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Market Summary

All 30 of the Dow's components ended in the red, paced by a 2.4% loss at Johnson & Johnson, for the week, the index retreated 1.5%. The S&P 500 Index dropped back below 2,100, finishing the week down 1.7%. The Nasdaq Composite skidded down .7% to end week. In the updated chart below gold stocks were far and away the best performers for most of the year, then all of a sudden, over the past week the bottom fell out of gold and these shares are in a brutal correction phase.

YTD performance Chart 1

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's commentary surmised "... we are still waiting on the S&P 500 Bullish Percent Index to breakout similar to the other indexes...the stock markets current bullish move is tenuous and may reverse soon...large cap index finally did a bullish breakout but now the trend appears to be moving sideways..." As evidenced in the updated Bullish Percent Index chart below, most of the major indexes have converted into range-bound trading. The relatively tight range suggests that very soon, prices will break out either higher or lower.

S&P500 Bullish Percent Daily Chart

Similar to the S&P 500 Bullish Percent Index above, the Nasdaq Composite is contained in a tight trading range. The near term probability is that the price breakout will be to the downside.

NASDAQ Bullish Percent Daily Chart

The dollar has been steadily rising, largely because America's economic outlook is stronger than those of other big countries and bond buyers expect the Federal Reserve to soon start raising interest rates for the first time since 2006. The dollar's rise culminated with the index that tracks the greenback against major currencies touching an 11-year peak. Last week's comments are still in play "...Price movement between the dollar and commodity assets remains correlated...the dollar ended the week near recent highs and this is reasserting downward pressure on commodity investments..."

UUP Daily Chart


Market Outlook

Next week, on March 10, this bull market will be starting its seventh year. It arrives at this milestone by avoiding a 20% (widely accepted threshold for a decline to be called a bear market) or greater decline, which was narrowly avoided in 2011 when S&P 500 dropped 19.4% from its April closing high to its October closing low. So far DJIA has gained 179.3%, S&P 500 213.0% and NASDAQ a whopping 294.8% at their closing highs yesterday. In the tables below, you can see the current bull market has lasted longer and returned more than the historical averages across all three indices. 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. As market pundits' debate how soon the U.S. Federal Reserve will start raising interest rates, rate sensitive asset classes are going underwater.

YTD Performance Chart 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.

Recent Momentum Factor ETF (MTUM) chart analysis is confirmed as we said "...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... stocks are displaying a topping action that precedes the next move higher or lower...noted is declining momentum which supports the contention an upward price move is stalling out..." The current downtrend is strong and we need to look for signs the sell off is dissipating?

MTUM Daily Chart

The updated chart below shows the Volatility Index breaking out of a downtrend and turning higher as investors sought protection during last week's market sell off. The chart clearly illustrates the adverse relationship between the two as you can see the S&P 500 index heading down and the Volatility Index climbing up.

VIX Daily Chart

Recent analysis is confirmed when we said, "...ratio is exceptionally bullish and might be a sign the market's current uptrend is due for a pause... investors have backed off buying calls as the market signals a top..." The current Put/Call Ratio has an exceptionally high number of puts as traders purchased downside protection during last week's market pullback. This ratio is overly bearish and suggests the current stock downturn might be due for a pause.

Tptal Put/Call Ratio

Last week's analysis proved to be on point as we stated "...major indexes have crawled to new highs, but the current AAII numbers support other signals indicating a near-term market top..." The current American Association of Individual Investor (AAII) survey bullish result approximates historical norms while the bearish reading remains extraordinarily low. The higher than normal neutral percent supports our analysis indicating near-term range-bound trading.

AAII Sentiment

Weekly Sentiment

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 99.23%, and the current week's exposure is 92.15%. Institutional Investors will maintain high equity exposure because they don't want to be showing a lot of cash on the books when they report quarterly results at the end of the month.

NAAIM Exposure Index

NAAIM Number


Trading Strategy

You can see in the graph below how Utility stocks have fallen off the map. Investors prefer utility companies during a low interest rate environment, but about a month ago they started dumping these stocks on speculation the U.S. Federal Reserve might start raising rates. This past Friday's strong jobs report added fuel to the fire about how soon the Fed will raise rates and traders responded by dumping utility shares at every opportunity. Utility stocks were the toast of the party a few months ago and investors who were smart enough to short these shares at that time are making a ton of money. Healthcare was the other recently red hot sector that has fallen off. Investors have been selling healthcare stocks over concerns about the outcome of the recent U.S. Supreme Court hearing on Obamacare subsidies. Due sometime in June, an adverse ruling is expected to have a chilling effect on the Affordable Care Act (ACA) and significantly hurt healthcare providers' bottom line. As the U.S. economy continues to signal improvement cyclical stocks should remain a leading sector. The Technology sector is another top performing group as these stocks are benefiting from some strong quarterly earnings and revenue data.

S&P500 Sector Performance 30-Day Chart

Feel free to contact me with questions,

 

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