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Market Summary

Stock market action so far this year has been weak and mostly negative. This action has been fueled by plummeting oil prices, weakness overseas, confusion about the Fed's next move and it's bellowing about low inflation. Santa's absence and a down January are bad omens, but they do not guarantee unmitigated market catastrophe. Lower oil and energy prices, while a drain on energy companies and the people they employ, it adds a lot of money back in the pockets of consumers to put into the economy and the stock market. Also, European quantitative easing funds are likely to find their way into the U.S. stock market where prospective returns are greater.

The U.S. stock market ended a rough month this past Friday, delivering its third loss in five days and extending its declines for the year. The S&P 500 index dropped 3% in January, its worse monthly performance in a year. While the U.S. economy continued showing signs of strength, energy companies suffered from a sharp drop in oil prices and some big multinational companies saw their earnings dinged by a stronger dollar. Investors also sifted through the latest batch of corporate earnings news, and the results were mixed.

As we said recently "...Gold Mining stocks are blasting off to start the year and Treasury Bonds continue to move higher as they have since the beginning of last year. Equity indexes are barely breaking even and how they end up at the end of January is considered a "barometer" of how they will end the year..."

January 2015 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 higher as more and more stocks are purchased.

Last week we stated "...the S&P 500 BPI is breaking above its downtrend line and starting a new uptrend. The market needs to finish the month on a high note to confirm a bullish breakout..." the current chart shows the breakout failed and converted into a tight trading range. The question is whether the break out of the trading range will be to the upside or downside.

S&P500 Bullish Percent Index

The updated chart below confirms recent analysis is still valid "...As circled in the updated chart below the dollar, treasuries and gold remain converged at high levels. Investors are expressing doubts about the global economy and are being cautious about overindulging in the stock market. This cautiousness is leading investors to park additional funds into commodity assets..."

US Dollar Index Bullish Fund


Market Outlook

As reported by the Stock Barometer In pre-election years, February's performance generally improves with average returns all turning positive. NASDAQ performs best, gaining an average 2.4% in pre-election-year Februarys since 1971. Russell 2000 is second best, averaging gains of 2.1% since 1979. DJIA, S&P 500 and Russell 1000, the large-cap indices, tend to lag with average advances of around 1.0%. However, February does not have a solid track record when full-month January was negative. Going back to 1950, DJIA has declined 23 times in January, S&P 500 25 times and NASDAQ (since 1971) 15 times. Regardless of index, the following February was down more often than up and the average performance was solidly negative.

Down Januarys and February's Performance

We recently commented "...Next week's performance is considered critical as a prognosticator of the market's expected 2015 performance. According to the Stock Trader's Almanac January has quite a legendary reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations typically propels stocks higher...January Barometer simply states that as the S&P goes in January so goes the year...The long-term record has been stupendous, an 89.1% accuracy...The market's position on January 31 will give us a good read on the year to come...No other month can match January's predictive prowess..." According to the Stock Barometer the January Barometer indicator is negative again for the second year in a row and 5 of the last 8 years. Since the start of the secular bear market in 2000 January has been down 7 of the last 15 years with an average loss of 1.2% on the S&P and Dow and a fractional gain of 0.1% for NASDAQ. Five of the indicators eight major errors have occurred in this 15-year timeframe as mentioned above.

All of the major errors have occurred in secular bears, so if we still are in a secular bear market, which we contend we are; perhaps we can find some solace in this fact. We are continually reevaluating the efficacy of the January Barometer as we do with all indicators, market cycles and seasonal patterns. But it is way too early to relegate the JB to the indicator graveyard. Its 754 batting average is solid. Also of note, this is the first time since 1950 our January Indicator Trifecta has registered a down Santa Claus Rally, an up First Five Days and a down January Barometer.

Last week we said, "...Commodities continue to be the top performers in the first-quarter. Fourth-quarter revenue and earnings results have not impressed investors, which are suppressing the equity indexes..."

January Performance 2

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 said, "...The current trend is pointing towards stock indexes moving back toward recent highs..." As noted, recent upward momentum converted into a new downtrend. The most probable near-term outcome is range-bound trading with triple-digit market fluctuations.

MTUM Daily Chart

Volatility is back and may be here to stay. Expect more of it moving forward this year and beyond. As seen in the graph below, the Volatility Index (VIX) and S&P 500 Index crossed last week. The VIX ended higher as the S&P 500 had a down week. Energy companies start reporting fourth-quarter revenue and earnings numbers next week, if they disappoint it is reasonable to expect the VIX to continue higher.

VIX Daily Chart

Our previous Total Put/Call Ratio analysis said "...investors are worried about a market pullback and loaded up on put option contracts. The current ratio is excessively bearish and reflects money managers protecting their long positions in the event traders respond negatively to fourth-quarter earnings and revenue numbers..." Investors remain bearish buying more puts than calls in response to higher volatility.

Total Put/Call Ratios

We have been pointing how the American Association of Individual Investor Survey (AAII) survey continues to prove its worth as contrarian indicator. Last week we stated "...as retail investors drastically reduced their future bullish outlook the stock market jumped higher..." This past week you can see that as individual investors' bullishness surged but the stock market responded with a losing week.

AAII Sentiment

AAII Sentiment History

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 76.23%, and the current week's exposure is 92.62%. Money managers drastically increased their equity exposure on the stocks that are exploding during fourth-quarter earning season.

NAAIM Exposure Index

NAAIM Number


Trading Strategy

The equity market is suffering under the weight of concerns about global economic growth and mediocre fourth-quarter earnings reports. The graph below is the 30-day return for the main 10 S&P equity sectors. You can see virtually all the groups are down for the month with only Healthcare and Utility sectors barely above water.

Our index indicators are giving bearish readings, which is more in line with the general market trend than the occasional bullish readings such as we saw last week. As we suggested might happen, the Dow has fallen into a bearish "lower highs, lower lows" chart pattern. Our internal indicators have also fallen back into more bearish modes, so options traders should continue to add bearish positions. Against the current whipsaw action, it is best to take smaller positions than you normally do, but don't sit out completely.

S&P Sector January Performance

Feel free to contact me with questions,

 

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