Trading Range Persists (Mutual Fund/ETF Newsletter 5/7/15)

The market took a hit yesterday, when Federal Reserve chairman Janet Yellen raised the following concern: “I would highlight that equity market valuations at this point generally are quite high. There are potential dangers there.” The market reacted accordingly. At one point, the Dow was down 195 points. Yellen’s comments could be compared to Alan Greenspan’s “irrational exuberance” speech, which he made on December 5, 1996. Greenspan’s effects on the market were mild, with the Dow dropping 2.6% over the next four trading sessions. Three years later, to the day, the Dow had gained another 75%, while over the same period, the Nasdaq soared 175%.

The overbought/oversold status of the market is neutral. We haven’t had a heavily oversold reading since last October. We should also point out that there have not been any heavily overbought or mildly overbought readings in several weeks. In essence, the market has been range-bound, which is reflected in our O/B readings. The obvious question is: which path will the market eventually take? At some point, the indecision pattern will be resolved. As always, we will continue to approach the market one day at a time. With our models in a positive mode, we continue to advise a fully invested position.

For the year-to-date, the market has made very little progress. The benchmark S&P 500 is ahead +1.73%, while over the same period, our Actual Cash Account is showing a profit of +$47,306 +3.33%. The strongest performer amongst the key indexes has been the Nasdaq Composite +4.42%, while the Dow Transports –4.63% and Utilities –6.20% continue to lag. As you can see by the chart, the Transports have bounced off support again and again over the last several weeks. Its ability to remain above this area continues to represent a strong plank in the bullish platform. However, a strong break through support could be indicating the possibility of a correction.

The S&P 500 is only 1.39% away from record high territory, although it has again dropped below its 50-day moving average, albeit narrowly, which has flattened out. However, it is still comfortably above support, in evidence at its March lows. The Dow, Nasdaq Composite, S&P mid-cap index, and Russell 2000 have also taken out their respective 50-day lines, but they have yet to breach their March lows. As long as the March lows hold, the chart patterns, although indecisive, are bullish.