The Dow Jones Industrial Average closed out the week with a bang, hitting the 18,000 level due to a mergers & acquisition inspired by General Electric Company. Also, the S&P 500 Index flirted with the key 2,100 level, while the Nasdaq Composite rallied on strength among biotechnology shares. For the week, the Dow is up 1.6 %, the S&P 500 up 1.7 %, and the Nasdaq up 2.2 %. As you can see in the graph below, for the first time since the middle of March, all the major asset classes are in the black year-to-date.
The question in the updated chart below is whether this is the beginning of positive divergence between the Dow Jones Industrial Average and Dow Transportation index? Recent analysis said "... the Dow Jones Industrial Average and Dow Transportation index have diverged from each other...If the Transportation index does not catch up to the DJIA, that is considered a bad sign for the strength of any bullish move..." If the Transportation index continues surging higher this provides solid confirmation that stocks current up trend has legs.
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, "...earning results over the next few weeks will guide the next move. Positive surprises will send the Nasdaq BPI back toward recent highs..." As the upward trend circled below suggests, investors are betting on good quarterly earning numbers.
Gold retreated from a seven-week high as the dollar strengthened and investors sold metal from bullion-backed funds. "We may have seen a bit of ETF liquidation as investors took profit on the strong advances we have seen in the previous sessions," Thorsten Proettel, a commodities analyst at Landesbank Baden-Wuerttemberg, said by phone from Stuttgart, Germany. "Gold is often viewed as a currency hedge against the dollar, so the stronger currency may also have played a role." As observed in the updated chart below the dollar's rise back toward its highs is exerting downward price pressure on treasury bonds and gold.
Wall Street is greeting what is expected to be the worst earnings season since 2009 with a gigantic shrug. Wall Street is temporarily putting the U.S. Federal Reserve and macroeconomic policy on the back burner in favor of a focus on individual company results and forecasts for a pulse on the economy's health. Profits of companies on the S&P 500 are projected to have declined by 2.9 percent in the first three months from a year ago, according to Thomson Reuters data. "The market will take a break from Fed watching and actually focus on fundamentals," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York. Energy companies will likely be hit by a dramatic drop in oil prices since last June. As well, a strong U.S. dollar is expected to eat into the earnings of companies with international exposure as they convert their profits back into dollars. In energy, the worst-performing sector, companies may see first-quarter earnings plummet 64.3 percent from the same quarter a year ago, according to analyst estimates. Despite the mixed macroeconomic reports, there are reasons why stocks should rise during earnings season, said Bruce Zaro, chief technical strategist at Bolton Global Asset Management in Boston.
For the start of the second quarter the graph below shows Energy and Nasdaq stocks are two of the leading performers. These two groups were beaten down to oversold levels weeks ago and now investors are bidding on these stocks again as they became undervalued. Treasury bonds remain strong primarily due to the Federal Open Market Committee (FMOC) indicating no hurry with raising interest rates, which depresses the value of bond investments.
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 Momentum Factor ETF (MTUM) chart below confirms stocks are in a solid uptrend. If companies report better than expected results during earnings season look for the trend to approach the top of the trading range.
The updated chart below signals a strong bullish trend. As the volatility index sinks toward the lowest level of the year the S&P 500 index returns to recent highs. This appears to be setting up for the S&P index to threaten its all-time high mark.
The current Put/Call ratio has moved to excessive bullishness. Traders are buying more call contracts versus puts to position for a stock market advance as quarterly earnings season progresses.
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 4/10/2015 reinforces our recent analysis suggesting a range-bound neutral trading trend.
With a mixed bag of recent economic data, many market participants are taking a neutral stance going into earnings season, said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco. "They're not negative, and they're not particularly bullish," Lip said. "They're positioning more neutrally due to the fact that some of the economic data we've had pretty recently has been flattish."
As we said last week "...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..." The technology sector, which had been leading for most of the year, has been in the doldrums over the past month. We are getting good results from oversold assets that are now moving higher during the current market bounce back.
Feel free to contact me with questions,