"We've come a long way back from the depths of despair six or seven weeks ago," said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management in New York. As seen in the chart below the Dow closed out the first quarter of the year in the green, after the worst start ever to a year. The Dow's quarterly comeback was its biggest reversal since 1933. After its worst January since 2009, the S&P 500 also has fully recovered. Gold's early-year rally began to lose momentum as March wore on, primarily due to profit-taking and a very large accumulation of short positions by the large commercials segment of paper-gold traders on Comex," said Brien Lundin, editor of Gold Newsletter. For the quarter, the S&P 500 Index basically ended flat up .77% while the Blue Chip Dow Jones Industrial Average rose 1.49%. The Nasdaq lagged down 2.75% while the small cap Russell 2000 fell 1.92% for the quarter. As confirmed in the chart below, the Fed's dovish interest rate comments have stabilized treasury bonds.
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. In the updated chart below, the orange uptrend line confirms that our recent analysis played out as advertised when we said "...the MTUM will break out and continue higher in the direction of the current trend...Technical analysis suggests there is still plenty of room for the uptrend to continue..." As highlighted, the market is moving higher on weak momentum. This indicates that buyers may be getting exhausted. The recent market surge has primarily been inspired by Fed pronouncements and not necessarily because of strong economic data.
We like to compare the DOW Industrials and Transports to confirm the current market trend. You can see in the chart below how the DOW Transports are starting to diverge away from the DOW Industrials. We need to keep an eye on this trend because if it continues this indicates weakness in the current uptrend and unless both indexes converge higher, it will be difficult for the DOW Industrials to continue going up.
In the chart below, the Russell 2000 is lagging the larger cap indexes. The Russell 2000 tends to lead the market when investors are committed to "risk-off" trading. The primary reason the large cap indexes are leading is due to the falling dollar, which benefits larger exporting companies because exports are cheaper. If the small cap Russell 2000 doesn't catch up with the other indexes it might signal upward price movement will stall out sooner rather than later.
In the chart below that the dollar hit its lowest level in more than five months posted its biggest quarterly percentage loss in more than five years after traders continued to digest dovish comments from Federal Reserve Chair Janet Yellen. Analysts also said month-end rebalancing flows weighed on the dollar. Global portfolio managers adjusting their existing currency hedges also contributed to these flows. The U.S. dollar dropped sharply and stocks on Wall Street ended at 2016 highs after Federal Reserve Chair Janet Yellen said the Fed should proceed "cautiously" in deciding when to raise interest rates. The U.S. Treasury market rallied, with benchmark yields hitting four-week lows on the expectation that the Fed would raise interest rates only gradually due to global risks. Dollar-denominated assets like gold bounced higher as the dollar retreated. Gold prices scored the best quarterly performance since 1986.
Investors are no longer fixated on financial data as they assume it will have a limited impact on domestic monetary policy in the near-term after Federal Reserve Chair Janet Yellen's remarks earlier in the week indicated she favored a cautious stance towards interest rate hikes this year. Market Watch's Mark Decambre reports that Yellen's remarks follow a string of conflicting comments from Fed officials who have been referred to as the "gang of five" by some. Those individuals include Atlanta Fed President Dennis Lockhart, St. Louis Fed President James Bullard, San Francisco Fed President John Williams, Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Patrick Harker, who hinted at rate increases as early as April in a series of speeches ahead of Yellen's. "If the economy is getting stronger and Yellen remains on hold, that's very good for the stock market because that theoretically is inflationary," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
Some market pundits are expressing concern about continued earnings weakness as one of the primary worries for investors. Some analysts forecast another U.S. earnings drop in the first quarter, and see just 2% profit growth for S&P 500 companies for all of 2016, according to Thomson Reuters data. The S&P 500 companies are expected to see a decline of 6.9% in first-quarter earnings, according to Thomson Reuters. According to Sam Stovall, chief U.S. equity strategist at S&P Global Market Intelligence, analysts are concerned earnings could give the market a bumpy ride. "If we continue to experience additional earnings erosion, then it could be like 2015 all over again, when we went from an 8% expected gain to a near 1% loss," he said.
A lot of the recent market discussion talked about how much stocks have recovered from the market bottom in February. "This is the tenth time we've had a decline of 5% or more only to get back to or close to breakeven by the end of the quarter," Stoval said. "Five of those times we set an even lower low (later in the year). There's no guarantee we'll set a lower low but there's concern about that." Even after reaching a lower low, the S&P averaged a 2.2 percent gain in those years. "If history should repeat, investors are encouraged to stay the course but not load up the truck," he said. The chart below displays first quarter results for major asset classes. Notice that not all the major equity indexes have fully recovered with assets that benefit most from the dollar's crash leading the way. "What's really amazing is that for an investor that's looking at their statement at the end of the first quarter, they're going to be saying: I'm flat! What's all the noise about?' It's shocking and there was a fair amount of damage that was done in the process," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets.
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 the VIX higher. Recently we said "...As recent market risk has subsided expect the VIX to stabilize near the support line, which is the November low mentioned last week..." The updated chart below confirms that this analysis came to fruition. The orange circles below denote where in the past, the stock market sank after the Volatility Index fell to the current support level. At the current price, the VIX can provide relatively cheap insurance if stocks do pull back.
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 03/30/2016. The most recent AAII survey showed 27.20% are Bullish and 25.80% Bearish, while 47.10% of investors polled have a Neutral outlook for the market for the next six months. Last week's analysis is still valid where we said "...The AAII survey continues to show healthy skepticism among retail investors. As a reliable contrarian indicator the survey signals stocks should continue grinding higher near term..." The updated AAII survey shows retail investors are even more skeptical which indicates continued higher stock prices.
The National 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 03/30/2016. Fourth-quarter NAAIM exposure index averaged 44.61%. Last week the NAAIM exposure index was 59.59%, and the current week's exposure is 67.94%. As mentioned above, Janet Yellen reassured investors the Fed was in no hurry to increase interest rates. This was sweet music to money managers' ears and they started pushing up stock prices even before Ms. Yellen finished her news conference. Next week begins quarterly earnings season and if companies report better than expected financial results it is reasonable to expect the NAAIM Exposure index to go higher.
April begins what is historically the best quarter of the year for the stock market and is usually a positive month for the market. The S&P 500 has been positive in April 70% of the time since 1945, and in the past 10 years, April has been the top-performing month. Investors remain concerned about a slow global economy, a weak dollar, volatile oil prices and lackluster top-line growth at U.S. companies. An ideal trading strategy is to use price dips as an opportunity to buy shares on your stock watch list. Prices are bit elevated, therefore using spread strategies will help mitigate the cost of entering a trade. The updated graph below confirms our recent trading suggestions are working out when we said "...all systems are on go as all the major S&P sectors are positive over the past 30 days... We are currently in the middle of what is considered the "best six months of the year" for the stock market. We like undervalued or oversold shares to bid on because the current bullish trend has more room to run..."
Feel free to contact me with questions,