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Summer Swoon In Stock Market

Market Summary

For the week, both the Blue Chip-heavy Dow Jones Industrial Average and S&P 500 Index rose 0.5% while the Midcap S&P 400 was the leading performer moving up 1.2%. The small cap Russell 2000 rose 1.0% and the Nasdaq was up .6%. All the major asset classes are in the black year-to-date.

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. The updated chart below displays downward pressure on stocks with descending momentum.

MTUM Daily Chart

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 current 20-day historical implied volatility average on the VIX is 69% versus 77% last week. This slight downtick reflects how long the VIX has been both low and in a very tight range. Currently the VIX is about a point above its YTD low. The VIX has been almost entirely below 14 for 7 straight weeks now. Even a moderately disappointing employment report and a very disappointing ISM Manufacturing report caused little impact.

VIX Weekly 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 08/31/2016. Pessimism among individual investors about the short-term direction of the market is above 30% for the first time in nine weeks, according to the latest AAII Sentiment Survey. Optimism and neutral sentiment, meanwhile, are both slightly lower. Bullish sentiment, expectations that stock prices will rise over the next six months, declined 0.8 percentage points to 28.6%. Optimism was last lower on June 22, 2016 (22.0%). This is the 76th week out of the past 78 that optimism is below its historical average of 38.5%. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 1.1 percentage points to 39.9%. Even with the decline, this is the 31st consecutive week that neutral sentiment is above its historical average of 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.9 percentage points to 31.5%. Pessimism was last higher on June 29, 2016 (33.4%). Optimism has now pulled back by a cumulative 7.0 percentage points since rising to its third-highest level of the year (35.6%) two weeks ago. Over the same period of time, pessimism has rebounded by 5.2%. Beyond the current stabilization of market prices following this summer's rally, there have not been any new events to sway individual investors' sentiment in one direction or the other over the past two weeks.

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 08/31/2016. Second-quarter NAAIM exposure index averaged 60.52%. Last week the NAAIM exposure index was 97.80%, and the current week's exposure is 88.10%. Money managers are backing away from relatively high levels of equity exposure which is contributing to the downward pressure on stocks. September is typically the slowest month of the year for the stock market, therefore is reasonable to expect the exposure index to continue falling.

NAAIM Number


Trading Strategy

Jeff Hirsh mentioned in the Stock Trader's Almanac that since the post-Brexit rally and the break to new all-time highs the market has been on summer vacation. The blue chips have been off the grid, virtually flat since mid-July. Techs and small caps have been a bit stronger, but less so since mid-August. Only the small caps have been able to gain any ground the past two weeks. The recent lack of momentum, added to all this frothy sentiment increases the risk of a pullback or correction in the near term. Mixed fundamental readings are not much help, but there seems to be enough good economic and corporate data to support the market and avoid a major pullback at this time, save some political, geopolitical or systemic market event that derails the bull. We have been recommending hedging long-term positions to protect gains in the event of a market pullback.

S&P Sector ETF 30-Day Performance

Feel free to contact me with questions,

 

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