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Market Update - February 22, 2016

Monday, February 22, 2016

Economic Comment

We are at the in between time with earning season ending and the next job’s report not due until Friday, March 4th. With no real earnings flow the markets seem to be looking to more head line news than anything else and lately that has been more positive. Let’s see what our indicators are doing.

Bullish Percent’s

10 Week Bullish Percent (Short-term) in the month of January the 10-week got down to 10% which historically has been a good signal for a bounce in a deeply oversold market. We are getting that bounce and the 10-week is moving back up to 38% which is still slightly oversold. 

Optionable Stock Bullish Percent (Intermediate term) this indicator is now on OFFENSE and has added some signals in the last two weeks. Now at 30% it is still in what is considered the “low risk” zone. The field position is good and this is now a positive for the US Equity markets.

NYSE Bullish Percent (NYSEBP) (Longer-term) this indicator is now on OFFENSE and also been adding some buy signals. Now at 32%, field position is still good for US Equities. (Source: Dorsey Wright)

Point and Figure Charts (Source: Dorsey Wright)

S&P 500 has a big test ahead of it. After testing the 1820 level twice, (once in January and again in February). The S&P 500 has rallied right up to a strong downtrend line at 1940-1950. Many times when an index or stock rallies up to a downtrend line, it gets turned back, before moving higher. (Source: Dorsey Wright Website) 

S&P 500

NASDAQ the NASDAQ is farther away from the same downtrend line seen in the S&P 500. The NASDAQ would have to get to 4720 from the current 4550 level. It looks like the rotation from Large Cap Growth to Large Cap Value could be taking place in the first quarter of 2016. (Source: Dorsey Wright Website) 

Russell 2000   the Russell 2000 is even farther from the same downtrend line. The Russell 2000 would have to rally 9% just to get to the down trend line. It doesn’t look like that is going to happen anytime soon. (Source: Dorsey Wright Website) 

US 10-Treasury Note:  The 10 year made a new low, down to 1.57%. After that low the 10-year had a brief rally back to 1.82% before closing at 1.75%. It looks like the “new normal” for the 10 year might be under 2% for the foreseeable future. (Source: Dorsey Wright Website) 

10-year Treasury

Relative Strength The big change in the relative strength picture is that US Equities have moved down TWO places. Fixed Income is now number 1 and money funds are number 2. Now that doesn’t mean that equities can’t make money in 2016, but it tells us that US Equities are now facing a head wind for the first time in over five years. (Source: Dorsey Wright Website) 

Conclusion

In August and September of 2015 the US Equity market had a 10% correction. Our indicators were much oversold and the US Equity markets had a 10% plus rally in October led by energy stocks. It looks like the same scenario has been building up in the current environment. Oil is rallying and so are US Equity markets. Last year any portfolio manager that avoided oil companies, (they usually pay a good pidend) had positive performance. This means that many investors have no oil company exposure or are very underweighted. We are seeing this play out as Large Cap Growth underperforms versus Large Cap Value. Our bullish percent indicators have improved, but the relative strength measures are still flashing caution. The big surprise for 2016 would be if after a rough first three weeks of 2016, the 1st quarter of 2016 actually turns positive for US Equity markets. This is something investors could not envision even two weeks ago, but it could become a possibility. We will keep you updated.

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