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Market Update

Markets Advancing; Fear and Greed Index Screaming ‘Extreme Greed.’

July 20, 2016

(Wednesday Market Open) The market ride looks to continue again today as the three major benchmarks score gains in the early going amid better-than-expected earnings results from Morgan Stanley (MS) last night and Microsoft (MSFT) this morning. Will today’s earnings parade provide enough dazzle to power another record on the market measures?

If it plays out, the Dow Jones Industrials (DJIA) could clock its ninth straight session of higher closes and the S&P 500 (SPX) could make it six out of eight market meetings to the upside and a fresh peak. The Nasdaq (COMP6), meanwhile, is in catch-up mode as it remains 3.5% away from its own best-ever close.

The markets moved sideways yesterday with a bit of ho-hum that could barely draw out a whisper among the major benchmarks amid a mixed bag of earnings results. The DJIA made a go of notching a sixth straight record session close, but almost lost the momentum in the final hour of trading. When the dust settled, DJIA edged again into record terrain at 18,559.01, up 25.96 points, or 0.1%.

The SPX snapped its string of greatest hits by returning 3.1 points of its recent advances to close at 2,163.78, off 0.1%. COMP6 still held its positive stance on the year despite slumping 19.41 points to end the session at 5,0367.37, lower by 0.4%. The tech-heavy index is still up on the year, at 0.6%, but lagging the 6% expansions of the DJIA and SPX.

Meanwhile, the volatility index (VIX), the market’s so-called fear gauge, has dropped 3.78% to 11.97. The forward-looking VIX tends to move in an opposite direction of the SPX some 80% of the time, according to the Chicago Board of Options Exchange.

Like Monday, trading was within a tight range without a whole lot of impetus to meaningfully move the needles, analysts said. Are these the dog days of summer? Or is everyone glued to the Republican Convention events in Cleveland? As equity and commodity prices dropped, Treasury yields moved in the usual opposite direction, rising moderately higher. The 10-year yield moved up 3 percentage points to 1.556%. The U.S. Dollar Index also climbed, up 0.52% to $97.07.

S&P 500


The S&P 500 (SPX), plotted through the close Tuesday on the TD Ameritrade thinkorswim platform, popped its six-day string of setting record closings by pulling back 0.1%. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

A Slippery Slope for Crude. The August West Texas Intermediate (CLQ6), the U.S. crude benchmark, slithered to a 10-week low as traders worried about high inventories and slowing demand. CLQ6 prices pulled back $0.59, or 1.3%, to finish at $44.65 a barrel. They’re heading lower in the early going, toward $44.04. The Energy Department releases its usual Wednesday report on oil and gasoline inventories later this morning.  

Are the Bulls Back? If the latest American Association of Individual Investors (AAII) recent survey is on track, that looks to be a yes. “Optimism among individual investors about the short-term direction of stock prices is at a level not seen in over four months,” according to AAII. Bullish sentiment, defined as expectations that stock prices are on an upward trajectory over the next six months, climbed 5.8 percentage points to 36.9%. But that’s still behind the 37.4% registered on March 9 and the historical average of 38.5%.

Don’t break out the champagne just yet. AAII says it’s only the second time since last November that optimism has topped 30% in consecutive weeks.

What’s moving the mark? A flight to higher yields, according to AAII, amid record lows in Treasury yields. “Nearly 33% of respondents are either more optimistic or said that the low bond yields make stocks attractive,” AAII reports. “Several of these respondents noted the comparatively higher yields that dividend-paying stocks are trading with.”

And Then There’s the Fear and Greed Index. This is one of Warren Buffet’s favorites, according to a number of published reports: CNN’s Fear and Greed Index that measures seven market indicators like put and call options, market momentum, and stock-price strength. Massive greed is anything above 90 while maximum fear has the chart arm dipping below 10. It’s pushing toward “extreme greed,” passing the 90-mark at least once in the last week and sitting at 87 today with all seven in a greed position. A month ago, it stood on neutral ground at 53, according to the index.

Some comments on the index include this on puts and calls: “During the last five trading days, volume in put options has lagged volume in call options by 39.29% as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors.”

And this on market momentum: “The S&P 500 is 6.37% above its 125-day average. This is further above the average than has been typical during the last two years and rapid increases like this often indicate extreme greed.”

And this on safe-haven demand: “Stocks have outperformed bonds by 2.61 percentage points during the last 20 trading days. This is close to the strongest performance for stocks relative to bonds in the past two years and indicates investors are rotating into stocks from the relative safety of bonds.”

What would Warren do? According to a number of published reports, his famous quote is this: “Be fearful when others are greedy and greedy when others are fearful.”   

Good Trading,

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