It was a back-and-forth week for the stock market. Wall Street ended on a sour note on Friday as a drop in energy stocks eclipsed wage data that supported expectations that the U.S. Federal Reserve might hold off on an interest rate.
For the week, the DOW rose 0.7%, the S&P 500 added 1.2% and the Nasdaq increased 0.8%. For July, gains for the Dow, S&P and NASDAQ were 0.4%, 2% and 2.8% respectively.
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 we commented "...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..." The updated chart below confirms that essentially there are only a few stocks keeping the NASDAQ index elevated as the BPCOMPQ is in a firm downtrend.
The S&P 500 Bullish Percent Index (BPSPX) remains contained below its downtrend line. The major indexes will not reach new highs until the BPSPX breaks out above the downtrend.
Recently we have been discussing how the S&P 500 index is leading the market higher during uptrends. The current chart confirms this analysis is valid as the S&P led the other major equity indexes higher at the start of the week. However at weeks end the S&P stalled and the other indexes also topped out. The current move probably signals a near-term range bound trend.
As circled in the chart below both the DOW Industrials and Transports are moving in tandem. Both indexes had a countertrend bounce last week but ended resuming the downtrend. The current chart supports a market top and probable range-bound trading environment.
Last week we reported "...investors pulled money out of equities and bought safe haven assets like Treasuries...Lower commodity prices put upward pressure on the dollar...Gold has slid to its lowest level since early 2010 as fresh strength in the dollar prompted another wave of selling..." The dollar continued to fall and treasuries moved to multi-week highs as an unexpectedly weak government reading of American labor costs dulled prospects for higher U.S. interest rates. After spending the year bouncing around five-year lows, the gold hit a new bottom last week. And according to some traders, the worst is yet to come. "The long-term trend is indeed lower," Ari Wald of Oppenheimer said Thursday on CNBC. "Gold has been making lower highs for a number of years now." Wald said gold and other commodities that are priced in U.S. dollars will continue to be hit hard by the strengthened currency. The dollar itself has gained 8%t year to date.
The stock market ended July on a cautious note with the S&P 500 benchmark index ending the month higher by 2.0%. Meanwhile, the Nasdaq locked in a 2.8% gain for July. A disappointing economic report weighed on stocks. With more than half of the S&P 500 companies having reported their second-quarter results, analysts expect overall earnings to edge up 0.9% and revenue to decline 3.3%, according to Thomson Reuters data. According to Ari Wald, market breadth and seasonal weakness could be signaling a massive decline for stocks. "The recent strength we've seen hasn't been enough to fix the divergence in the internal breadth work," Oppenheimer's chief market technician said last week on CNBC. Wald pointed to the divergence between the NYSE advance/decline line and the S&P 500 index as the major cause for concern. "It's been trending lower and that indicates that the breadth of the market is narrowing," said Wald. "I think that could be setting up for a bull market correction." For Wald, the current state of the market is purely stock specific, as he believes weak stocks will get weaker and strong stocks will continue to tread water. "We believe a market-neutral stance is appropriate," he said.
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 box below highlights the current Momentum Factor ETF trading range. Also noted is neutral momentum which indicates a near term range-bound stock market.
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. VIX options were particularly busy in July with trading volume surging to nearly 28 million contracts, the highest for any month this year. The chart below confirms the VIX fluctuated widely the past six weeks. Expect this trend to continue because the current relatively low volume is widening bid/ask spreads.
Fear of increased volatility in the U.S. stock market and the growing proximity of a Federal Reserve interest rate hike helped boost options trading volume in July, sending it to the highest level since October. The total volume of trading in U.S.-listed equity and index options looks set to rise to about 387 million contracts in July, up 16 percent over June, according to a Reuters analysis of data from options clearinghouse OCC. Average daily trading volume in July surged to 17.3 million contracts, the highest since January. The last time options trading volumes had jumped higher was in October, when market volatility spiked to close to a three-year high. The latest surge in the trading volume appears to be linked to hedging demand ahead of the looming rate hike, strategists said. "Since the financial crisis, options volume on a monthly basis has been a direct function of demand for hedges," said Jared Woodard, equity derivatives strategist at BGC Partners in New York. In July, traders in the options market were focused on key economic reports that could give clues to the timing of the prospective hike, and appeared to be buying up options that expire over the next several months, he said. The current Put/Call Ratio is moderately bearish. This reading tends to support a range-bound trend.
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 7/29/2015. The most recent AAII survey showed 21.10% are Bullish and 40.70% Bearish while 38.20% of investors polled have a Neutral outlook for the market for the next six months. As a generally reliable contra-indicator the current AAII poll results suggests prices should return to recent highs. The theory is that individual investors are usually wrong about market direction and the predominant bearish and neutral reading means prices should actually trend bullish.
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 7/29/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 52.34%, and the current week's exposure is 50.75%. One of the reasons for the recent sudden burst of market volatility is because professional money managers remain on the sidelines. Full market participation by institutional investors equates to higher levels of liquidity. High liquidity helps smooth out market fluctuation as bid/ask spreads tighten and there is equilibrium between buyers and sellers. With investors on the sidelines, bid/ask spreads widen and prices gap because buyers/sellers are not always available at nearby support/resistance levels.
From the Stock Trader's Almanac, it is known that the first trading days of each month combined gain more points than all other days. However, the first trading day of August does not contribute greatly to this phenomenon ranking fourth from last place amongst other First Trading Days in the. In the past 21 years the S&P 500 has risen just 38.1% (up 8, down 13) of the time on the first trading day of August. Due to several sizable gains in those up years, S&P 500 has an average first day gain of 0.06%, but the median performance is a loss of 0.12%. DJIA and NASDAQ exhibit similar records over the same time period. Digger deeper and longer into August's first trading day history reveals a modestly bullish trend for S&P 500 when the first trading day falls on a Monday. S&P 500 has been up on eight of the last 11 Monday August first trading days with an average gain of 0.4% since 1988. The long-term track record of Monday August first trading days, back to 1932, is 19 gains in 33 years (57.6% up). Neither the short-term nor long-term record makes an overwhelmingly compelling case to be long or short next Monday. However, First Trading Days so far in 2015 have been solid for S&P 500; up 5 of 7 with the worst decline of 0.40% happening on April 1 and the best being a 1.30% gain on February 2nd.
"It's all about rotation (between sectors). That's what this market has been about since we've been in such a tight trading range this year," said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading LLC in Las Vegas. Energy companies have been a major drag on corporate earnings in the second quarter. S&P 500 companies are on track for a 1.3% year-over-year decline in earnings, according to FactSet. If energy were excluded, corporate profits would be up 5.4%. Countercyclical groups outperformed over the past month, which include Utilities and Consumer Staples. A continued low interest rate environment will benefit this group.
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