The Dow and S&P 500 snapped an eight-week winning, their longest since 2013 and the Nasdaq ended a six-week winning streak. Meanwhile, the Russell 2000, which tracks small-cap stocks had its biggest weekly decline since August. For the week, the S&P 500 Index edged down 0.1%, while the Blue Chip-heavy Dow Jones Industrial Average slipped 0.2%. The tech-heavy Nasdaq index fell .2% over the week and the small cap Russell 2000 was the biggest loser down 1.2%.
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 our recent analysis is playing out as advertised where we said “…Retail investors are coming late to the party as professional money managers head for the exit. Expect prices to stall next week unless institutional investors return to the stock market…” The orange square in the updated chart below shows the upward price move stalling out to absorb the overbought condition. Also, the orange circle highlights momentum is trying to turn bearish.
In the chart below the DOW Transportation index ($TRAN) is has diverged lower from the Dow Jones Industrial Average ($INDU). We look for DOW Transports and Industrials to move in synch for confirmation of the current trend. Technically, whenever these indexes pull away from each other, it is considered a weakening trend. You can see in the updated chart below how the transportation index has diverged lower away from the Dow Industrials. Last week we said “…Expect the Industrial index to retrench if the Transports don’t catch up soon. It is not always right and like everything else it is subject to interpretation, but it does have a reasonably solid track record. Weakness in the Transports has occurred while the Dow Industrials continues to log multiple new highs…” The updated chart shows why this comparison is such a reliable indicator as the Dow Industrials are starting to retrench lower to follow the Dow Transports.
In the chart below the High Yield Corporate Bond Fund Index (HYG) is has diverged lower from the S&P 500 Index ($SPX). High yield is a barometer of risk-taking. When high yield bonds start dropping, it might be yet another sign big money is moving away from risky assets.
In the updated chart below, the dollar slipped against a basket of currencies on Friday and was set for its biggest weekly drop in a month as investor disappointment that implementation of part of a planned big U.S. tax overhaul may be delayed until 2019 put a brake on the currency's recent rally. Gold settled sharply lower last week, even as both stocks and the dollar, which typically move inversely to precious metals, slumped on the back of waning confidence for economy-boosting tax reform. Treasury prices fell last week, pulling yields higher, with traders taking a cue from a selloff in European government paper after data showed the eurozone’s economic recovery continues apace.
Through the close on October 27, the S&P 500 index had yet to register a 2% move up or down in a single trading session. In comparison, there were 55 separate 2% daily moves in 2009 and 35 in 2011, according to First Trust. An analysis shows that there were 10 daily moves of 2% in 2016. The last “correction”—a decline of more than 10% but less than a 20% drop—for the S&P 500 hit its bottom on February 11, 2016, according to Sam Stovall, chief investment strategist at CFRA Research. Between then and October 27, 2017, the S&P 500 had yet to see a pullback of more than 5%. What is so impressive about this streak? Since World War II, according to Stovall, there have been 56 pullbacks—declines of more than 5% but less than 10%. In other words, there is, on average, a pullback every year. It has been well over a year since the last pullback. "Short-term overbought conditions are still in place, so we think it will take a couple of weeks for the pullback to run its course," said Katie Stockton, chief technical strategist at BTIG. "The loss of momentum is likely to be most pronounced in stocks that have extended their uptrends over the past several weeks." In the updated chart below, retail investors are chasing large cap DJIA and FAANG Nasdaq stocks higher as those indexes are the leading performers so far in the fourth quarter.
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. Recently we have been pointing out how institutional investors have been quietly heading for the exit by selling stocks to cash in profits the past few weeks. The current Put/Call Ratio indicates investors are buying more put option contracts to hedge against lower near term prices as they continue to dump stocks.
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 confirmed in the updated chart below, the CBOE Volatility Index recorded the highest weekly close in several months. Investors are getting nervous about high valuations and buying more put option contracts.
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 11/08/2017. Pessimism about the short-term direction of the stock market among individual investors is at its lowest level since mid-September. The latest AAII Sentiment Survey also shows a rebound in neutral sentiment. Bullish sentiment, expectations that stock prices will rise over the next six months, is unchanged at 45.1%. Optimism is above its historical average of 38.5% for the sixth time in nine weeks. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 5.4 percentage points to 31.8%. The rise follows what had been an eight-month low. The historical average is 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months, fell 5.5 percentage points to 23.1%. Pessimism was last lower on September 13, 2017 (22.0%). Bearish sentiment is below its long-term historical average of 30.5% for the seventh week out of the past nine weeks. Pessimism has fallen by a cumulative 10.0 percentage points over the past two weeks. The drop in bearish sentiment has occurred as the major large-cap indexes have continued to set new record highs. At their current levels, all three sentiment indicators are well within their typical historical ranges.
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 11/08/2017. Third-quarter NAAIM exposure index averaged 79.40%. Last week the NAAIM exposure index was 60.18 %, and the current week’s exposure is at 56.16%. Money managers continue to sell off equities and the declining exposure index confirms our recent analysis where we said “…Money managers appear to be taking profits and stashing some cash to bid on stocks based on earnings announcements… Professional money managers are quietly moving to the exit. Their exposure to stocks, which had been holding near 90% in September, is down to 60% now as amateur investors grow more and more bullish. The last time this happened, to such an extent, was in 2014...”
In the updated graph below investors are still trading full ‘risk-on’ as evidenced by the technology sector leading the market higher. As reported in the Stock Trader’s Almanac, DJIA has been up 9 of the last 13 years on Monday of expiration week and Friday is up 12 of the last 15 years with an average gain of 0.62%. S&P 500, NASDAQ and Russell 2000 have not been as bullish as DJIA around or on November option expiration. S&P 500 has advanced only 16 times during options expiration week while NASDAQ and Russell 2000 have climbed only 14 and 13 times respectively over the past 23 years. All four indices have posted average losses on Monday and aside from DJIA and S&P 500 have been essentially mixed on options expiration day. Friday’s solid average gains across the board are largely due to a sizable gain in 2008. Money managers continue to sit on more cash than they have in a very long time. As earnings season progresses investors are ‘selling the news’ at the current elevated prices and sitting on cash waiting to buy the next dip. Any weakness next week could be a good entry point for new longs ahead of the usually bullish Thanksgiving holiday. Note solid strength during the week after options expiration since 2002. The worst blemish on the recent history is 2011.
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.