E Market Outlook – Oct. 23

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum.

This type of momentum fund is considered a reliable proxy for the overall stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. In the updated chart below the MTUM ETF has broken into a strong bullish uptrend as investors are in full ‘risk-on’ trading mode. The Momentum Factor has not been this overextended since June 2015 and prices crashed the next month. The market can remain overextended indefinitely and prices can settle at the highs to absorb an overbought condition.

Last week day traders pushed equity prices through sell stops to kick stocks higher during option expiration. Stocks are due for a pause.

A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth” indicator used to gauge the internal strength/weakness of the market. Like many of the technical market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. Over the past twenty months or so Nasdaq stocks have led market direction. In the updated BPCOMPQ chart below you can see that Nasdaq stock prices have stalled to absorb an extremely overbought condition. The other equity indices are also overbought and it is reasonable to expect the market to take a breather next week to ‘sell the news’ after some high profile quarterly earnings announcements.