After a sluggish start to the year, stocks rebounded sharply in February. The S&P 500 ended February with a gain of 5.5 percent, its best month since October 2011, while the Nasdaq rose 7.1 percent, its best monthly performance since January 2012. The strong gains have pushed the Nasdaq within striking distance of the 5,000 mark and record highs set in March 2000. The Dow rose 5.6 percent in the month, its best monthly performance since January 2013. Volume was again low. About 6.5 billion shares changed hands on U.S. exchanges, below the 6.8 billion average for the month, according to BATS Global Markets. Gold stocks moved back up as investors debate when interest rate will rise following Fed Chairwomen Janet Yellen's congressional testimony this past week. All the major stock indexes remain in the black for the year.

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.

As noted in the updated chart below we are still waiting on the S&P 500 Bullish Percent Index to breakout similar to the other indexes. Until this occurs, the stock markets current bullish move is tenuous and may reverse soon.

As indicated in the chart below the Nasdaq and Mid-Cap stocks are leading the market higher with strong bullish breakouts.

In the NYSE BPI chart below the large cap index finally did a bullish breakout but now the trend appears to be moving sideways.

Price movement between the dollar and commodity assets remains correlated. Observe in the updated chart below treasury securities and precious metals began moving higher as the dollar pulled back a little. The dollar ended the week near recent highs and this is reasserting downward pressure on commodity investments.

Market Outlook

So far in the first quarter of the year, investors have developed an appetite for riskier stocks. As evidenced in the graph below, Nasdaq 100 and MidCap 400 index are far and away the leading stocks for the quarter. Larger cap stocks with extensive exposure to overseas markets and energy companies are lagging these leading indexes.

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 "...a confirmed breakout. Next we need to see if the uptrend continues or are we close to a near-term market top. The best bet is a market top to establish a new resistance level..." As circled in the chart below stocks are displaying a topping action that precedes the next move higher or lower. Also, noted is declining momentum which supports the contention an upward price move is stalling out

Last week's analysis stated "...Volatility index is contained near the bottom of its recent trading range...If this complacency continues the VIX is due to break through the bottom if it's trading range..." The updated chart below highlights the Volatility Index breaking below its recent trading range. Expect the VIX to continue falling to its December lows while the S&P 500 index is stabilizing at its highs.

Last week we said, "...Put/Call ratio shows investors aggressively buying calls anticipating the stock market will continue higher. This ratio is exceptionally bullish and might be a sign the market's current uptrend is due for a pause..." In the updated ratio below, investors have backed off buying calls as the market signals a top.

The current American Association of Individual Investor (AAII) survey results remain overly bullish, primarily at the expense of the bearish reading, which is extraordinary low. The major indexes have crawled to new highs, but the current AAII numbers support other signals indicating a near-term market top.

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 87.91%, and the current week's exposure is 99.23%. Money managers are maxing out their equity exposure as earnings season winds down. Also, institutional investors don't want to be showing a lot of cash on the books when they report quarterly results at the of the month.

Trading Strategy

As the earning season winds down, continuing to invest in the leading companies in the sectors that stand to benefit most from the improving domestic economy is a good move. As displayed below in the S&P sector graph, over the past month Cyclicals, Technology and Materials sectors are the leading groups. These are the primary sectors that should continue to do well during the recovery phase of a cyclical economy. As the U.S. economic recovery continues, stocks of the top companies in these cyclical sectors can be expected to outperform. Conversely, Utilities have converted from the top-performing sector to the worst. Safe-haven utility stocks have lost their luster as investors bet on whether the U.S. Federal Reserve will raise interest rates later this year.

Feel free to contact me with questions,