Last week the markets were dealt with a tough hand in sometime and we saw VIX (volatility index) spiking almost 45% on 05/17/2017 and that was the 8th largest 1-day increase since 1990. The equity markets have recovered well since the rout, clawing back to its 50-Day moving average. According to the Association of Individual Investors (AAII) the bullish sentiment of the equities has now been tempered as the bulls sentiments moved to 23.85%, 8.9 points less from the previous week’s reading of 32.73%.
The market breadth was positive last week as the Advance/Decline line gained 979 units while the number of new 52-week highs out did the lows on three sessions. The percentage of the stocks above their 20-day moving average was about 37.25%, above the 1 std-dev line of 33%. But what about the divergences between the DJ transportation index and the DJ industrial index. This year the DJT has declined about 0.5% as compared to increase of 5.7% in the DJ Industrial average. According to Sam Stovall of CFRA,
“Dow Theory is…time-flexible warning signal of economic disagreement, rather than a time-specific, rules-based investment approach. Besides, most indicators are not meant to be used in isolation, but rather as confirmation of other fundamental and technical signals. Therefore, while the divergence of performances between the Dow and its Transports since the beginning of the year may sound alarm bells to some, it represents dissonant noise to others. We believe that investors should not ignore its warning that a pullback (decline of 5%-9.9%) or even a correction (-10% to -19.9%) is possible. The length of time since the last correction is a simple supporter of that conclusion.”
So like I mentioned in my previous newsletter, various divergences, sign posts (hindenburg omen, Dow theory and so forth) and narrow breadth are the signs which warrant caution and hence risk management becomes more important than ever. But the drawdown or pullback does not mean that there will be bear market unless the trend is broken. The market (S&P 500) still remains in the uptrend and to follow that is one of key the rules of investing – Always be a friend of the trend!
This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Chintan Shukla, CFA and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. You cannot invest directly in any index and Past performance may not be indicative of future results. Investing involves risk and investors may incur a profit or a loss. Securities offered through Raymond James Financial Services, Inc, Member FINRA/SIPC. VIX is the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. It is a widely used measure of market risk. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc. Goldfarb Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc.