U.S. stocks put a choppy week in the books as the major indexes posted minute weekly gains. For the week, Blue Chip-heavy Dow Jones Industrial Average rose a modest 0.21% and the S&P 500 Index rose 0.53% while the Midcap S&P 400 fell .48%. The small cap Russell 2000 was up .46 and the Nasdaq led the gains finishing up 2.6% on the heels of its largest component, Apple (AAPL), spiking over 11% on the week. All the major asset classes remain in the black year-to-date.
In the graph below you can see the Nasdaq 100 index diverging away higher from the Dow and S&P indexes. Tech stocks have led the market the past month. If this pattern continues it signals the current pullback may have ended and prices can be expected to reverse higher. Especially if investors like what they hear from next week's FOMC meeting, that will almost certainly move the overall market higher.
The U.S. dollar climbed sharply in the run up to key central bank policy meetings next week. In the chart below you can see that the dollar advanced building on strength that came on data showing a sharper-than-expected increase in consumer prices. In response to the dollar rising, gold finished at its lowest level in almost three months on Friday, logging a seventh drop in eight sessions to finish the week with a nearly 2% loss. Treasury prices dropped to the lowest level in three months after official data showed a stronger-than expected rise in consumer prices last month, boosting the case for the Federal Reserve to raise interest-rates at least once before the end of 2016.
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. Option Volatility mimicked stocks and were choppy throughout the week. The CBOE Volatility (VIX) hit 2½ month highs on Monday and briefly printed above the psychological $20 level to start the week. Thursday's rally and Friday's muted session in equities help push the 'Fear Gauge' back near $15 by the close of Quadruple Witching expiration yesterday. The updated graph supports analysis indicating the current pullback may have bottomed out. You can see the VIX turning down as the S&P finds support.
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 09/14/2016. Pessimism jumped to a three-month high as more than one out of three individual investors described their short-term outlook as "bearish" in the latest AAII Sentiment Survey. At the same time, neutral sentiment fell to its lowest level since February. Bullish sentiment is also lower. Bullish sentiment, expectations that stock prices will rise over the next six months, fell 1.8 percentage points to 27.9%. The decline puts optimism at its lowest level since June 22, 2016 (22.0%). The decline also keeps bullish sentiment below its historical average of 38.5% for the 78th week out of the past 80.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 5.6 percentage points to 36.1%. Neutral sentiment was last lower on February 17, 2016 (32.1%). Nonetheless, neutral sentiment remains above its historical average of 31.0% for the 33rd consecutive week. Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 7.4 percentage points to 35.9%. Pessimism was last higher on July 15, 2016 (37.5%). This week's rise puts bearish sentiment above its historical average of 30.5% for the second time in three weeks. Though this week's neutral and bearish sentiment readings are well within their typical historical ranges, both are unusual relative to what we've seen throughout this calendar year. This week's neutral sentiment is the fifth-lowest reading recorded this year, and pessimism is at its eighth-highest level for the year. The four lower neutral sentiment readings and six of the seven higher pessimism readings occurred near the start of this year, in January and February. The shift in sentiment occurred as both large-cap and small-cap stocks experienced recent downward volatility. Some AAII members have previously expressed concern about valuations or the potential for a decline occurring.
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 7have made to client accounts over the past two weeks. The current survey result is for the week ending 09/14/2016. Second-quarter NAAIM exposure index averaged 60.52%. Last week the NAAIM exposure index was 90.85%, and the current week's exposure is 68.55%. Money managers aggressively sold off equities during the recent market pullback. Equity exposure fell from historically lofty levels as investors may be leery about historically poor performance results.
As reported by Jeff Hirsh in the Stock Trader's Almanac, consistent with a rise in volatility in September, the week after options expiration week, next week, has a dreadful history of declines especially since 1990. The week after September options expiration week has been a nearly constant source of pain with only a few meaningful exceptions over the past 26 years. Substantial and across the board gains have occurred just three times: 1998, 2002 and 2010 while many more weeks were hit with sizable losses. Average losses since 1990 are even worse; DJIA down 1.15%, S&P 500 off 1.08%, NASDAQ falling 1.07% and a whopping 1.65% average loss for Russell 2000. End-of-Q3 portfolio restructuring is the most likely explanation for this trend as managers trim summer losers and position for the fourth quarter. In the updated chart below investors have focused on defensive sectors over the past month.
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