Stocks kicked off the week on a strong note, driving the NASDAQ to its latest record high and bringing the S&P 500 within shouting distance of a record high. But it's been downhill since then. Mixed company earnings results increasingly weighed on stocks as the week wore on. The Dow Jones Index fell back into negative territory for the year. The S&P 500 index has now lost ground four out of the last five weeks. The tech-focused NASDAQ remains the best-performing index for the year. It's up 7.4%, compared with 1% for the S&P 500. New signs pointing to a slowing of China's economy also added to investor jitters, bringing down the price of oil and other commodities. Adding to the concerns regarding lukewarm earnings, the S&P 500 is relatively expensive, trading at 16.9 times forward 12 months' earnings, above the 10-year median of 14.7 times, according to StarMine data.

For the week, the S&P 500 fell 2.2% and the NASDAQ slid 2.3% in their largest weekly drops since the last week of March. The 2.9% fall on the Dow was the largest for any week since January.

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.

NASDAQ stocks got boosted a few weeks ago by explosive upward price moves from tech stalwarts Netflix and Google. But the advance was not broad based, as other technology shares couldn't keep up the pace. As displayed in the chart below, the Nasdaq Composite BPI has resumed its downtrend after the brief countertrend bounce.

Last week we said "...the S&P 500 index is leading equity markets higher. The market's current upward move probably will not stall out until the S&P's advance decelerates..." This analysis is confirmed in the updated chart below as the S&P 500 fell along with the other major indexes.

As circled in the chart below both the DOW Industrials and Transports crashed simultaneously last week. This is considered a strong negative for the near term market because it confirms the strength of the current downtrend.

Treasury yields, which move inversely to bond prices, fell throughout the week and their descent persisted on Friday as investors pulled money out of equities and bought safe haven assets like Treasuries. Falling long-term yields are mainly due to the disinflationary effect of the commodity slump, because long-term yields are most sensitive to inflation whereas short-term yields are more sensitive to Fed rate-hike expectations, said Ilya Feygin, managing director at WallachBeth Capital. Lower commodity prices put upward pressure on the dollar, which the Federal Reserve has stated is one of its main concerns ahead of the first interest-rate increase in nearly a decade. "Lower commodities strengthen the dollar and a stronger dollar keeps the Fed away," Feygin said. Gold has slid to its lowest level since early 2010 as fresh strength in the dollar prompted another wave of selling, pushing the precious metal to its biggest weekly loss in nine months.

Market Outlook

Of the 187 companies in the S&P 500 that have reported earnings so far, about 72% of them have delivered results that beat Wall Street estimates, according to S&P Capital IQ. That's better than the historical average of 66%. "Generally most companies are seeing modest growth, but nothing to write home about," said Brad Sorensen, managing director of market and sector analysis at Schwab Center for Financial Research. Another 163 companies, or a third of the S&P 500, are due to report earnings next week, including Facebook, Twitter and Exxon Mobil. Economic news ramps up this week. Manufacturing opens the week with durable goods where orders have been struggling. Housing and the consumer, two positives for the economy, are Tuesday's focus with Case-Shiller home price data and the consumer confidence report. Wednesday morning, pending home sales will offer leading indications on housing but attention will be on the mid-afternoon FOMC announcement and updates on the Fed's view of the economy and monetary policy. Gold is expected to struggle for the rest of this year after sliding to five-year lows on expectations of higher U.S. interest rate. As gold prices slump, holdings of the world's biggest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD), fell to the lowest price since September 2008. The fund had its biggest weekly outflow since early May.

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.

As noted in the chart below, the Momentum Factor ETF confirms the market is bumping into upside resistance. Also the current overbought level is highlighted where stock prices normally pull back, and already momentum is starting to decline.

The CBOE Volatility Index (VIX) is known as the market's "fear gauge" because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends VIX higher. Last week we commented "...the VIX can become a contra-indicator when it gets too high or too low..." The VIX contra-indicator signal was confirmed as the S&P 500 had one of its worst weeks of the year as the VIX bounced from its lows.

For most of the past two weeks traders were buying a high number of calls apparently anticipating the market to keep advancing. As the market closed lower the last four days of the week, traders suddenly piled into puts as evidenced below.

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 7/22/2015. The most recent AAII survey showed 32.50% are bullish and 25.60% bearish while 41.90% of investors polled have a neutral outlook for the market for the next six months. As confirmed in the graph below, individual investors have been primarily neutral toward the market since the beginning of April. The move away from excessive bullishness or bearishness is reflected in most of the major indexes being stuck in a trading range for most of the year.

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. 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. The current survey result is for the week ending 7/22/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 52.24%, and the current week's exposure is 52.34%. One of the primary reasons the recent market rally stalled out quickly is because professional money managers remain on the sidelines. Without money managers' participation, when stock prices drop there are more sellers than buyers, which is why recent pullbacks have been so fast and hard.

Trading Strategy

Last week we warned "...So beware the summer rally hype as it is usually the smallest of the year and can fade just as quickly as it began..." and right on queue stocks fell the past four trading days. Disappointing quarterly results and outlooks from several companies pulled the major stock sectors sharply lower last week. Stocks in the energy and materials sectors weighed down the market after weaker-than-expected economic data from China and the euro zone raised concerns about global growth. Oil prices hit their lowest since March. U.S. oil prices entered in bear market territory on Friday, settling with a weekly loss of more than 5% on the heels of a continuing glut of crude supplies, a rise in domestic oil-drilling rigs and China-demand worries. Oil futures are off about 22% since their $61-a-barrel highs in June, fitting the bill for a bear market. Right now the market is setting good risk/reward opportunities for bearish trading strategies.

Feel free to contact me with questions,