The S&P 500 is up 4.22% for the year, after sliding into a correction—a fall of 10% from its Jan. 26 all-time high—in February and logging its biggest monthly decline since March 2016. The Dow Jones Industrial Average has risen 2.49%, while the Nasdaq Composite is up 9.52% and the small cap Russell 2000 is up 4.1% for the year. Over the past year you can see the Nasdaq soaring over 28% followed by the Dow near 20% with the S&P and Russell 2000 both gaining around 16%. Gold and bonds are the laggards compared to equity assets. For the week, the Dow moved up 3.25%, with the S&P 500 climbing 3.54%. The Russell 2000 and the Nasdaq both jumped 4.17% for the week.
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 orange square in the updated chart below highlights a trading range. The orange circle at the bottom confirms the trend is neutral. Typically a stock price breaks out of range in the direction of the prevailing trend. The question is when will the breakout occur and will it continue in an uptrend?
Another tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth” indicator used to gauge the internal strength/weakness of the market. Like many of the technical market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. We always point out how in recent years technology stocks have been a relatively reliable indicator of overall market direction. The updated BPCOMP chart below shows Nasdaq shares catapulting higher. If the bullish move continues above the 200-day MA (moving average) green line this can be considered a strong technical signal indicating the other equity indices are headed back toward all-time highs.
In the updated chart below, the Dollar set a modest weekly advance that marks the third straight week of gains for the dollar. The U.S. dollar held gains against most of its rivals after President Donald Trump formally announced tariffs on steel and aluminum imports. U.S. trade partners Canada and Mexico will be exempted from the levies for now, leading their currencies to strengthen. Gold prices ended higher last week, as monthly data revealed a strong rise in U.S. jobs, but disappointing growth in wages. Gold and the greenback often move inversely as a weaker dollar can raise the appeal for investors using other currencies to buy the precious metal. “The jobs numbers initially sent gold lower, but also the wage growth data was not too robust at 2.6% and this has allowed traders to buy the dip and/or keep their long positions heading into the weekend,” said Jeff Wright, chief investment officer at Wolfpack Capital. Treasury bond prices dropped after February’s employment report showed strong jobs gains but a muted wages number, which nonetheless keeps the central bank on track for three to four rate hikes this year. The labor data also comes as investors wrestle with a bevy of geopolitical events, including the implications of steel and aluminum tariffs signed by President Donald Trump late Thursday, increased signs of easing monetary-stimulus measures outside of the U.S., and news Trump will convene with North Korean leader Kim Jong Un in a historic meeting. Bond traders sold Treasurys after the jobs data highlighted the conundrum of strong job gains but tepid wage growth. Investors said February’s wages number was unlikely to derail the Federal Reserve from its gradual rate hike path, with a few investors maintaining the central bank would shift to four rate increases from the widely expected three in the dot plot, the Fed officials’ projections of future interest rates.
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. Last week we said “…Investors are aggressively buying put option contracts to hedge against price plunges…” You can see this week the situation has completely reversed as investors now are into call contracts to bet on higher prices as stocks are trending higher in a recovery bounce.
As reported in the Wall Street Journal, the bull market turned nine years old Friday, extending an epic run for U.S. stocks even as concerns about heightened volatility and inflation have slowed the pace of the rally in recent weeks. It has been 2,266 trading days since stocks hit the financial crisis low on March 9, 2009. In the years that have followed, corporate profits have regained their footing, while the unemployment rate has fallen to 17-year lows and the pace of global economic growth has accelerated. The S&P 500 has more than quadrupled over that period—making its bull run, defined as a gain of 20% or more from a low point, the second longest in U.S. history. The Dow Jones Industrial Average is up 280%, while the Nasdaq Composite has surged 486% over that time. Yet even as stocks have repeatedly defied investors’ expectations, the bull market has been called “unloved,” or even the “most hated rally ever,” reflecting investors’ widespread disdain for shares that look pricey, gridlock in Washington and—more recently—the threat of trade wars casting a shadow on corporate earnings growth.
“It’s going to be a hard slog, certainly compared to the previous nine years,” said John Velis, a macro strategist at State Street Global Markets. Still, Mr. Velis said, it is tough to argue that the end of the bull run is imminent. Corporate earnings look strong enough to continue supporting further stock gains, investors say, even as the Federal Reserve pares its bond holdings and raises short-term interest rates from near historic lows. With nearly all results in for the latest quarter, companies in the S&P 500 are on track to report earnings growth of 15% from the year-earlier period, according to FactSet, the fastest pace since 2011. Many analysts expect the gains to continue in the coming quarters, thanks in part to savings from corporate tax cuts, a weaker U.S. dollar and stabilizing commodity prices.
In the graph below, as they always have in past years, technology stocks remain the big dog in the equity world. When tech stocks weaken the other indexes fall and vice versa when the Nasdaq soars it pulls the overall market higher. Bonds and real estate continue to suffer from concerns over future higher interest rates.
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. As evidenced in the weekly chart below, market volatility did a complete about-face this week and dropped sharply. Low volatility is once again stoking market buyers. The positive jobs report on Friday was a key trigger, but the VIX had been falling all week long. It is now in the mid-teens, a level we have not seen since the "Groundhog Day Massacre". With the last week’s move, the VIX has jumped back below the closely watched level of 20, which is considered its long-term average.
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 03/07/2018. The percentage of individual investors describing their outlook for stocks as “neutral” rose to its highest level in nearly two years. At the same time, optimism is at its lowest level in more than six months according to the latest AAII Sentiment Survey. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 5.9 percentage points to 45.2%. Neutral sentiment was last higher on May 25, 2016 (52.9%). The historical average is 31.0%. Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 10.9 percentage points to 26.4%. Optimism was last lower on August 31, 2017 (25.0%). The drop keeps optimism below its historical average of 38.5% for the third time in five weeks. Bearish sentiment, expectations that stock prices will fall over the next six months, rose 5.0 percentage points to 28.4%. Though it is at four-week highs, pessimism remains below its historical average of 30.5% for the 12th time in 13 weeks. Neutral sentiment has now risen for five consecutive weeks, increasing by a cumulative 18.7 percentage points. Conversely, optimism has fallen by a cumulative 22.1 percentage points since Valentine’s Day. At current levels, neutral sentiment is unusually high, while optimism is unusually low. Since our survey was started in 1987, the S&P 500 index has experienced average six-month returns following unusually high neutral sentiment readings and better-than-average returns following unusually low bullish sentiment readings. Trade policy appears to have had some impact, though it’s uncertain how much. Tariffs and trade policy were specifically mentioned by some respondents to this week’s survey even though we did not ask about it. Many individual investors are also anticipating continued volatility and/or think the political backdrop could have a further impact on the stock market. Higher interest rates are having an influence on some, but not all individual investors. Also playing a role are valuations, tax cuts, earnings and economic growth.
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 03/07/2018. Fourth-quarter NAAIM exposure index averaged 70.97%. Last week the NAAIM exposure index was 81.00 %, and the current week’s exposure is at 72.05%. Last week’s comment is valid where we stated “…Many quality stocks are currently selling at a discount and money managers stepped in to take advantage of the opportunity to buy these shares which increased equity exposure…” Especially as stocks remain in recovery mode money managers can be expected to increase equity exposure.
The updated graph below confirms the market is in full recovery mode from the recent correction. All S&P sectors are up over the past month being led by technology stocks as usual. Plus, March is usually one of the more profitable months for stocks. Paul Hickey, the co-founder of Bespoke Investment Group, told CNBC that, since 1983, the S&P 500 has posted an average gain of 1.46% in March. During the current bull market, the index has performed even better in that month, with an average gain of 2.95%, he notes. When March showed a gain, the average advance was 3.6%. Investors have been fixated on inflation and last Friday job number reported an average hourly earnings miss to quell inflation fears. The long term bull market remains in place after the recent correction which provided and an opportunity to “buy the dip”. Market direction is starting to display a propensity to change instantaneously so hedging strategies are appropriate in this environment. Especially with Quadruple Witching day coming up this Friday which often generates increased trading volume and volatility.
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.