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Market Summary

A surge in oil and gas companies pulled the stock market out of a five-day slump on Friday, as the price of crude swung higher. The rally came at the end of another rough week for the market. Since the start of the year, worries about the strength of the global economy and falling oil prices have weighed major indexes down. Even with its strong performance on Friday, the S&P 500 still lost 1 percent for the week, its third straight weekly drop.

As seen in the graph below, Gold Mining stocks are blasting off to start the year. The primary reason for gold's explosion is the Swiss National Bank disassociating the franc from the euro. This surprise move suggests the Swiss currency might be pegged to gold. Also, the impact of lower fuel prices for gold miners should not be overlooked. Gold Miners benefit from lower fuel prices.

2015 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 weak and moving down, the BPI should also be moving down as more and more stocks are sold off.

As seen in the updated chart below, the S&P 500 BPI has broken out of its range bound trend into a downtrend. Also, the momentum indicator is turning bearish. As you can see in the chart, the last time the index fell this fast is when the market suffered a significant pullback in the middle of October.

S&P500 Bullish Percent Daily Chart

After the Swiss National Bank shocked financial markets by scrapping the franc's peg to the euro, gold surged higher on speculation that the franc's rally could spark a commodities countertrend that would ignite a raft of short covering across the commodities complex. The US Dollar continued its run higher to end the week while Treasuries added another leg up to new all-time highs. Plus Gold joined the party by pushing higher all week. Last week we pointed out "...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..." As circled in the update chart, the dollar, treasuries and gold are converging at their highest levels.

UUP Daily Chart


Market Outlook

Last week we said, "...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, Gold is coming on strong to start the first-quarter 2015. Gold's performance is surprising considering interest rates are expected to remain extremely low for the foreseeable future. The low rate environment is benefitting reasury Bonds and Real Estate which are the only other sectors in the black for the year.

2015 Indices 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 Momentum Factor ETF (MTUM) chart analysis is still valid "...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

As evidenced in the current Volatility Index (VIX) chart below you can see volatility exploded higher last week as the S&P 500 index was down - Friday was the only day stocks closed higher.

VIX Daily Chart

The updated Total Put/Call Ratio shows investors buying more calls than puts. Investors appear to be buying calls as inexpensive way of investing in stocks ahead of fourth-quarter earnings announcements.

Put/Call ratios

The American Association of Individual Investor Survey (AAII) survey confirmed its reputation as a reliable contrarian indicator. As individual investors reported excessive bullishness last week, the stock market responded with 4 consecutive losing days with all the major indexes down for the week.

Weekly Sentiment

Weekly Sentiment Table

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 71.11%, and the current week's exposure is 87.13%. Expect money managers to continue picking up shares of companies with better than expected fourth-quarter earnings results.

NAAIM Exposure Index

NAAIM Number


Trading Strategy

Exxon Mobil, Chevron and other energy companies led all 10 sectors of the Standard & Poor's 500 index to gains, climbing 3 percent. Oil's seven-month slide had cut its price by more than half. The Utility sector remains the best performing group over the past month, but with earnings season heating up, Consumer Staples and Healthcare and Materials are also performing well. Financial stocks are the biggest loser as disappointing fourth-quarter earnings reports is hurting this group.

S&P500 Sector Performance

Feel free to contact me with questions,

 

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