Market Summary

After the dismal May Jobs report on Friday, market pundits are speculating that a rate hike in June is not going to happen. For the week, the S&P 500 Index finished flat and the Blue Chip-heavy Dow Jones Industrial Average slid a modest 0.4%. The Nasdaq finished the week flat also while the small caps actually rose 1.2%.

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 MTUM is threatening to break out above the orange dotted line, which is the resistance level. If the breakout is confirmed this supports the contention that stocks are headed back toward all-time highs.

You can see in the chart below how the dollar plunged the most since December against the euro after U.S. jobs growth trailed forecasts, weakening the case for the Federal Reserve to raise interest rates as early as this month. The dollar's tumble was the biggest post-payrolls move in at least a year, according to Bloomberg data. The U.S. currency rose 3.7 percent last month, paring losses this year, after policy makers including Chair Janet Yellen said higher rates in the coming months look appropriate. The employment report throws cold water on prospects for greenback strength based on policy divergence between a tightening Fed while central banks in Europe and Asia add to stimulus. "The dollar correction higher is over for now," said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. "A wave of weakness is likely. The weak report is heavily weighing on the dollar." Gold futures settled at a more than three-month low on Thursday as consensus for an imminent interest-rate hike solidified on the back of comments from a Federal Reserve official who stressed the need for an early rate increase. Dallas Federal Reserve Bank President Robert Kaplan reiterated his belief that the Fed should move quickly to raise rates as the economy is showing signs of sustained recovery while inflation is accelerating, Reuters reported. "Gold prices have been pressured by the prospects of higher rising rates and a rebound in the U.S. dollar. The Fed has been hinting that they would like to hike rates in June or July if economic data come in favorable," said Ken Ford, president of Warwick Valley Financial Advisors. Slow economic growth and wide uncertainty point to the need for safety and liquid investments and hence demand for U.S. Treasuries, which are widely considered the safest investment on the planet. The chart shows how bond prices spiked on Friday and the inverse yields fell sharply as the rate hike expectations fade.

Market Outlook

The Stock Trader's Almanac presented the chart below displaying the results of the 8th year of presidential terms. It mentions how this year got off to a miserable start with steep January losses, the market then bottomed in February and rebounded to an April high followed by weakness into May and now a bounce higher. The magnitude of the moves in 2016 has been greater than the historical 8th Year average, but the shape and highs and lows have been in close proximity. This apparent tracking of the historical seasonal pattern has driven interest in each of the past 8th Years and whether or not the incumbent party won or lost the election. In the following chart, the six 8th Years since 1901 have been plotted individually. The only year with a positive full-year return was 1988, up 11.85%. In that year Republicans retained control of the White House. In 1940 Roosevelt was re-elected to a third term, but WWII knocked DJIA down 12.72% that year. Wilson, Eisenhower, Clinton and G.W. Bush turned the White House over to the opposing party and DJIA suffered full-year losses in each of those years.

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. Last week's comments are still valid where we stated "...Similar to what happened in the beginning of April, the VIX has descended to its lowest level as investors trade "risk-on" and push stock indexes back toward all-time highs..."

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 06/01/2016. Bullish sentiment rebounded strongly from last week's extraordinarily low reading, but still remains well below its historical average. At the same time, neutral sentiment remains at an unusually high level despite falling significantly this week. Optimism among individual investors about the short-term direction of stocks rebounded strongly in the latest AAII Sentiment Survey. The rise followed two consecutive weeks of extraordinarily low levels of bullish sentiment. At the same time, neutral sentiment plunged after having reached a 26-year high last week. Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 12.4 percentage points to 30.2%. Though a six-week high, optimism is only at the lower end of its typical historical range. Furthermore, bullish sentiment remains below its historical average of 38.5% for the 30th consecutive week and the 63rd out of the past 65 weeks. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 12.1 percentage points to 40.8%. Even with the significant drop, neutral sentiment remains at an unusually high level. This is the 13th consecutive weekly reading above 40% and the 18th consecutive week that neutral sentiment has been above its historical average of 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months, declined 0.3 percentage points to 29.1%. Pessimism is below its historical average of 30.5% for the 12th time in the past 14 weeks. As noted above, this week's big change in bullish and neutral sentiment follows what had been extraordinarily low and high, respectively, readings for both measures. Even with the big changes, optimism remains low and neutral sentiment remains high. Pessimism is close to, though technically below, its average. Giving individual investors cause for concern is the slow pace of U.S. economic growth and uncertain pace of global economic growth, terrorism and global unrest, lackluster corporate earnings, the prevailing level of valuations, the forthcoming election and monetary policy. Some AAII members, however, are encouraged by sustained domestic economic growth, corporate earnings and still comparatively low energy 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 06/01/2016. First-quarter NAAIM exposure index averaged 45.89%. Last week the NAAIM exposure index was 64.67%, and the current week's exposure is 68.94%. We recently said, "...expect professional money managers to linger in a holding pattern ahead of the FOMC meeting in a few weeks..."

Trading Strategy

Last week we discussed how "... If post-Memorial Day strength fails to buoy the market, then it would we susceptible to profit taken especially now that it is near resistance once again. If the market does stall next week, it might be a good opportunity to load up on technology stocks on your watch list. As confirmed in the graph below, tech stocks are leading the recent market surge as investors are now trading "risk-on". If the major equity indexes do make a move toward 52-week highs, don't be surprised if HFT algorithms kick-in and sell off stocks at the highs..." Next week could be interesting to see if stocks will continue to ignore the negative news and trend higher. Expectations for a robust second quarter are fizzling away and so are the odds for a rate hike this summer. Despite the lackluster news this past week, stocks were resilient but the bullishness could begin to fade at resistance.

Feel free to contact me with questions,