It has been seven consecutive days of declines for the Dow Jones industrial average. That's the longest losing streak for the index since July 2011, when investors were worried that the U.S. would slip back into recession. Wall Street took the latest signs of an improving economy as a fresh reason to sell shares in a market that has remained range-bound for much of 2015 in anticipation of the Fed's first rate hike in nearly 10 years. For the week, the Dow lost 1.8%, the NASDAQ dipped 1.7% and the S&P edged down 1.2%. After hitting a record high in May, the S&P 500 is now up less than 1% for the year, while the DJIA and Treasuries are barely underwater and Gold has sank into correction territory.
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, "...there are only a few stocks keeping the NASDAQ index elevated as the BPCOMPQ is in a firm downtrend..."This week the Nasdaq Composite saw 27 new highs and 161 new lows.
The S&P 500 Bullish Percent Index (BPSPX) could not make a break above its downtrend line and has resumed its downtrend. This indicates overall market weakness and a further price pullback. This week the S&P 500 index chalked up four new 52-week highs and 20 new lows.
Recently we reported "...According to Ari Wald, market breadth and seasonal weakness could be signaling a massive decline for stocks...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 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..."
As circled in the chart below, both the DOW Industrials and Transports are in a downtrend. Both indexes had a countertrend bounce last week but ended up resuming the downtrend.
Last week we reported "...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..." Gold price dropped to a 5-1/2-year low last week as the dollar strengthened after comments from a Federal Reserve official backed expectations that the U.S. central bank would hike interest rates as early as next month. Atlanta Federal Reserve President Dennis Lockhart has said it would take "significant deterioration" in the U.S. economy for him to not support a rate hike in September, according to the Wall Street Journal. Gold, an asset that does not earn interest, has taken a big hit given rising risks of a U.S. rate hike. The U.S. yield curve flattened as longer-dated bond prices rose with traders believing a possible Fed rate hike would erode the value of shorter maturity debt faster than longer dated bonds.
The prospect of higher U.S. interest rates has made the dollar significantly more attractive to investors in the past year, which in turn has lowered demand for commodities and crimped U.S. corporate earnings from exports. Observe in the chart below how the dollar and commodities maintain an adverse relationship. As the dollar has jumped higher from its low in May, conversely the commodity index was at a high point in May and is now lower for the year.
Top Wall Street banks still expect the Federal Reserve to raise interest rates in September, but a growing number now believe the central bank is likely to only hike once this year, a Reuters poll found on Friday. Thirteen of 19 primary dealers or the banks that deal directly with the Fed, polled said they expect the Fed to raise rates by September but just nine now believe the Fed will hike rates twice in 2015, compared with 15 of 20 in the July Reuters poll. The central bank has kept rates at a near-zero level since December 2008 as part of its effort to spur the recovery from the 2007-2009 financial crisis.
With second-quarter earnings season almost over, S&P 500 companies' aggregate profits are estimated to have increased 1.6%, while revenues are projected to have fallen 3.4%, according to Thomson Reuters data. With many U.S. companies boosting their earnings per share by cutting costs and buying back stock instead of by growing their businesses, stock valuations remain a concern. The S&P 500 trades at 16.6 times expected earnings, which is pricier than the 10-year median of 14.7. Holdings of the SPDR Gold Trust (GLD), the world's largest gold-backed exchange-traded fund, dropped further on Tuesday to 21.56 million ounces, the lowest since September 2008. The graph below reflects this statistic in the Gold ETF price crash. The slump in crude helped push energy stocks even lower. The sector is down 16% this year, making it the worst performer in the S&P 500.
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 highlighted below, the Momentum Factor ETF is breaking below the bottom of its recent trading range. Also noted is momentum is in a new downtrend.
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 said, "...the VIX fluctuated widely the past six weeks. Expect this trend to continue because the current relatively low volume is widening bid/ask spreads..." Now solidly in the middle of its 6-month trading range, the SPX remains above the 200, 100 and even the 50-day SMA (simple moving average). Technical resistance is still around 2120, with support around the year's starting point of 2058. As we have been alluding to, until a breakout occurs, this well-defined range and moderate volatility might provide some opportunities for short-term traders. With the VIX about 2 points above its YTD low and more than a point below its YTD average a neutral trend is the most probable outcome.
Put/Call Ratio is the ratio of trading volume of put options to call options. The Put/Call Ratio has long been viewed as an indicator of investor sentiment in the markets. Times where the number of traded call options outpaces the number of traded put options would signal a bullish sentiment, and vice versa. Technical traders have used the Put/Call Ratio for years as an indicator of the market. Most importantly, changes or swings in the ratio are seen as instances of great importance as this is commonly viewed as a change in the tide of overall market sentiment. The current Put/Call Ratio is extremely bearish as over the past week traders have invested heavily in put contracts to play the current market downtrend.
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 8/5/2015. The most recent AAII survey showed 24.30% are Bullish and 31.70% Bearish while 44.00% of investors polled have a Neutral outlook for the market for the next six months. Surprisingly, Individual Investors are not excessively bearish, which suggest range-bound trading.
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 8/5/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 50.75%, and the current week's exposure is 63.17%. Money managers are basically still sitting on the sidelines.
The S&P 500 is locked in a 100 point trading range (2040-2140) since March because of a serious split in sector performance. At less than 5% this is the narrowest range in several years. A volatility expansion often follows a volatility contraction. Therefore, don't be surprised if there is a significant move in the coming weeks or months. As we said last week "...Countercyclical groups outperformed over the past month, which include Utilities and Consumer Staples. A continued low interest rate environment will benefit this group..." According the Stock Trader's Almanac, seasonally, there is a strong price period for gold from late August until late September or early October as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India and also, when investors return from summer vacations. Entering long positions on or about August 26 and holding until October 1 has worked 13 times in the last 18 years.
Feel free to contact me with questions,