Market Summary

The slow, steady retreat of the stock market ahead of the 2016 election continued Friday, with the market falling for a ninth straight day. Wall Street is now in its longest period of decline in more than three decades. The last time the S&P 500 fell for nine straight days is December 1980, nearly 36 years ago. Ronald Reagan wasn't even president yet. According to Howard Silverblatt at S&P Global Market the nine days' worth of declines has been relatively minor, comparatively speaking. The S&P 500 fell 9.4 percent during the 1980 nine-day losing streak, Intelligence, compared with the 3.1 percent decline in this sell-off. For the week, the benchmark S&P 500 Index finished down 1.9% while the Blue Chip-heavy Dow Jones Industrial Average dropped 1.5%. The Nasdaq was the biggest loser sinking 2.8% and the small cap Russell 2000 indices fell 2.0%. The major equity indexes are holding on barely above water year-to-date. Gold has been a stellar performer for most of the year but has been crashing as investors expect an imminent rate increase which normally has an adverse effect on precious metals.

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 overall 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 a confirmed stock market downtrend. You can see the MTUM has crashed below the support level established in the middle of September. The MTUM ETF was last below the current level in the middle of May. As we said last week we said "...If the market doesn't stage a recovery bounce after the November election the downtrend will probably continue heading into the December Fed meeting..."

Market Outlook

Jeff Hirsh reported in the Stock Trader's Almanac how October lived up to its reputation of underperforming during election years. For S&P 500 October's 1.9% decline was its second worst monthly performance this year and it was also the third consecutive down month. DJIA has also declined in three straight months. NASDAQ and Russell 2000 suffered the most damage in October, off 2.3% and 4.8% respectively. October's poor performance in presidential election years has historically been accompanied by an incumbent party loss since 1952. In the chart below, since the S&P 500 Index attained all-time highs in the middle of August, all of the major asset classes are in the red. The results of the presidential election may cause a sharp short-term market reaction. Most likely investor reaction to Fed policy after the election will dictate the longer term trend.

Put/Call Ratio is the ratio of trading volume of put options to call options. The Put/Call Ratio has long been viewed as an indicator of investor sentiment in the markets. Times where the number of traded call options outpaces the number of traded put options would signal a bullish sentiment, and vice versa. Technical traders have used the Put/Call Ratio for years as an indicator of the market. Most importantly, changes or swings in the ratio are seen as instances of great importance as this is commonly viewed as a change in the tide of overall market sentiment. Traders are aggressively buying put contracts in advance of the November election to protect against lower stock prices in response to a Trump win.

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. Investors continue to focus on the U.S. presidential election, which has become too close for comfort for some investors and has put the market on the defensive. In response, as indicated in the updated chart below, stocks diverged lower as the VIX surged 40 percent this week. That's its highest level since June, when Britain voted to leave the European Union.

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 11/02/2016. Optimism among individual investors about the short-term direction of stock prices fell to a very low level as the streak of below-average readings was extended to a full year's span. This week's AAII Sentiment Survey also shows increases in both neutral and bearish sentiment. Bullish sentiment, expectations that stock prices will rise over the next six months, declined 1.1 percentage points to 23.6%. Optimism was last lower on June 22, 2016 (22.0%). The drop keeps bullish sentiment below its historical average of 38.5% for the 52nd consecutive week and the 85th out of the past 87 weeks. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 0.9 percentage points to 42.0%. This is a four-week high. This week's rise keeps neutral sentiment above its historical average of 31.0% for the 40th consecutive week.

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 11/02/2016. Third-quarter NAAIM exposure index averaged 80.32%. Last week the NAAIM exposure index was 66.47%, and the current week's exposure is 58.08%. Last week's analysis is still valid when we said "...As seen in the updated chart below, professional money managers have backed off of lofty equity exposure levels at the end of the summer. The current lower NAAIM number reflects money managers' cautiousness ahead of the November election and December FOMC meeting..."

Trading Strategy

The recent market decline hasn't received much attention because it's come in little drips and drops instead of one big dramatic plunge. Ryan Detrick, senior market strategist at LPL Financial, said that investors should not fear the slow decline, which he mainly attributes to nervous investors facing an election that offers two drastically different outcomes. Some market pundits consider declines of eight days or so to be buying opportunities that are usually followed by gains over the next six to 12 months. Last week we said "...November maintains its status among the top performing months as fourth-quarter cash inflows from institutional investors drive November to lead the best consecutive three-month span November-January...investors appear to be anticipating a Clinton election win as Healthcare stocks have been decimated over the past month...investors seem to be anticipating a Fed rate increase which generally benefits the bottom line of financial institutions. Now might be good time to look for an entry price for stocks on your watch list or consider low priced option call spreads to minimize trading risks while waiting on the market to rebound..."

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