3 signs of hope for bulls

8/12/2019 3 Signs of Hope for Bulls

1/11


http://www.schaeffersresearch.com/commentary/printpage.aspx?id=121700

3 Signs of Hope for Bulls

Taking a historical look at third-quarter SPX returns

by Todd Salamone6/28/2014 8:18 AM

Keywords: SPX DJIA RUT stocks options commodities currency economy education

Escalating tensions in Iraq and hawkish comments from St. Louis Fed President James Bullard

pressured most U.S. markets last week, although bursts of late-session buying power helped ease

the blow. By the time the closing bell sounded on Friday, the Dow Jones Industrial Average and

broader S&P 500 Index were sitting slightly in the red for the week. Bucking the trend lower,

however, was the tech-laden Nasdaq Composite, which managed to notch a second consecutive

weekly win. Heading into the third quarter, Todd Salamone highlights three contrarian indicators

that could help buoy markets during a historically bearish period.

3 key benchmarks face off with critical technical levels

Why we're keeping a close eye on this indicator

Rocky White offers up 17 stocks that tend to outperformin the third quarter

Finally, we close with a preview of the major economic and earnings events for the week ahead,

plus our featured sector.

Notes from the Trading Desk: Why Complacency May Not Be as Widespread as Advertised

By Todd Salamone, Senior VP of Research

"With 1,900 on theS&P 500 Index (SPX - 1,949.44) in the rear-viewmirror, and now

targeting 1,980-2,000 (1,980 is the target for the inverse head-and-shoulders

breakout pattern, and 2,000 is triple the 2009 low), traders should not lose sight of

the historical significance of half-century marks on the SPX as the index approaches

1,950 ... the SPX either hesitated for a couple weeks to a couple months around such

half-century marks (1,550 and 1,750), or became unstable after moving above a

half-century level (1,650). The 1,650 level, in fact, was first tested in May 2013, but

was not cleared for good until marking a bottom in early October, after a 4%

pullback that lasted just under a month."

-Monday Morning Outlook, June 7, 2014

"After another $22 billion in new capital was allocated to hedge funds in May, the

industry now has surpassed $3 trillion in assets under management for the first time

on record."

-24/7 Wall St., June 25, 2014

"4.5% increase in $SPX component short interest, which is far above the '12 lows -

and there is a lack of fear?"

-@ToddSalamone on Twitter, June 26, 2014

"At least five Wall Street firms on Thursday slashed their growth forecasts for the

current quarter. Among them, Goldman cut its second-quarter GDP target to 3.5%
http://www.schaeffersresearch.com/commentary/content/ezines/why+this+record-setting+run+may+not+be+over/mondaymorningoutlook.aspx?id=121417&utm_source=SR&utm_medium=Link&utm_campaign=DCGhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=SPXhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=DJIAhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=RUThttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=stockshttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=optionshttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=commoditieshttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=currencyhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=economyhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=educationhttps://twitter.com/toddsalamonehttp://247wallst.com/banking-finance/2014/06/25/hedge-funds-now-hold-over-3-trillion-in-assets/http://www.schaeffersresearch.com/commentary/content/ezines/why+this+record-setting+run+may+not+be+over/mondaymorningoutlook.aspx?id=121417&utm_source=SR&utm_medium=Link&utm_campaign=DCGhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=educationhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=economyhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=currencyhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=commoditieshttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=optionshttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=stockshttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=RUThttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=DJIAhttp://www.schaeffersresearch.com/search/index.aspx?type=phraseobs&searchstring=SPX


2/11


http://www.schaeffersresearch.com/commentary/printpage.aspx?id=121700 2

from 4.1%. Barclays went to 2.9% from 4.0% and RBS trimmed its target to 2.2%

from 2.7%."

-The Wall Street Journal, June 27, 2014

Despite weak economic reports -- including lower-than-expected gross domestic product (GDP)

data -- and persistent warnings from market technicians that low volatility is indicative of

complacency in the marketplace, U.S. equities displayed some resilience this past week, when

various headlines could have easily shaken market participants. This resilience suggests that

complacency is not as widespread as advertised (more on this to follow).

The S&P 500 Index (SPX - 1,960.96) has moved into another choppy pattern during the past

seven trading days. The half-century mark of 1,950 has become an important level recently, as

we speculated could happen a few weeks ago. It acted as resistance earlier in the month, and,

following a June 18 breakout above this level, it was retested on two separate days last week.

We still think a move into the 1,980-2,000 level is possible, but it will not be a huge surprise if

1,950 is revisited multiple times as we move through the summer months. As the SPX challengesits half-century mark, other key benchmarks could be challenged by round numbers just overhead.

For example, per the study below, millennium levels on the Dow Jones Industrial Average (DJI -

16,851.84) have proven to be short-term speed bumps since 10,000 was first touched in 1999.

Since Dow 10K, the Dow Jones Industrial Average has displayed weaker-than-normal price

action in the one to two weeks after rallying to a millennium mark that has never been

touched:
http://www.schaeffersresearch.com/commentary/content/marketobs/why+this+record-setting+run+may+not+be+over/observations.aspx?id=121417&utm_source=SR&utm_medium=Link&utm_campaign=DCGhttp://blogs.wsj.com/moneybeat/2014/06/27/morning-moneybeat-wall-street-resets-expectations/


3/11



Moreover, the round 1,200 century mark on the Russell 2000 Index (RUT - 1,189.50) lingers just

overhead, after a failure at this level in March. This round number is 10% above the May lows,

which were being carved out over a two-week period. So, not only is there the potential forsellers to emerge as the March highs are tested, but profit-taking could also surface amid those

timely traders who bought the May lows.

The RUT 1,090 level served as support in January and May, while the 1,200 area continues

to shape up as potential resistance


4/11



A contrarian indicator that we have been following closely the past few weeks reflects the

sentiment among equity option speculators, who were at a bearish extreme ahead of the SPX's

breakout above the 1,900 century mark in late May. This group has grown increasingly optimistic

the past few weeks, as the unwinding of fear continues among these traders. Right now, the 10-

day average of buy-to-open put volume relative to call volume is nearing the levels of January,which preceded a 5% SPX pullback. As long as the direction of this ratio continues south, the

market is likely to advance. However, if the sentiment shifts and this ratio heads higher, the

market becomes at increasing risk of another pullback. As such, we'll continue to closely monitor

this indicator.


5/11


6/11



Fund flows are not indicative of complacency toward U.S. stocks

Indicator of the Week: Quarterly Numbers

By Rocky White, Senior Quantitative Analyst

Foreword:With Monday marking the end of the second quarter, I'll be taking a look at how

stocks have done in the past, depending on the quarter. The S&P 500 Index (SPX) is up nearly

5% for the quarter, so I think it's safe to assume this will be the sixth straight positive quarter ina row for the index. I'll look at past data and see if we can get a sense as to how long the streak

might last. Finally, Monday is also quarterly expiration for the major indexes. I'll see how stocks

have done historically following those events.

S&P 500 Returns by Quarter:The tables below summarize how the SPX has done in each

quarter over the past 20 and 50 years. You can see in more recent times the third quarter has

been the laggard of the group. It's the only quarter averaging a loss over the past 20 years. It

has also been the worst-performing quarter over the past 50 years, based on average return.

Looking at the standard deviation over the past 50 years, the third quarter has been the most

volatile, as well. Stocks have a tendency to underperform from July through September.


7/11



Six in a Row:I noted earlier that this will be the sixth straight positive quarter for the SPX. That's

the longest streak since 1996. In fact , that previous streak was the longest ever for the SPX

(data back to 1928), lasting a full two more years. It finally ended when the third quarter of 1998

was negative.

The table below shows all of the previous times when the SPX had six straight positive quarters.

The index has gained about 37% during the current streak, which is the second lowest return on

the table. You can see that in the past, after six straight positive quarters, the next quarter has

typically been pretty strong -- averaging a gain of 4.09%. In addition, the streak went on to at

least seven quarters all but one time. Moreover, the next year's returns have been pretty good

compared to typical SPX returns.


8/11



Individual Stocks:Finally, below is a list of stocks that have performed best in the third quarter

over the past 10 years. I considered all optionable stocks meeting some basic liquidity

requirements, based on average daily stock volume and open interest. These are all stocks in

which more than 80% of the returns were positive.


9/11



This Week's Key Events: Home, Auto Sales UpcomingSchaeffer's Editorial Staff

Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates

listed below are tentative and subject to change. Please check with each company's respective

website for official reporting dates.

Monday

The Chicago purchasing managers index (PMI) and the Dallas Fed's manufacturing survey

are scheduled for Monday, along with pending home sales data. There are no significant

earnings reports scheduled.

Tuesday

The latest reports on construction spending and motor vehicle sales will come out on

Tuesday, as well as Markit's PMI and the Institute for Supply Management's (ISM)

manufacturing index. Acuity Brands (AYI) and Paychex (PAYX) will step into the earnings

confessional.

Wednesday

The regularly scheduled crude inventories update, factory orders data, and the Automatic

Data Processing (ADP) employment report will be released on Wednesday. Furthermore, Fed

Chair Janet Yellen is scheduled to speak at the International Monetary Fund (IMF) central


10/11



banking conference. Constellation Brands (STZ) will report quarterly earnings.

Thursday

Although markets will close at 1:00 p.m. ET on Thursday, the economic calendar is chock-

full. Specifically, weekly jobless claims, international trade data, and the ISM non-

manufacturing index will hit the Street on Thursday. Additionally, Wall Street will get an

early look at the Labor Department's nonfarm payrolls report, which is being released a day

ahead of schedule due to the Fourth of July holiday. No notable names are slated to report

earnings.

Friday

Markets are closed on Friday in observance of Independence Day.

And now a sector of note...

Energy

Bullish

The Energy Select Sector SPDR Fund (XLE) reached another all-time high on Monday before

consolidating some of its gains just above the round-number $100 level to finish the week. This

wasn't unexpected, as we noted last week that the ETF's 14-day Relative Strength Index (RSI)was in overbought territory at 85. Regardless, the ETF is still sitting with a year-over-year gain of

more than 27%. Despite XLE's technical prowess, skepticism remains evident among speculative

players. Specifically, XLE's 10-day put/call volume ratio of 9.71 on the International Securities

Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks in

the 94th percentile of its annual range. This reading has popped higher from last week's ratio of

7.69 (in the 94th percentile). Simply stated, puts have been bought to open over calls at an

accelerated clip in recent weeks. What's more, a recent Merrill Lynch-Bank of America survey

found hedge funds are underweight the energy sector, relative to other sectors and historical

weightings in the group. However, the uptick in XLE put buying may indicate the firms are starting

to buy shares of the ETF -- using the options as a hedge -- which could fuel another leg higher.

At the same time, pessimism toward the energy sector is witnessed in the Market Vectors Oil

Services ETF (OIH). Over the past year, the percentage of analyst "buy" ratings toward the 37stocks we track in this basket has declined to 52% from 62%, while short interest on the

component stocks has surged over 49%. In fact, short interest as a percentage of the stocks'

float, on average, stands at 7.1%. Meanwhile, OIH has rallied 30.5% in the same time frame --

and tagged a new five-year high of $57.36 on Friday. From a contrarian perspective, an unwinding

of skepticism in the face of continued strength in the energy sector could help OIH notch higher

highs.


11/11


2014 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email:[email protected]

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.Market Data provided by QuoteMedia.com | Data delayed 15-20 minutes unless otherwise indicated.
mailto:[email protected]

3 signs of hope for bulls

Documents