The major indices ended higher last week, with the Dow posting its longest win streak since late last year. Few economic reports on inflation or the economy were able to deter Wall Street from tentatively buying assets perceived as risky. Investors felt supported by solid corporate earnings, and a retrenchment of government bond rates and the dollar, both factors that can prompt investors to sell stocks
For the week, the Dow Industrials moved higher 2.34% marking its seventh straight positive session — its longest winning streak since a similar stretch that ended Nov. 8, 2017 and benchmark S&P 500 Index ended up 2.41%. The small cap Russell 2000 jumped 2.63% and the tech-heavy Nasdaq was the top performer higher 2.68%. You can see the Nasdaq and Russell 2000 are gradually moving back to highs for the year.
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. In the updated chart below the ETF finally broke out of its recent trading range. The orange line tracks the new uptrend line with the orange circle highlighting bullish momentum.
In the updated chart below, the Dollar edged lower Friday, marking a third straight loss after a brisk run-up and its first weekly decline after three consecutive weekly gains. “Broadly speaking our indicators for the dollar remain broadly positive but some commodity related currencies have broken away from this; especially those with links to oil,” wrote Steve Barrow, head of G-10 strategy at Standard Bank, in a Friday research note. Gold finished higher than a week ago as a benchmark dollar index weakened, offering some support to prices for the precious metal. “Gold is still stuck mirroring moves in the dollar,” said Adrian Ash, head of research at BullionVault. Treasury bonds fell last week as investors said the data would not discourage the Fed from raising rates in June, the widely-expected date for the second hike of the year.
Per Factset Research, for Q1 2018 with 91% of the companies in the S&P 500 reporting actual results for the quarter, 78% of S&P 500 companies have reported a positive EPS surprise and 77% have reported a positive sales surprise. If 78% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008.
In a recent issue of the Almanac Trader Jeff Hirsch mentioned how over the last twenty-one years, May has a mixed record. DJIA has averaged just 0.01% gain in eleven advancing and ten declining Mays. Russell 2000 has the best record, up thirteen and down eight with an average advance of 0.6% in all years. In the chart below, the full month of May’s average performance has been plotted. The month usually begins well, but quickly weakens before recovering and trading sideways until around mid-month. Just after mid-month, the major indexes then begin a six-trading-day slide before rebounding to close the month in mildly positive territory.
In midterm-election years like 2018, May’s average performance has been weaker. Midterm May’s begin in generally similar fashion, but weakness begins sooner, just ahead of mid-month, and lasts longer, until the penultimate trading day of the month. The month-end rally is also smaller in magnitude and duration leaving the full-month midterm May performance in the red across the board.
In the updated graph below, the energy sector is far and away the outstanding second-quarter performer. Gas prices are still rising based on the U.S. decision to withdraw for the Iran nuclear deal and reimpose economic sanctions on Tehran, raising the risk of further tensions in the Middle East and could tighten crude supplies from the oil-rich region.
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 CBOE Volatility index fell seven straight days, its longest streak in about a year. For the week, the VIX fell 13.4%, its fifth straight weekly decline, the lengthiest period of losses since August 2016. After closing below 13 for the first time since the end of January, the VIX has completely erased the massive spike it saw in early February, when concerns over inflation saw Wall Street's so-called "fear index" more than double in a single session amid a stock selloff that sparked a correction for major indexes.
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 05/09/2018. Optimism about the short-term direction of stocks rebounded, but remains below average according to the latest AAII Sentiment Survey. Pessimism, meanwhile, pulled back after having risen last week. Both bullish and bearish sentiments are within their typical historical ranges.
• Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.1 percentage points to 33.5%. Optimism remains below its historical average of 38.5% for the 11th consecutive week and the 12th time in 14 weeks.
• Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined by 0.4 percentage points to 41.0%. This is the 12th consecutive week with a neutral sentiment reading above the historical average of 31.0%. Neutral sentiment remains at an unusually high level (more than one standard deviation above its historical average) for the second consecutive week. Such readings have been followed by slightly higher than average six-month returns for the S&P 500 index, but not significantly so.
• Bearish sentiment, expectations that stock prices will fall over the next six months, reversed last week’s increase and fell 4.7 percentage points to 25.5%. Pessimism is below its historical average of 30.5% for the fourth consecutive week and the 18th time out of the past 22 weeks.
Many individual investors, but not all, anticipate continued volatility and/or think that the current political backdrop could have a further impact on the stock market. Trade policy is influencing some individual investors’ sentiment. While many individual investors either approve of the Federal Reserve’s plan to gradually raise interest rates or don’t expect it to affect the stock market, some are concerned about the impact that rising rates will have. Also influencing sentiment are valuations, tax cuts, earnings and economic growth.
This week’s special question asked AAII members how the Dow Jones industrial average’s and the S&P 500’s inability to revisit their respective January highs is impacting their sentiment toward stocks. Respondents generally fell into one of three groups. The largest group, representing 39% of all respondents, say the lack of new highs mostly is not impacting their sentiment. Many of them describe themselves as long-term investors or see this as normal market activity. Just under 30% have become more cautious, with several saying they are holding off on buying new stocks or are uncertain about how the macro (especially political) backdrop will evolve. About 29% are optimistic about stock prices, particularly because they believe a short-term bottom has either already been set or because the economy is continuing to grow.
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 05/09/2018. First-quarter NAAIM exposure index averaged 78.08%. Last week the NAAIM exposure index was 52.56 %, and the current week’s exposure is at 69.82%. The stock market also has a way of correcting the extremes that take place over the course of time. Stock prices have come down and money managers’ exposure had dropped to a level that is below what has been the norm in the last four years. The weak hands have been flushed out and active investors might be ready to start buying again.
Technology stocks have been a reliable indicator of overall market direction. If tech shares follow through on recent bullishness that should be considered a signal the market is ready to break out of a trading range. As discussed in a MarketWatch.com article, the sector has been under pressure recently, with many investors worried that tech’s big rally in 2017 had gotten overextended, with limited additional upside potential from levels that were seen as elevated.
The information technology sector has been rallying thus far in May, a steep upward move that has returned it to near-record territory and helped it erase some of the pronounced weakness it saw earlier this year. The sector has gained 7.5% thus far this month, nearly twice as much as any of the other 11 primary S&P 500 sectors. (In second place is materials, up 3.9% over the same period.) The S&P 500 itself is up 2.9% thus far in May, while the Dow Jones Industrial Average is up 2.5%. The Nasdaq Composite Index which maintains a heavier weighting toward large-capitalization technology and internet names, is up 4.8% over the same period.
Over the last week or so of trading, we've seen investors really start to bid up shares after they report earnings, indicating much more optimism. The recent action is constructive, as the issue of "lower highs" during this consolidation period was finally broken this week. That action adds more confidence to the bullish theme and takes the bearish views down a notch. No might be an opportune time for bullish bets with various debit and credit spread strategies to limit risk.
Feel free to contact us with questions,
Senior Trading Strategist
The opinions and forecasts expressed herein are those of Mr. Gregory Clay and may not actually come to pass. Mr. Clay’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.