.

Looking ahead to pre-election year 2015, history suggests another double-digit S&P 500 is quite possible as all previous 3-year streaks were followed by a fourth double-digit gain. Furthermore, monetary policy remains highly accommodative with the European, Japanese and now Chinese Central Banks providing stimulus. Should this stimulus prove effective, global growth could accelerate and the S&P 500 could perform similar to the average performance of past fourth years (1945, 1952 and 1998)? At the very least, bullish pre-election year forces are likely to keep 2015 in the black.

Last week we pointed out "......Since 1929, January has been one of the seasonally strongest months for the S&P500, with average and median price returns of +1.3%/+1.6% vs. average/median returns of +0.6%/+0.9% for all months. January has also had the second highest percentage of positive returns (64%) after December (75%). Returns have tended to be even stronger following years where the S&P 500 has double-digit gains, as it was last year. In these years, returns have averaged +1.8%, with positive returns 68% of the time......" Fourth-quarter earnings season officially kicks-off next week and we can expect continued triple-digit up and down price moves. Most of the technical indicators that we follow point toward the market continuing to fluctuate in a trading range.

As seen in the graph below, Treasury bonds are starting out the first-quarter as the best performing asset class in response to several Federal Reserve members signaling continued suppressed interest well into the year. The Real Estate stocks are also starting out strong; as this is another sector the benefits from low rates. Gold is performing surprisingly well considering the dollar is at stratospheric levels.

30-Day Sector 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.

In the updated Momentum Factor ETF (MTUM) chart below we highlight stocks settling into a trading range with flat momentum. It is reasonable to expect stock prices to continue fluctuating up and down in a trading range as investors absorb fourth-quarter earnings and future guidance announcements over the next month.

MTUM Daily Chart

Last week we said "......For the first trading day of 2015, the VIX pulled back as the equity market stabilized......" In the updated Volatility Index (VIX) chart below you can see the index continued down even when stocks retrenched last week. Expect the VIX to remain subdued depending on investors' response to fourth-quarter earnings announcements that begin next week.

VIX Daily Chart

Last week's comments "...... excessively high Put/Call ratio numbers derive from investors buying puts at the end of the year to protect gains on long positions......" The updated Total Put/Call Ratio indicates investors are equally bearish and bullish. The current ratio supports the current range bound trading trend.

Total Put/Call Ratios

We have been pointing out how the American Association of Individual Investor Survey (AAII) survey result had gotten excessively bullish. As a contrarian indicator this signaled that stocks were due to pull back as they did last week. The current reading approximates historical norms, which supports the current range bound trend.

Sentiment

Sentiment Numbers

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by association members. The green line shows the close of the S&P 500 Total Return Index on the survey date. The purple line depicts 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. Fourth-quarter NAAIM exposure index averaged 67.77%. Last week the NAAIM exposure index was 95.86%, and the current week's exposure is 71.11% as we said last week "...... expect money managers to pull back on their equity exposure over the next few weeks. They will need to have some funds available when corporate earnings season arrives......"

NAAIM Exposure Index

NAAIM Numbers


Trading Strategy

The plunge in Energy stocks has been one of the main topics of discussion on financial news, but over the past month share prices appear to be trying to stabilize. Monitoring energy companies whose shares might lead a move higher when the energy sector recovers is probably a smart long term planning strategy. The Utility sector remains the best performing sector over the past month, but with earnings season starting up, bidding on Consumer Staples and Cyclicals could provide quick gains as the U.S. economic recovery moves forward. Financial stocks are down over the past few weeks because a lot of market pundits anticipate disappointing results when this sector starts reporting fourth-quarter earnings next week.

S&P 30-Day Sector Performance

Regards,

 

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