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Market Summary

June started off strong this week before faltering on shaky economic news out of a Greece and a struggling domestic economy. With nearly half the year in the books, the S&P 500 Index has only had one winning streak as long as four days this year, and just one losing streak that long - a five-day skid in mid-January. The benchmark S&P 500 settled below a key technical level of its 50-day moving average for the first time in a month. For the week, the S&P 500 fell 0.7%, its second straight week of losses, the Dow was down 0.9% and the Nasdaq was down 0.03%.

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.

The NYSE Bullish Percent Index (BPNYA) chart shows the large cap index broke below its recent tight trading range. Expect the DOW index to find support at its March low. Look out below if the March support level fails because the next stop is the February lows.

Last week we said, "...the divergence between the Dow industrials and the transports is the widest it's been in three years..." The updated chart shows the DOW Industrials in a free fall as Transports bounced higher. Expect both indexes to converge and start trending in the same direction.

A burst of hiring last month led to a drop in the bond market as investors placed bets that the Federal Reserve would raise interest rates later this year. Traders reacted immediately to the report, dropping U.S. government bond prices as yields shot up. The dollar gained strength against the Japanese yen and other major currencies. Low inflation expectations are keeping gold subdued.

Market Outlook

June is historically one of the toughest months for markets. In fact, it ranks second worst month of all time! One looming concern is the steady increase in investors using borrowed money to buy stocks. Total margin debt hit a record $507 billion in mid-April, according to the most recent figures from the New York Stock Exchange. High levels of margin debt do not necessarily mean a selloff is coming. But they can make selloffs more violent should volatility increase. "Margin debt is usually at record highs when markets peak, but it's also usually at record highs in the months and years leading up to a market high," said Paul Hickey of Bespoke Investment Group. European Central Bank President Mario Draghi told us "we should get used to periods of higher volatility" which he assures us is common when interest rates are low. It seems as if Treasuries, Real Estate and Gold are already sinking as a precursor to action by the Fed. In the second-quarter chart below, Nasdaq shares remain the best performers. This is mostly due to biotechnology stocks being a major component of the Nasdaq index and these shares have been soaring all year.

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 updated chart below highlights stocks current downtrend. A breakout was inevitable from stocks tight trading range over the past few weeks. Also circled in the chart is the start of bearish momentum. The next question is whether the trend will convert into a new trading range or drop all the way to long-term support. An increase in market volatility could quickly worsen market sentiment, which could become amplified by high margin levels. Since the market has been in a trading range for several weeks, and some analyst worry that a break lower could be violent.

As highlighted in the Volatility Index (VIX) chart below the index has been contained under relatively low resistance all quarter. Option Volatility ground slightly higher for the week. Though all signs point to some resolution in Greece, there is still uncertainty and doubt, and that brings volatility. As a result, the VIX rose sharply this week, and it now hovers near 15%. The CBOE Volatility Index (VIX) rose only 2.6% but experienced some big swings despite the modest gains. "There's complacency, more complacency than I'm comfortable with. It makes me nervous," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York. "Market participants don't seem prepared for an uptick in volatility, which is consistent with high levels of margin debt."

The current Put/Call ratio signals investors are equally bearish and bullish.

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 is for the week ending 6/3/2015. At the moment, individual investors lack any particularly strong inclination to buy or sell, suggesting uncertainty about where stocks are going. The most recent AAII survey showed 48% of investors polled have neutral outlooks for the market for the next six months, while 27.30% are bullish and 24.60% bearish. The bullish figure has been below 30% for five weeks, the longest since 2003, while the neutral figure has exceeded 45 percent for nine weeks, longest in the 28-year history of the survey.

The Nation Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue bars depict a two-week moving average of the NAAIM managers' responses. NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. 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 83.02%. Last week the NAAIM exposure index was 65.50%, and the current week's exposure is 71.07%. Money Managers' remain cautious about investing in stocks. Since hitting record levels two weeks ago, the U.S. stock market is struggling for direction.

Trading Strategy

Stock investors are expected to tread carefully next week, as speculation about the timing of a U.S. Federal Reserve interest rate hike adds to concerns about valuations. The S&P Utilities index tends to fall when bond yields rise, is down and remains one of the weakest-performing sectors. The U.S. benchmark bond yield jumped to its highest since October, with the Energy sector following the expected negative path and Industrials flat. Over the past month Health Care is the strongest as this group is actually the best performing S&P sector for the entire year. Heath Care sector gains are being driven by exceptional gains among biotechnology stocks. Financial stocks might be a good near term bet if rates rise as pundits expect.

Feel free to contact me with questions,


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