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Good Time to Take Profits

Market Summary

The Dow extending its streak of record-setting gains to 11 days, the longest such streak since 1987, as increases in utilities and other safety plays outweighed declines in financials. Both the S&P 500 and the Nasdaq rose for a fifth straight week, while the Dow brought its string of weekly gains to three. As seen in the chart below, since the presidential election the major stock indexes have been on a tear. The only major asset classes to fall during this time are precious metals and bonds which are being adversely impacted by the threat of higher interest rates.

Index Performance Since Nov 8/16

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 maps the aggressive bullish surge. However, now we are starting to see the first technical signs indicating a possible pullback since the so-called Trump rally started. Overbought markets like the current situation can continue indefinitely, but now stock prices are converging into a tight range near resistance levels. Also, momentum levels are starting to turn down.

MTUM Daily Chart

In the chart below the dollar has stalled a bit following remarks by Trump, who once said that the dollar was "too strong," stoking speculation that his administration might abandon the longstanding "strong dollar" policy. Gold settled higher last week, logging its highest finish in more than three-and-half months, and for a fourth straight week of gains, as the metals complex was boosted by a softer dollar. Treasury bonds recovered last week, beginning after the release of minutes from the Federal Reserve's latest policy meeting. In the minutes, Fed officials sounded somewhat more reluctant to raise interest rates than in recent remarks from Fed Chairwoman Janet Yellen and a bevy of other Fed officials.

UUP, Gold and T-Bonds Daily Chart

Market Outlook

Jeff Hirsch in the Almanac Trader mentions how tempestuous March markets tend to drive prices up early in the month and batter stocks at month end. Julius Caesar failed to heed the famous warning to "beware the Ides of March" but investors have been served well when they have. Stock prices have a propensity to decline, sometimes rather precipitously, during the latter days of the month. March is the end of the first quarter, which brings with it Triple Witching and an abundance of portfolio maneuvers from The Street. March Triple-Witching Weeks have been quite bullish in recent years, DJIA up 9 of the last 11. But the week after is the exact opposite, DJIA down 19 of the last 29 years—and frequently down sharply for an average drop of 0.5%. The updated graph below displays first quarter performance for the major asset classes. After plunging at years-end you can see that gold has staged a dramatic comeback as a hedge against inflation and uncertainty about global reactions to Trump social-economic policies. The Nasdaq is the next best performer which has been the market leader since early last year. We look for the leaders to perform well to provide evidence of market strength.

YTD Performance

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. In the daily chart below the Volatility Index crashes to its lowest levels as the S&P 500 continues making a series of all-time highs.

VIX and S&P500 daily Charts

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 02/22/2017. Optimism among individual investors about the short-term direction of the stock market is at a six-week high, according to the latest AAII Sentiment Survey. The rebound is occurring as neutral sentiment is at a seven-week low. Bullish sentiment, expectations that stock prices will rise over the next six months is at 38.5%. Optimism was last higher on January 11, 2017 (43.6%). The rise puts bullish sentiment even with its historical average of 38.5%. Though bullish sentiment had been below average over the five previous weeks, it was never unusually low. Rather, optimism had merely fluctuated within the lower half of its typical range before rebounding to back to its historical average this week. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell to 29.2%. Neutral sentiment was last lower on January 4, 2017 (28.6%). The historical average is 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months, is 32.30%, pessimism remains above its historical average of 30.5% for the fifth time in six weeks. This week's rebound in optimism comes as both large- and small-cap stocks rose to new record highs.

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 02/22/2017. Fourth-quarter NAAIM exposure index averaged 84.15%. Last week the NAAIM exposure index was 95.89%, and the current week's exposure is 100.83%. The NAAIM Exposure Index rises to extremely elevated levels as the equity indexes keep continue making all-time highs. Sellers have virtually disappeared as earnings season winds down and it is reasonable to expect NAAIM exposure to remain high.

NAAIM Exposure Percent

Trading Strategy

Not all investors are sold on the Trump rally, however with some worrying about valuations or a forthcoming pullback. The potential impact that President Trump could have on the domestic and global economy continues to cause uncertainty or concern among some investors, though encouraging others. Also influencing investor sentiment are earnings, consumer sentiment and the magnitude and timing of future interest rate increases. At such frothy levels a smart move is to consider taking some profits from the recent run up or at least hedging long bullish positions. In the near term we don't fight the trend which is our friend. Every pullback or pause should be considered an opportunity to load up on shares from your target stock list. In the graph below, cyclical stocks are the leading sectors with the Energy group being the only loser.

S&P Sector ETFs 30-Day Performance

Feel free to contact me with questions,


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