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Why To Expect Stock Price Boost

Market Summary

Both the Dow Industrials and the S&P 500 posted their second straight week of losses, which last happened in early February. Recall that immediately after this happened in February stock prices exploded higher. For the week, the S&P 500 Index finished down .4% and the Blue Chip-heavy Dow Jones Industrial Average was basically flat down .2%. The Nasdaq was also flat lower by .1% while the small cap Russell 2000 again was the biggest loser down 1.3% for the week.

YTD Performance

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 in the chart below, the market remains definitively stuck in a trading range. Also noted is momentum remains flat which suggest range-bound trading will continue indefinitely.

MTUM Daily Chart


Market Outlook

Wall Street's top analysts have all but given up on any expectation that the Federal Reserve will raise interest rates this summer, and most now see the U.S. central bank's next rate hike coming in September, according to a Reuters survey conducted on Friday. Friday's weaker-than-expected payrolls report for April was the rationale for several economists to back away from their previous predictions for an interest rate increase at the Fed's next meeting in June. The conviction among many market watchers that the Fed would do more than one hike in 2016 is quickly eroding as well, with weak employment data being the latest indicator that U.S. economic growth is far from robust. U.S. employers added 160,000 jobs in April, the fewest in seven months. Economists had anticipated more than 200,000 jobs had been added last month. "This report did very little to make the case for a June rate hike," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "The data today really underscores our view that the Fed will want to see more data before hiking rates further." In truth, the stock market has been feeding off of the low rate environment, therefore the announcement of continued low rates might provide a short term stock price boost. In the chart below, energy shares exploded higher in the 2nd quarter as oil and gas prices recovered from the recent bottom. The next best performing asset group so far in the quarter is gold, which has been the best performing asset class all year.

Performance since April 1

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. The orange box in the chart below denotes the Volatility Index continues trading range-bound. Quarterly earnings have been sufficient to minimize investor nervousness and they have been reluctant to bid the VIX higher.

VIX Daily Chart

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 05/04/2016. The most recent AAII survey showed 23.30% are Bullish and 30.30% Bearish, while 4% of investors polled have a Neutral outlook for the market for the next six months. As a contrarian indicator the current AAII Bullish percent is near the low level where it is reasonable to expect stock prices to bounce.

AAII Sentiment

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 05/04/2016. First-quarter NAAIM exposure index averaged 45.89%. Last week the NAAIM exposure index was 74.19%, and the current week's exposure is 67.66%. Last week's analysis was confirmed where we said "...Portfolio managers' will probably cash in some profits as the market is stalling which should further reduce NAAIM exposure..."

NAAIM Exposure %


Trading Strategy

Some market analysts are suggesting the stock market could get a boost from consumer names reporting quarterly results next week. With first-quarter earnings near an end, consumer discretionary components are the only sector showing double-digit earnings growth from a year ago. As mentioned above, the Fed signaled a continued low interest rate environment, which could give the market a shot in the arm. As we have been saying recently, make sure stop-loss plans are in place and be prepared for daily up and down price movement.

30-Day Performance

Feel free to contact me with questions,

 

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