Despite the rising concern about the earnings season and the weaker data, stocks showed resilience to start the year. This past week the S&P 500 index closed its ninth consecutive quarterly gain, even if it was a meager 0.4 percent rise. The Dow Jones Industrial Average closed the quarter with a slight loss while the other major asset classes finished a lot stronger.
The updated chart below continues to support negative divergence as we opined last week "... the Dow Jones Industrial Average and Dow Transportation index have diverged from each other. Observe how normally these two indexes move in synch to confirm the trend. If the Transportation index does not catch up to the DJIA, that is considered a bad sign for the strength of any bullish move..."
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.
Recent comments about the Nasdaq Composite BPI stated "...shares had been overbought for a long time and were overdue for a pullback. Most of the bloodletting in technology stocks is probably ending and prices should stabilize prior to earnings season in a few weeks..." As circled in the chart below, Nasdaq prices do appear to be stabilizing. But earning results over the next few weeks will guide the next move. Positive surprises will send the Nasdaq BPI back toward recent highs, but negative results will probably continue the downtrend.
Treasury prices surged and the dollar dipped on Friday following news that U.S. employers added the fewest jobs in a month since December 2013. The stock market was closed in observance of Good Friday. Traders saw the weaker-than-expected job gains in March as a sign that the Federal Reserve might hold off raising interest rates. The rise in bond prices sent the yield on the 10-year Treasury down to its lowest level in two months.
Last week we said "...The dollar and treasuries intersected for the first time since the middle of February. If the dollar remains under pressure expect treasury bonds and gold to intertwine over the next few weeks..." The dollars' downward move leveled off in the updated chart below. Treasury bonds strengthened because investors bid up prices in anticipation of delayed rate hikes. Gold prices stabilized after rebounding higher off recent lows.
Market focus will shift from macro to micro next week, and investors betting on market gains will hope coming earnings reports will be somewhat stronger than recent disappointing economic figures. Earnings expectations have been falling sharply in the past weeks, with the most recent estimate showing a 2.8 percent decline in earnings growth. More than 80 percent of the earnings pre-announcements this season were negative, according to Thomson Reuters data, setting the bar lower than is usually the case toward the start of earnings season. In a typical quarter, about 63 percent of companies beat estimates and just above 20 percent miss. But the negativity has set the bar excessively low which may have set the foundation for the market to bounce higher.
The graph below displays the final first quarter results for each asset class. Last week we commented "...Smaller capitalization equity indexes are the leading stock performers for the first quarter. The companies comprising these indexes generate most of their sales and earnings from the domestic market, which is showing steady improvement. Larger firms rely more on overseas economies where there are questions about future growth..." The Federal Reserve has not yet raised interest rates and this low rate environment is reflected in the strong first-quarter performance for Real Estate and Treasury Bonds.
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.
The current market trend is a day trader's nirvana for those who know what they are doing. As displayed in the Momentum Factor ETF (MTUM) chart below, over the past month the general stock market has settled into a trading range. The trading range is product of daily triple-digit price moves up one day and down the next. Depending on how investors perceive upcoming companies earnings, revenue and future guidance reports will determine how prices break out of the range and whether it will be a bullish or bearish move?
The Volatility Index and S&P 500 index did not intersect last week but trended in parallel. This is consistent with neutral momentum and daily triple- digit market fluctuations.
The current Put/Call ratio indicates traders are getting nervous ahead of earnings announcements. Investors are buying an excessive amount of put contracts to protect against a market pullback.
The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result for the week ending 4/15/2015 approximates their long term averages and reinforces last week's comments when we said "...The current American Association of Individual Investors (AAII) Sentiment Survey supports near term range-bound trading. Bullish sentiment approximates the long term average. Retail investors are leaning heavily toward neutral trading and moved away from the bearish reading..." This analysis is playing out as advertised.
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. First-quarter NAAIM exposure index averaged 67.77%. Last week the NAAIM exposure index was 84.32%, and the current week's exposure is 75.88%. Money Managers have recorded their end of quarter stock holdings and are starting pare back equity assets in preparation for the upcoming earnings season.
You can see in the updated graph below how investors are rushing to a 'flight to safety' by piling into utility stocks. In previous months the Utility sector was a major laggard. Investors go for utilities as 'safe haven' during periods of economic uncertainty and trepidations about future growth. Interestingly the next best performing S&P sector over the past month is another group that has been slacker lately. Energy companies have made all kinds of headlines the past six months related to layoffs and financial losses due to depressed energy prices. The Energy sector is enjoying a nice bounce as prices have bottomed out. The Materials sector is now the worst performer due in part to the strong dollar impeding companies' efforts to export supplies overseas.
Our recent advise is still appropriate "...With the major stock indexes falling to neutral readings and economic indicators struggling, options traders should continue to evenly weight between bullish and bearish positions. Fed-generated momentum could continue to push stocks higher, but slowing growth and geopolitical events could cause the market to do an about-face very quickly..."
Feel free to contact me with questions,