"The FOMC policy statement and Fed Chair Janet Yellen's press briefing could be mid-week drivers. The removal of the word 'patient' from the FOMC statement has been anticipated by some Fed watchers. If 'patient' is removed, stocks might sell off in response, as our 'data dependent' Fed was just presented with weaker-than-expected retail sales and inflation data ... SPY comes into this week trading around the biggest put open interest strikes in the March series ... [T]he upside to this configuration is that a positive reaction to the Fed would unleash short covering related to this expiring put open interest."
-- Monday Morning Outlook, March 16, 2015

"But the internal economic projections published alongside the committee's statement and Yellen's news conference were less reassuring. Far from suggesting that better times are here to stay, they indicate that policymakers are becoming more pessimistic about the economy's prospects ... Investors and traders weren't reacting to good news about the economy. They were celebrating the rising probability that the Fed isn't about to remove the punch bowl, after all."
-- The New Yorker, March 18, 2015

The "Madness" that began last week in the college basketball world carried over into the financial markets, as the underdog Fed surprised market participants by removing the word "patient" with respect to its rate-hike outlook, while simultaneously coming across dovish in its forecasts and statement. While we believed a dovish statement was appropriate but not a given, it was how the Fed delivered its message that was surprising, removing "patient" but also maintaining the dovish tone that market participants were seeking.

The dollar experienced its biggest losses in over a year, catching many long the dollar off guard, much like those unpleasantly surprised when Georgia State and Alabama-Birmingham produced bracket-busting upsets in the second round of the NCAA Tournament. Oh yes, equity markets surged and 10-year bond yields declined back below 2.00%.

"London's FTSE 100 Closes Above 7,000 for First Time"
-- Wall Street Journal Market Alerts, March 20, 2015

Ultimately, the bulls came out on top of last week's quadruple-expiration week battle, with the S&P 500 Index (SPX - 2,108.10) surging more than 2.5% and above the round 2,100 area that marked a peak earlier this month. Other equity benchmarks rallied back above respective round-number resistance areas by last week's close, including the Nasdaq Composite (COMP - 5,026.42), which closed back above the 5,000 millennium mark. Additionally, on Friday, the COMP marched above its month-to-date high that occurred in the first week of the month.

From a technical perspective, the biggest risk to the immediate term is that multiple equity benchmarks are again trading around key round-number areas simultaneously, which was also the case earlier in the month when weakness quickly followed. In other words, we have seen markets become unstable in the early stages of overtaking a new round-number level, until they don't. With a key European benchmark overtaking a new millennium level for the first time, it will be interesting to see if anxious profit-takers take center stage in the days ahead, and whether or not this impacts world markets, particularly the U.S.

" [A]nother major index -- the U.S. Dollar Index (DXY - 100.18) -- has run up to the round $100 century mark. The strong dollar has been one of many 'fear factors' among market participants, especially as it relates to multi-national companies doing business overseas. Just as the dollar grabs headlines with its impressive rally and analysts trip all over themselves to reduce earnings estimates based on recent dollar movement, one has to ask whether this round number proves to be a major speed bump in the days and weeks ahead? ... A rejection at $100 would certainly be a surprise, as long positions in the dollar are at multi-year highs, according to the weekly Commitment of Traders (CoT) data."
-- Monday Morning Outlook, March 16, 2015

As we mentioned above, on the heels of the Fed's dovish tone last week and market participants bracing for a rate hike in the not-so-distant future, the U.S. dollar index experienced a nasty rejection at the round 100 level.

If last week marked a peak of some kind in the dollar rally, the question asked last week in this report becomes even more important: "What (if any) upside is there to the coverage the U.S. dollar is getting? In other words, might lower earnings expectations work in favor of the bulls, in terms of a lower bar to hurdle when earnings season rolls around again?" So, just as analysts scrambled to reduce earnings estimates due to a surging dollar, there is the possibility that perceived dollar headwinds are "overly" factored into earnings estimates, a potentially bullish underpinning in the months ahead.

Also, don't forget that many hedge-fund managers have moved out of U.S. stocks and into Japan and European equities. If dollar weakness continues, these same managers may move back into U.S. stocks.

Also on our radar is the CBOE Market Volatility Index (VIX - 13.02), which carved out a new 2015 intraday low on Friday, before closing back above 13.00. Previous to last week's decline and ahead of the Federal Open Market Committee (FOMC) meeting, the VIX had danced around 15.50, which is half the October 2014 high. With a new 2015 low achieved last week, our thought is the VIX has room to decline further, with an 11-plus reading a possibility in the short term. The near-term risk for equities is a short-term pop from the prior 2015 closing low.

A slow, lengthy VIX decline would be a surprise to the many strategists that have been preparing us for higher volatility. In fact, remember, it was as recently as the middle of last month when VIX futures traders were in a rare net-long position. They are now shorting volatility futures again, but the net short position is not anywhere near previous extremes. This would suggest that if the recent shorting activity in VIX futures continues, volatility is apt to remain depressed in the weeks ahead.

Various stock-market sentiment gauges support bullish price action in equities, which could depress volatility too. For example, a weekly survey of the American Association of Individual Investors (AAII) just produced its lowest bullish percentage reading since April 2013. Moreover, per the chart below, the SPX's 10-day equity-only, buy-to-open put/call volume ratio is elevated, nearer to levels that have marked major bottoms. Unwinding of this pessimism among equity option players could be supportive in the weeks ahead.

Read more:

Indicator of the Week: What the First 50 Days Tells Us About 2015

The Week Ahead: GDP, BlackBerry Limited in the Spotlight

"Now, the January highs in the $206 area -- which is also home to SPY's 40-day and 80-day moving averages -- become a potential support zone in the days immediately ahead. Also, note that SPY's Dec. 31 close is at $205.54, adding an additional layer of support, from a technical perspective."

"... for those of you with a time frame of six weeks or less, we recommend a decent balance of long and short exposure. Or, if you're trading options, maintain a healthy mix of call and put exposure, given the growing risk to the bullish outlook ..."
-- Monday Morning Outlook, March 9, 2015

Last week was almost a carbon copy of the prior week's price action, if you follow the SPDR S&P 500 ETF Trust (SPY - 205.83). In other words, a Monday rally was quickly wiped out by a mid-week decline, a rally back to the prior week's close, and then Friday ending in a huge disappointment. The one difference is that this past Friday's lows were above the lows in the middle of the week, whereas in the week prior, new weekly lows were carved out on the last trading day of the week.

As you might infer from the tweets above, things quickly changed as SPY at first reacted favorably to weak economic data, but then sold off on weak economic data the following day. Volatility, as measured by the CBOE Volatility Index (VIX - 16.00), advanced and declined sharply around the 15.53 area -- half the October peak, and a level that we have been watching closely.

Moreover, during a three-day period, SPY bounced around its year-to-date (YTD) breakeven point at $205.54, with closes below this level on Tuesday and Wednesday followed by a close well above it on the heels of Thursday's surge. By Friday, the put-heavy 205 strike (for options expiring on Friday, March 13) and YTD breakeven zone were again retested as the market plunged on a negative producer price index (PPI) reading, with SPY ending the week around its 2014 close.

With the sharp movements from day to day, it was certainly a week in which having a healthy mix of long and short exposure proved to be worthwhile, as we suggested last week. We continue to recommend such exposure in the days and weeks ahead, amid a mixed short-term technical backdrop and a potentially volatile expiration week upcoming, with the featured event a two-day Federal Open Market Committee (FOMC) meeting.

On the technical front, bulls might be encouraged by the fact that a few major indexes continue to trade above their respective 2014 year-end closes, such as the Russell 2000 Index (RUT - 1,232.14), Nasdaq Composite (COMP - 4,871.76), and S&P MidCap 400 Index (MID - 1,491.12).

Furthermore, the RUT remains above the round 1,200 level, which was a resistance area during much of last year. But the COMP has been unable to retake 5,000 after a brief move above this level earlier in the month, and the same can be said for 1,500 on the MID. And if that isn't enough, the Dow Jones Industrial Average (DJI - 17,749.31) and Dow Jones Transportation Average (DJT - 8,945.13) have not been able to sustain movements above the round numbers 18,000 and 9,000, respectively.

The FOMC policy statement and Fed Chair Janet Yellen's press briefing could be mid-week drivers. The removal of the word "patient" from the FOMC statement has been anticipated by some Fed watchers. If "patient" is removed, stocks might sell off in response, as our "data dependent" Fed was just presented with weaker-than-expected retail sales and inflation data, and yields on the 10-year Treasury note have risen almost 50 basis points from their early February lows.

SPY comes into this week trading around the biggest put open interest strikes in the March series. In the event of a negative reaction to the Fed, these heavy put strikes could act as magnets, with potential downside to the round-number 200 strike and slightly below. But the upside to this configuration is that a positive reaction to the Fed would unleash short covering related to this expiring put open interest. This is, again, why we recommend that those with a shortened time frame maintain exposure to both sides of the market heading into a potentially volatile expiration week, amid this lingering uncertainty.

"Hedge fund titans from Stan Druckenmiller to George Soros to David Tepper have been scaling back on their exposure to U.S. stocks and, instead, are putting more money to work overseas. Just last week Mr. Druckenmiller said the majority of his long exposure is in Europe and Japan as both markets are cheaper than the U.S. and should benefit from their own versions of QE."
-- The Wall Street Journal, March 10, 2015

"The strengthening dollar is forecast to contribute to the first back-to-back profit contractions since 2009."
-- Bloomberg, March 5, 2015

"The stronger dollar will continue to weigh on U.S. companies this year. Wall Street analysts are making deeper cuts to their forecasts ... analysts now expect companies in the S&P 500 to report earnings growth of 2.4% for 2015. That's the weakest pace of annual profit growth since 2009 ... analysts had been expecting S&P 500 profits to grow 8% for 2015."
-- The Wall Street Journal, March 6, 2015

Speaking of round numbers, another major index -- the U.S. Dollar Index (DXY - 100.18) -- has run up to the round $100 century mark. The strong dollar has been one of many "fear factors" among market participants, especially as it relates to multi-national companies doing business overseas.

Just as the dollar grabs headlines with its impressive rally and analysts trip all over themselves to reduce earnings estimates based on recent dollar movement, one has to ask whether this round number proves to be a major speed bump in the days and weeks ahead? The century level was a temporary resistance area in 1987 and 1997, but this round number proved meaningless during the early 1980s advance. A rejection at $100 would certainly be a surprise, as long positions in the dollar are at multi-year highs, according to the weekly Commitment of Traders (CoT) data.

Regardless, here are important facts to consider with respect to the dollar and its impact on stocks:

• On May 6, 2014, DXY closed at 79.09, which means this index has rallied 26.7% over this period.
• On May 6, 2014, the S&P 500 Index (SPX - 2,053.40) closed at 1,867.72. The SPX is up roughly 10% during this period.

With the above facts in mind, here are three questions to ask yourself, as an investor in U.S. stocks:

1. Is the dollar rally really impacting U.S. stocks, or is something else at work?


2. If so, why now? Are hedge fund managers reacting to the reduced earnings estimates and seeing a market perceived to be overvalued, and now seeking what they view as "greener pastures" in Europe and Japan?


3. What (if any) upside is there to the coverage the U.S. dollar is getting? In other words, might lower earnings expectations work in favor of the bulls, in terms of a lower bar to hurdle when earnings season rolls around again?

Read more:

Indicator of the Week: Does This Bull Market Have Legs?

The Week Ahead: All Eyes on the Fed

"One short-term risk we see is that on Wednesday, the SPY experienced a candlestick 'doji,' in which the open and close were nearly the same. Such candlesticks will sometimes indicate increasing risk of a reversal. So, from this perspective, bulls beware. If recent support from the SPY's 10-day moving average at 210.79 is broken, look for a move back to the December highs in the 209 area... In fact, in looking at each expiration series through mid-April, the SPY 3/6 weekly option expiration series has the lowest ratio of put open interest to call open interest. From this perspective, this suggests that there is more optimism than usual for the immediate days ahead, which may put the market more at risk of an early March pullback..."
-- Monday Morning Outlook, March 2, 2015

"Fed funds futures, used by investors and traders to place bets on central bank policy, showed Friday that investors see a 21% likelihood of a rate increase in June, compared with 16% a day earlier, according to data from CME."
-- The Wall Street Journal, March 6, 2015

Last week's pullback was not a major surprise, with the majority of the downside occurring on Friday, following a stronger-than-expected employment report. Overall, it was a busy week, punctuated by the release of multiple economic reports -- highlighted by slowing wage growth and weaker-than-expected consumer spending and factory orders. However, on Friday, the focus was the larger-than-expected job creation in February, causing investors to raise their expectations for a June rate hike, and sending bond yields and the dollar significantly higher.

That said, the magnitude of last week's pullback was larger than we expected. After the SPDR S&P 500 ETF Trust (SPY - 207.50) bottomed Wednesday morning in our anticipated support area around $209, it stalled on Wednesday afternoon and Thursday at repeated attempts to rally above the prior week's close at $210.66. Finally, on the heels of the Friday morning employment number, the exchange-traded fund (ETF) broke below several heavy put open interest strikes (209, 209.50, and 210) in the 3/6 weekly options expiration series. Moreover, there was a frenzy of put buying on the weekly 3/6 SPY 208-strike put, perhaps adding to the weekly expiration-day selling.

Regardless, the SPY broke below its December highs, which we were anchoring to as a potential support area last week. Now, the January highs in the $206 area -- which is also home to SPY's 40-day and 80-day moving averages -- become a potential support zone in the days immediately ahead. Also, note that SPY's Dec. 31 close is at $205.54, adding an additional layer of support, from a technical perspective.

In the middle of last week, we observed that multiple equity benchmarks we monitor were pulling back to round-number areas. However, on Friday, these indexes broke south of their respective round-number levels, following the Nasdaq Composite's (COMP - 4,927.37) decline back below 5,000 earlier in the week. The fact that multiple indexes quickly became unstable after short-lived advances above round-number levels would suggest the market is now more susceptible to a period of choppiness, with the recent highs now becoming potential resistance areas for these indexes in the weeks ahead.

The jury is out as to the immediate impact that weekly option expiration mechanics had on Friday's trading. Outsized movements in the dollar and the bond market would suggest that option mechanics played a small part, and the employment report could indeed be enough to stoke caution among traders and investors in the weeks ahead. This would be a change from the apparent shift from caution to optimism, as we discussed last week.

"Skew on the SPDR S&P 500 ETF has increased over the past few weeks. But the SPY also rose in that period, suggesting that investors were accumulating stocks and hedging those positions at the same time, says Todd Salamone, senior vice president of research at Schaeffer's Investment Research."
-- The Wall Street Journal, March 6, 2015

One of several indicators that we are keeping a close eye on is the skew in SPY options, or the ratio of implied volatility of out-of-the-money put options (usually purchased as portfolio insurance) relative to out-of-the-money call options (options used to make upside bets). When put options are getting more and more expensive than usual relative to call options, amid rising stock prices, it is usually an indication that hedged players are in accumulation mode.

However, note on the chart below that when the ratio of put implied volatility to call implied volatility is relatively high or near an extreme after a run higher in stocks, the market becomes vulnerable to a decline. We prefer to wait for a rollover before becoming seriously concerned, as this would suggest that the accumulation phase among hedged players has peaked.

As such, we are monitoring this indicator closely, after it rose considerably last week. The direction of this ratio and the SPY look similar to that of the August-September 2014 period, and the eventual rollover in the skew preceded a 10% pullback in stocks during that period. So far, we have not seen a rollover in this ratio, making it premature to call for such a significant pullback. But, after buy-to-open put and call volume dried up last week on the ETF hedging vehicles we follow, such as SPY, we are open to the growing possibility that Friday's action will give way to more weakness in the weeks ahead -- especially if SPY breaks below its January highs and its year-to-date breakeven mark.

Therefore, for those of you with a time frame of six weeks or less, we recommend a decent balance of long and short exposure. Or, if you're trading options, maintain a healthy mix of call and put exposure, given the growing risk to the bullish outlook we discussed for the month of March in last week's commentary.

Read more:

Indicator of the Week: Should You Hold Stocks or Gold in March?

The Week Ahead: Retail in the Spotlight

"One sector displaying clear leadership is technology, as measured by the Nasdaq Composite (COMP - 4,955.97). This index is up more than 4% in the first two months of the year and, on Wednesday, cleared 4,900. Barring a pullback back below 4,900, the next major round-number area is 5,000 ... From a technical perspective, the march to 5,000 is not taking on the 'bubble-like' parabolic move that it did 15 years ago ... The bottom line is that investors seem to be accumulating technology stocks at a much more measured pace, in contrast to the aggressive pace that preceded the bubble."
-- Monday Morning Outlook, February 23, 2015

The Nasdaq Composite (COMP - 4,963.53) continued to grind higher last week, but the celebration remains on hold, as the high last week was 11 points shy of the 5,000 millennium mark. As most of you know, this level has not been touched since March 2000 (although, for some of us, it may seem like only yesterday).

So, after closing out February on Friday, we enter the month of March. Perhaps it is fitting for this index to revisit the 5K millennium mark for the first time in 15 years in the month of March once again, but -- hopefully, for bulls -- with different results. In March 2000, the 5,000 area essentially marked the beginning of the end. As we discussed last week, we aren't seeing near the speculative froth that was evident ahead of the bubble's burst 15 years ago. While 5,000 could act as resistance in the near term, it is less likely that 5,000 marks a major top, as it did in 2000.

Moreover, on Wednesday, the COMP ended a 10-day winning streak. Historically, after a long winning streak like this ends, the COMP quickly picks up where it left off. This suggests a higher-than-normal probability that 5,000 will not only be touched this month, but we could see the index advance well above, if historical tendencies play out. For more on this, review "Indicator of the Week: Nasdaq Hot Streaks," by our Senior Quantitative Analyst Rocky White.

"As is evident by the latest Commitment of Traders (CoT) report, it appears large speculators (typically, hedge funds) continue to cover their bets on declining volatility, as they also continue to reduce short positions on CBOE Volatility Index (VIX - 14.30) futures. The short covering has created a net long position among VIX futures players, and this long position has grown, per the latest CoT report ... It is possible that the late news out of Europe generates a change in the views among this group, and shorting of VIX futures takes hold again."
-- Monday Morning Outlook, February 23, 2015

With round numbers cleared on many indexes, the Fed indicating a rate hike is not imminent, and a little uncertainty related to Greece lifted last week, we are seeing indications that some market participants have become more constructive on the market -- specifically, option speculators and hedge funds.

The good news for bulls is that these participants were in caution mode previously, so they could be in the early stages of increasing equity exposure, which would be supportive of the market during the coming weeks.

For example, in the Commitment of Traders (CoT) report -- which comes out weekly, with the latest data being reported as of Feb. 24 -- there is evidence that large speculators (typically, hedge funds) are again shorting CBOE Volatility Index (VIX - 13.34) futures. In other words, they are again betting on lower volatility, although the number of short positions is relatively small. If shorting of VIX futures continues, it would be a coincident tailwind for the S&P 500 Index (SPX - 2,104.50).

As this group shorts VIX futures, call buying on VIX futures has increased -- perhaps as hedges to those short VIX futures positions, or to long equity positions being initiated. But while VIX call volume has increased relative to January, when the market struggled, it still remains lackluster overall. This relatively tepid VIX call volume might indicate that only a few hedge funds are becoming constructive on stocks. For bulls, the prospect that more of these managers will increase their equity exposure in the weeks ahead is encouraging.

Also, we are seeing an increasing number of bought-to-open put positions being initiated, relative to calls, on key equity exchange-traded funds (ETFs) -- such as the SPDR S&P 500 ETF Trust (SPY), iShares Russell 2000 ETF (IWM), and PowerShares QQQ Trust (QQQ). To the extent that some of this put activity is related to hedging as stocks are accumulated by hedge funds, it would further suggest that these market participants are in the beginning stages of accumulating stocks once again, which could prove supportive in the weeks ahead.

The graph below reflects the increasing put activity relative to call activity on these equity-based ETFs, which also includes SPX options. Our theory is that when this ratio is turning higher amid higher stock prices, hedge funds are in accumulation mode. And when the ratio turns higher from a low level, as it is now, strong advances usually follow, as the accumulation is in its early stages.

Looking ahead to next week, there is a plethora of economic data due out, beginning with today's reports on personal income and spending, the Institute for Supply Management's (ISM) manufacturing survey, and construction spending, and concluding with February's employment report on Friday.

If the market rallies strongly, one potential area of resistance is 215 on the SPY, which -- as you can see on the chart below -- is home to more than 130,000 call contracts for the 3/6 weekly option series. We point this out because last week, the peak was around the 212 level, which for most of the week represented the peak call open interest in the 2/27 weekly option series. In other words, the 212 strike proved to be a "call wall." As we move into this week, the notable call wall is at the 215 strike.

One short-term risk we see is that on Wednesday, the SPY experienced a candlestick "doji," in which the open and close were nearly the same. Such candlesticks will sometimes indicate increasing risk of a reversal. So, from this perspective, bulls beware. If recent support from the SPY's 10-day moving average at 210.79 is broken, look for a move back to the December highs in the 209 area.

In fact, in looking at each expiration series through mid-April, the SPY 3/6 weekly option expiration series has the lowest ratio of put open interest to call open interest. From this perspective, this suggests that there is more optimism than usual for the immediate days ahead, which may put the market more at risk of an early March pullback within the context of our bullish bias for the month ahead.

Read more:

Indicator of the Week: Nasdaq Hot Streaks

The Week Ahead: All Eyes on Jobs Data

"After the SPX breakout above its 2014 close, many indexes -- including the SPX -- now face another potential short-term hurdle from round-number levels, including 18,000 on the Dow Jones Industrial Average (DJIA - 18,019.35) ... From a short-term perspective, however, note that the round 1,500 level is now in play for MID ... Small-cap investors would like to see the RUT finally make a noticeable break above the 1,200-1,220 area, which has turned back all rallies since March 2014.

"... Why is the fact that large speculators are net long, according to the Commitment of Traders (CoT) report, making a lot of noise? ... since the financial crisis, it has been a rare event for these investors to be net long, or looking for higher volatility. In fact, since 2011, it has happened on only three occasions...In the few instances that this has happened, volatility headed lower or rose modestly over the next two months, while stock prices (as measured by the SPX) soared."
-- Monday Morning Outlook, February 16, 2015

If you tend to view the glass as "half full" instead of "half empty," you should be encouraged by last week's holiday-shortened, expiration-week price action. The S&P 500 Index (SPX - 2,110.30), after breaking out above resistance around 2,060 earlier this month, took a breather around the round 2,100 level -- as we suggested in last week's report could occur, especially with other key benchmarks trading around respective round numbers, too. The optimist would note that an immediate sell-off did not occur, as the index went sideways, with Friday's lows of the week occurring at the uptrending 10-day moving average (currently located at 2,083.26).

Moreover, call open interest was nearly three times that of put open interest at the February 210 strike on the SPDR S&P 500 ETF Trust (SPY - 211.24), which is roughly one-tenth (1/10) the value of the SPX. Those options expired on Friday. Therefore, round numbers and a "call wall" at SPY 210 likely influenced the sideways pattern that we witnessed throughout most of the week -- which, for bulls, was better than a violent rejection from this area. The call wall was penetrated late Friday afternoon on positive news with respect to the Greece situation in Europe.

But the bears and those waving caution flags may be feeling more and more pressure. The S&P MidCap 400 Index (MID - 1,516.84) has now closed above potential resistance at 1,500 for five consecutive days. While MID hasn't made a huge move through 1,500, neither have sellers made a bold statement at this level.

Moreover, the Russell 2000 Index (RUT - 1,231.79) finally moved into new all-time high territory this past week, taking out the 1,220 area that has capped rallies since March 2014. While the RUT hasn't taken on a leadership role, it is no longer lagging like it did throughout much of 2014, which gave some market watchers reason to wave the red flag.

"At its peak, technology stocks represented 70% of the [Nasdaq Composite], today they are 55%. Healthcare now makes up 15% of the index, up from just 5% in 2000. Today the dividend yield on the index is 1.1% which is one thousand percent higher than it was just a decade ago."
-- The Irrelevant Investor on Yahoo Finance, February 19, 2015

One sector displaying clear leadership is technology, as measured by the Nasdaq Composite (COMP - 4,955.97). This index is up more than 4% in the first two months of the year and, on Wednesday, cleared 4,900. Barring a pullback back below 4,900, the next major round-number area is 5,000, which hasn't been touched since the technology bubble burst in 2000. From a technical perspective, the march to 5,000 is not taking on the "bubble-like" parabolic move that it did 15 years ago, and as described in the tweet above.

Another way to quantify the difference in today's technical backdrop is by measuring historical volatility. The COMP's 10-month historical volatility in March 2000 was a whopping 38%, whereas now it is slightly below 10%. The bottom line is that investors seem to be accumulating technology stocks at a much more measured pace, in contrast to the aggressive pace that preceded the bubble.

Despite the COMP's march to levels not seen in 15 years, technology names seem to have lost their appeal among investors and traders. Whereas you cannot trade options on the COMP, note that open interest on the PowerShares QQQ Trust (QQQ - 108.41) options, an exchange-traded fund (ETF) with a heavy technology tilt, has imploded over the years.

The QQQ debuted for trading in early 1999, so option activity was relatively light in the early years. But open interest on the QQQ exploded as the fund clawed its way out from a bear-market bottom. Once total call and put open interest reached about 10 million contracts, disappointing sideways action emerged.

Plus, there was record open interest of 12-13 million contracts on this ETF ahead of the 2007-2008 peak. Right now, there are barely 3 million put and call contracts open on the QQQ. This would suggest that interest in the technology sector has cooled considerably, which could have bullish implications, even as the QQQ and COMP approach old highs.

As is evident by the latest Commitment of Traders (CoT) report, it appears large speculators (typically, hedge funds) continue to cover their bets on declining volatility, as they also continue to reduce short positions on CBOE Volatility Index (VIX - 14.30) futures. The short covering has created a net long position among VIX futures players, and this long position has grown, per the latest CoT report.

The nervousness among these players may be related to any number of factors, including uncertainty overseas. However, in the minutes ahead of Friday's close, markets rallied as Greece was granted a four-month bailout extension by its European creditors. It is possible that the late news out of Europe generates a change in the views among this group, and shorting of VIX futures takes hold again.

With the VIX below the 15.53 level -- half its October 2014 high -- aggressive speculators could make short-term bets on declining volatility in the days ahead, on the heels of the four-month extension granted to Greece. A pickup in VIX call volume, indicative of hedging related to growing short volatility futures positions or an increase in equity exposure, would signal that a volatility decline is imminent. So, we will be monitoring VIX call volume closes in the days ahead, looking for daily volume of 500,000-plus.

Read more:

Indicator of the Week: Why the Dow at 18K is Different This Time

The Week Ahead: The Home Depot, Inc. and Hewlett-Packard Company Report; Plus, Yellen Testimony and GDP

"...It is not a bad idea to be hedged or at least make preparations to hedge when necessary, as one risk to the market is a break of support potentially causing panic selling among unhedged longs and/or a sudden demand for portfolio protection, which could coincidentally push indexes lower than expected. And the cost of the hedge may prove to be very small in the context of the potential rally that we could witness if hedge funds begin increasing their leverage once again."
-- Monday Morning Outlook, January 24, 2015

For the first time in 2015, the S&P 500 Index (SPX - 2,096.99) experienced two consecutive closes above 2,058.90, its 2014 close. As we have pointed out in past discussions, this level has been worth keeping an eye on -- up until last week, a close at or just above this year-to-date (YTD) breakeven level was immediately met with selling. In fact, notching that second consecutive daily close in the green for 2015 wasn't an easy task for the SPX, as an intraday pullback from its highs was supported right at this YTD breakeven.

After this SPX breakout above its 2014 close, many indexes -- including the SPX -- now face another potential short-term hurdle from round-number levels, including 18,000 on the Dow Jones Industrial Average (DJIA - 18,019.35). However, the most notable is the S&P MidCap 400 Index (MID - 1,502.78), which is an area of the market that we recommend (mid-cap stocks). In fact, several weeks ago, we discussed the implications of a breakout above 1,450, which is the neckline of a bullish inverse "head and shoulders" pattern. The target remains a move to the 1,630 area by the end of June.

From a short-term perspective, however, note that the round 1,500 level is now in play for MID. Longtime readers of this column might remember how the 1,000 millennium mark acted as resistance for several months during 2011 and 2012. With the MID now at a round-number level that's also 50% above a major breakout area, it would be natural for profit taking to act as a headwind. The MID might be especially vulnerable to headwinds with other indexes nearing key round-number levels, too.

While on the round-number discussion -- quickly turning to another asset class -- note that the CBOE 10-Year Treasury Note Yield (TNX - 20.21) is bumping up against the round-number 20 level (equivalent to a 2% yield on 10-year Treasury notes). If 2% acts as a cap on yields, bonds will rally, and stocks would likely weaken. In early 2013, TNX moved back up to 20 (2%) from 15 (1.5%). It closed just barely above this level for a few weeks before yields plummeted back below 2% in March.

Turning back to equities, not to be forgotten is the Russell 2000 Index (RUT - 1,223.13), as it moved above the round 1,200 level and its YTD breakeven mark at 1,204.70. But there is work to be done, as its all-time closing high occurred in late December at 1,219.11, and the index comes into the shortened trading week around this potential resistance. Small-cap investors would like to see the RUT finally make a noticeable break above the 1,200-1,220 area, which has turned back all rallies since March 2014.

"Turmoil in Europe and an unprecedented decline in oil are complicating the guessing game around Federal Reserve rate increases, says Peter Cecchini at Cantor Fitzgerald LP...

'Investors are getting increasingly nervous about a potential selloff,' Bill Merz, a strategist on the derivatives and structured products team at U.S. Bank Wealth Management, said by phone...

Hedge funds and other large speculators have pared positions that profit should the VIX decline, increasing the balance of those betting on a higher VIX to the most since at least 2004...

'The fact you've got all these uncertainties makes you feel like there's better risk-reward to be net-long volatility than net short,' Justin Golden, a partner at Lake Hill Capital Management LLC in New York, said by phone Feb. 10."
-- Bloomberg, February 12, 2015

There has been a lot discussion in recent days about large speculators, which are usually hedge funds, moving into a net long position on CBOE Volatility Index (VIX - 14.69) futures. The Bloomberg excerpt may capture the drivers behind this, which appear to be fear and uncertainty. If this fear/uncertainty is being accurately portrayed, it would further support the notion that the drop-off in VIX futures call open interest -- which has been written about extensively in this space during the past few weeks -- could be driven by hedge funds reducing long equity exposure. During this period, the market has remained relatively resilient -- which is why we have suggested not disturbing long positions, but also maintaining a portfolio hedge in the event that continued unwinding of long equity exposure did technical damage to the market (which, thus far, has not been the case).

Something we haven't discussed, but which the excerpt from the Bloomberg article would imply, is that reducing long equity exposure might take place in the form of reversing short VIX futures positions that were put on in anticipation of lower volatility and higher stock prices. To the extent that hedge funds use VIX calls to hedge against a short VIX futures position or a long equity portfolio, it would make sense that VIX call open interest experiences a coincident drop.

Why is the fact that large speculators are net long, according to the Commitment of Traders (CoT) report, making a lot of noise? As you can see on the chart below, since the financial crisis, it has been a rare event for these investors to be net long, or looking for higher volatility. In fact, since 2011, it has happened on only three occasions, which is admittedly a small sample size.

However, our curiosity got the best of us, as to what both the SPX and the VIX did following instances when large speculators moved into a net long position. In the few instances that this has happened, volatility headed lower or rose modestly over the next two months, while stock prices (as measured by the SPX) soared. In two of the three instances, the SPX was higher and the VIX headed lower during the ensuing two-week and one-month periods, as well. Fortunately for bulls, the SPX's price action following the Jan. 20 "signal" looks more like the two-week period that followed the March 2011 and October 2014 signals, which produced healthy SPX returns. Specifically, the SPX rallied 1% in the two weeks following the recent Jan. 20 signal, and also rallied in the two weeks following the March 2011 and October 2014 signals.

In fact, those betting on volatility (as measured by the VIX) to move lower were happy to see the VIX close below 15.53, which is half its October 2014 intraday high of 31.06. The VIX's end-of-January closing low was 15.52, ahead of a nearly 50% pop into the first week of February.

The bottom line is that from a historical perspective, if large speculators move into a long position on VIX futures, it is far from a slam dunk that volatility will head higher and stocks lower. Therefore, we advise that investors continue not to disturb long positions. Traders should continue to be open to opportunities on both sides of the market, especially if you are short-term oriented, as one cannot rule out another retest of the SPX 2,050-2,060 area.

Read more:

Indicator of the Week: Why Presidents Day Could Spell Trouble for Stocks

The Week Ahead: FOMC Meeting Minutes, Wal-Mart Stores, Inc. Winds Down Earnings Season

"From a shorter-term perspective, the SPX is trading in a volatile, choppy range. Throughout January, in fact, a defined area of resistance was at the Dec. 31, 2014 close of 2,059 ... Support has been in the round number 2,000 region ... A concern for the bulls is that the SPX has spent more time in the 2,000 area, which is the bottom of the range. The risk is that buyers at this level eventually disappear, which would likely set up a test of the 10-month moving average in the 1,985 region..."

"...a review of several Commitment of Traders (CoT) reports reveals low levels of VIX, SPX and E-mini futures open interest, coincident with multi-year high levels of open interest in euro, gold, oil and copper futures contracts. This is still more evidence that suggests some hedge funds, particularly macro funds, are exiting positions in U.S. equities in favor of other assets, such as commodities and currencies."
-- Monday Morning Outlook, February 2, 2015

The technical scenario that we presented in our Feb. 2 report played out last week with respect to the S&P 500 Index (SPX - 2,055.47) breaking below the 2,000 level, setting up an intraday decline to the lowest levels of 2015. However, longer-term support came into play in the 1,985 region -- around the index's 10-month moving average -- from which a furious rally began, proving once again the significance of this trendline.

The SPX behavior that we are observing looks very similar to the beginning of the year -- a decline to the vicinity of a key round-number area and long-term moving average, followed by a sharp rally to its year-to-date breakeven point at 2,058.90 -- a volatile, choppy range. Moreover, the importance of half-century marks on the SPX (a topic we have discussed in prior reports) remains a theme, with the index for the most part stalling in this area since it was first touched in November. Bigger picture, however, the bulls are happy to see the SPX continue in a low-volatility uptrend amid volatile headlines, with support from its 10-month moving average.

In a week's time, we have moved from the SPX trading just above potential support from the round-number 2,000 area and its 10-month moving average to the SPX trading back in the vicinity of the half-century 2,050 zone and its 2014 close at 2,058.90, an area that marked peaks in early and late January. Coincidentally, as the SPX hits resistance, the Russell 2000 (RUT - 1,205.46) and the S&P MidCap 400 Index (MID - 1,476.89) are trading around round-number century marks at 1,200 and 1,500, respectively.

The MID quietly achieved new all-time highs last week, but has never touched 1,500, which we suspect will act as resistance. The 1,500 century mark is 50% above the 1,000 level that capped multiple rallies in 2011 and 2012, so those who bought the 1,000 breakout will likely reduce exposure at a 50% gain.

Meanwhile, the RUT has failed to sustain a move through 1,200 since it first touched this level in March 2014. The 1,200 level is roughly triple the 2008-2009 lows in the vicinity of 400, and looks very much like the resistance that took hold on the MID at 1,000 a few years ago.

Last week, the CBOE Volatility Index (VIX - 17.29) peaked at 22.81, right below two key levels, in our view -- 23.28, which is 50% above its 2015 low, and 23.64, representing double the late-2014 low. That said, the VIX has not moved below 15.50, its late-January low, which is also half the 2014 peak. Thus, it is too soon to declare that the higher volatility that we are witnessing in 2015 is over.

Speaking of the VIX, a theme we have discussed the past few weeks has been the extremely low call open interest. While VIX call volume picked up a little this past week, our theory has been that hedge funds that use VIX calls as portfolio protection have reduced equity exposure, and thus do not need as many VIX calls to protect their equity portfolio. We went on to suggest that these same funds may be viewing opportunities elsewhere – such as bonds, currencies, and commodities. An article in The Wall Street Journal on Friday morning, entitled "Computer-Driven, Automatic Trading Strategies Score Big," [subscription required] supports this theory:

"Hedge-fund managers who employ complicated, automatic-trading strategies made millions off the wild swings in currency and commodity markets in recent weeks, investors said."

"In many cases, they ramped up bets on the momentum against the euro and reaped a huge win when the Swiss National Bank removed its currency peg, pushing the euro down deeper. They also have capitalized on what was until recently a consistent plunge in oil prices without worrying about when they would hit a bottom. The volatility is a rare treat for automated traders, who make their livings jumping on markets moving out of sync but have been stymied by the placid markets since the crisis and years long march higher for U.S. stocks and other related assets."

The implication for the stock market is that a powerful segment of market participants is not as actively engaged in the equities market, reducing liquidity and resulting in higher volatility. Therefore, the market may face stronger headwinds relative to last year, especially when resistance areas are approached. This is not to say that this is the end of the bull market, as the latest pullback proved that there are still willing buyers -- whether this is in the form of corporate buybacks, retail inflows, short covering, or traders playing the range. In fact, from a bigger-picture perspective, equities have remained remarkably resilient amid a plunge in oil prices, plus Fed and overseas uncertainty, particularly in Europe and China. So for this reason, we advise longer-term investors to remain long, but still have those portfolio hedges in place.

Our short-term sentiment indicators are giving mixed signals at the moment, with the buy-to-open equity put/call ratio moving lower from a relatively high level, which historically has bullish implications. However, weekly data from the National Association of Active Investment Managers (NAAIM) survey shows managers reducing equity exposure from a relatively high level, which is a potential headwind.

Therefore, short-term traders should have both long and short exposure, looking to add short exposure nearer the top of the range, and continue to either lengthen or shorten your typical time frames amid this choppy, volatile range.

Read more:

Indicator of the Week: The Super Bowl and Randomness

The Week Ahead: Retail Sales, Earnings from The Coca-Cola Company, Cisco Systems, Inc., and Tesla Motors, Inc.

It was a disappointing January for bulls. In fact, for only the third time since 1979, the Russell 2000 Index (RUT - 1,165.39) did not experience a single daily close above the previous year's close for the entire month. The only two other times this occurred was in 2005, when the RUT went on to rally 7% into year-end 2005, and in 2008, when the RUT lost an additional 26% into year-end 2008.

(In January 2008, the RUT was in far worse technical condition than 2005, with the index closing below its 40-month moving average in January 2008. Today's technical backdrop is more like that of 2005.)

The January Barometer suggests that as January goes, so goes the rest of the year. Rocky White, our Senior Quantitative Analyst, discussed this subject in detail last week in a study he ran on the Dow Jones Industrial Average (DJIA - 17,164.95).

As a reminder, with the DJIA finishing with a negative return in January, historical data suggests that the probability decreases that the rest of the year will be positive relative to years when the month of January is positive. That said, despite a negative January, it is still slightly better than a coin flip that the rest of the year finishes positive, according to Rocky's research (summarized in the table immediately below). Therefore, bulls should not necessarily throw in the proverbial white towel just because January was negative -- but at the same time, the risk of a double-digit decline through year-end has increased.

Lost amid the "bearish" tone when negative Januaries occur is this: In the years in which the February-December period produced positive returns after a negative January, the average return was 13.5% -- just slightly less than the 14.1% mean return when January is positive. So, it might "bear" repeating what Rocky suggested last week, which is that the January Barometer indicator does not give one a statistical edge over a "buy and hold" strategy.

The January Barometer indicates roughly a 50/50 chance of a double-digit decline from now until year-end, and understandably, this may not sit well with most of you. But, with the S&P 500 Index (SPX - 1,994.99) still displaying a nice uptrend with support from its 10-month moving average, as well as the "coin flip" odds of a double-digit February-December advance, according to this indicator, we currently advise not disturbing long positions.

That said, the SPX is sitting just above a critical level that, if broken, could lead to additional weakness in the days ahead. If the 10-month moving average is breached, we could see a move down to at least 1,900, or the August 2014 low.

From a shorter-term perspective, the SPX is trading in a volatile, choppy range. Throughout January, in fact, a defined area of resistance was at the Dec. 31, 2014 close of 2,059, which is the top horizontal line in the chart below. Support has been in the round number 2,000 region, represented by the bottom horizontal line. The 30-minute chart, which goes back to the first trading day of January, paints this picture clearly.

A concern for the bulls is that the SPX has spent more time in the 2,000 area, which is the bottom of the range. The risk is that buyers at this level eventually disappear, which would likely set up a test of the 10-month moving average in the 1,985 region, as discussed above.

"It is not a bad idea to be hedged or at least make preparations to hedge when necessary, as one risk to the market is a break of support potentially causing panic selling among unhedged longs and/or a sudden demand for portfolio protection, which could coincidentally push indexes lower than expected."

"We don't have a definitive reason as to why VIX call open interest and SPY put open interest have plunged in recent months. Another theory could be hedge funds have chosen to play in other areas -- currencies, commodities, emerging markets, bonds, for example."
-- Monday Morning Outlook, January 24, 2015

Still on our radar is the low level of CBOE Volatility Index (VIX - 20.97) call activity and open interest, especially with the VIX closing above 20 in January and up nearly 15% year-to-date.

Moreover, a review of several Commitment of Traders (CoT) reports reveals low levels of VIX, SPX and E-mini futures open interest, coincident with multi-year high levels of open interest in euro, gold, oil and copper futures contracts. This is still more evidence that suggests some hedge funds, particularly macro funds, are exiting positions in U.S. equities in favor of other assets, such as commodities and currencies. If this trend continues, it will be a major market headwind -- especially in the absence of short-covering activity, which helped drive the market higher late last year.

Bulls would prefer to see higher stocks coincident with hedging activity as a sign that hedge funds are in equity accumulation mode. With short interest increasing on SPX and PowerShares QQQ Trust (QQQ - 101.10) components in the most recent report, an ongoing short-interest build is an additional risk if the deep-pocketed players continue moving into other assets, as we suspect is occurring at present.

If the VIX rises above the January high of 23.43, a move to 31.00 could very well be in the cards. Last month's VIX high is in the vicinity that marks a 50% advance from the mid-January VIX low of 15.52. If the January high is taken out, the 31.00 area represents double the January low and is the site of the 2014 peak. Therefore, as we've been saying for the past few weeks, owning VIX calls is not a bad idea if you have long exposure at risk, especially at a time when VIX calls are relatively unpopular.

Read more:

The Week Ahead: Jobs Data and Earnings from Exxon Mobil Corporation, Twitter, Inc., and General Motors

The Dow Jones Industrial Average (DJI) and S&P 500 Index (SPX) both ended their weekly losing streaks on Friday, despite giving back some gains from earlier in the week. Of course, the big lift came on Thursday, courtesy of the European Central Bank's (ECB) monetary stimulus decision, which powered the aforementioned benchmarks to matching 1.5% daily gains. Despite these (and other) indexes now trading near resistance, Schaeffer's Senior VP of Research Todd Salamone explains why there's reason to believe these levels could be taken out.

• One historically bullish signal from last week.
• Why long-term investors shouldn't disturb their long positions.
• Rocky White takes a look at the January Barometer theory.

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 It's Still Smart to Be Hedged
By Todd Salamone, Senior VP of Research

"... the SPX must break important support areas that are in play now before the October lows can be tested. For instance, the index comes into this week around the 2,000 millennium mark and its 120-day moving average -- a trendline we discussed last week as being supportive during multiple pullbacks since 2013 (exception being the October decline)."

"Additionally, SPX 1,980 could prove important as we enter the second half of the month, as it is the site of the index's 10-month moving average ... [T]he SPX has not experienced a monthly close below its 10-month moving average since January 2012 ..."

- Monday Morning Outlook, Jan. 17, 2015

"$DJIA YTD B/E = 17,823. Yesterday's close = 17,813...$COMP YTD B/E = 4,736. Yesterday's close=4,750."

"As major benchmarks, such as $SPX, $QQQ, $DJIA trade around 2015 B/E levels, $RUT getting set to do battle with round number 1,200 (again)"

-@ToddSalamone on Twitter, Jan. 23, 2015

On the heels of the European Central Bank's (ECB) decision to buy sovereign bonds on Thursday morning, world markets rallied. The S&P 500 Index (SPX - 2,051.82) began its ascent early last week -- ahead of the ECB's decision -- as buyers emerged with the index sitting on major support, which we've discussed previously.

Thursday's ECB decision propelled the SPX higher into positive territory for 2015 by Thursday's close. The move north of breakeven was short-lived, however, with the SPX moving back into the red by Friday's close. Perhaps investors are moving to the sidelines ahead of the Federal Open Market Committee's (FOMC) scheduled meeting next week -- and as indexes trade at resistance.

Moreover, the PowerShares QQQ Trust (QQQ - 104.26) and S&P 400 MidCap Index (MID - 1,455.79) rallied from round-number levels at 100 and 1,400, respectively. And the Dow Jones Industrial Average's (DJI - 17,672.60) low for the year remains barely above the 17,000 millennium mark.

Despite equities trading at resistance, there is an encouraging sign for bulls that short-term resistance levels will be taken out. Coincident with the ECB decision and subsequent market rally, the 10-day average of the equity-only, buy-to-open put/call volume ratio experienced a relatively sizable decline on Thursday. A single-day decline in this ratio of the magnitude we saw on Thursday has proven to be bullish historically. It is a sign that short-term traders are in the early innings of moving from an environment filled with caution and/or skepticism to one that is more optimistic. This transition typically lasts a few weeks and is supportive of stocks.

Specifically, the 10-day, equity-only, buy-to-open put/call volume ratio declined by 2.7% from a reading above 0.60, which is historically high. Since June 2012, it has done this 16 other times. On 14 of those occasions, the SPX was higher one week later by an average of 1.10%, or three times its anytime average over the same time period. Moreover, the SPX has advanced 88% of the time one week after this signal, more than the expected 61%.

Volatility expectations also remain on our radar. On the volatility front, the fact that single-day volatility is almost twice 2015's daily volatility is getting a lot of play on blogs and in various media.

One potential reason for the high single-day volatility could be the effects of a previous topic in this report -- extremely low SPDR S&P 500 ETF Trust (SPY - 204.97) put open interest and extremely low CBOE Volatility Index (VIX - 16.66) futures call open interest, which some investors purchase for portfolio protection.

If the low levels of VIX call open interest and SPY put open interest are indicative of market participants giving up on hedging -- after such activity proved to be a performance headwind throughout most of 2014 -- there may be more knee-jerk reactions to perceived negative headlines now, relative to last year, when portfolio protection was extremely popular. But the wide daily fluctuations have, so far, proven to be noise within the bigger picture. For example, the SPX's 10-month historical volatility is at its lowest reading since May 2013. On balance, monthly historical volatility continues to track lower since its peak in 2009.

If you are a longer-term investor, the longer-term, low-volatility trend suggests not disturbing your long positions, unless and until you see a significant break of longer-term support. After all, as the environment stands now, there is some rationale for portfolio-protection trades to lose their popularity from the perspective of a major decline in volatility during the past few years.

"Hedge funds' use of borrowed money, or leverage, to amplify the effect of their bets dropped last week to the lowest level in more than two years, Morgan Stanley told clients in a confidential memorandum. The drop in leverage signals a dwindling conviction that markets will push ever higher."

- The Wall Street Journal (subscription required), Jan. 11, 2015

We don't have a definitive reason as to why VIX call open interest and SPY put open interest have plunged in recent months. Another theory could be hedge funds have chosen to play in other areas -- currencies, commodities, emerging markets, bonds, for example. Or, as a recent Wall Street Journal article suggested (see excerpt immediately above), reduced leverage among hedge funds could be limiting demand for portfolio protection, which may ultimately prove bullish if leverage again increases.

All things considered, we reiterate what we said last week. That is, it is not a bad idea to be hedged or at least make preparations to hedge when necessary, as one risk to the market is a break of support potentially causing panic selling among unhedged longs and/or a sudden demand for portfolio protection, which could coincidentally push indexes lower than expected. And the cost of the hedge may prove to be very small in the context of the potential rally that we could witness if hedge funds begin increasing their leverage once again.

Indicator of the Week: The January Barometer
By Rocky White, Senior Quantitative Analyst

Foreword: Heading into the last week of January, the Dow Jones Industrial Average (DJIA) is right around breakeven on a month-to-date basis. Does it really matter if it finishes the month positive or negative? It might if you subscribe to the January Barometer theory. That's the idea that the direction of the market in January sets the tone for the rest of the year. This week, I'm taking a look to see if January has actually been a good predictor for the rest of the year, and if there is anything we should do knowing that information.

Is January a Barometer?: First, I wanted to see if January was in fact a decent barometer for the rest of the year. Looking back to 1950, the table below summarizes the returns of the dow depending on whether January was positive or negative. Looking at this table, the January Barometer theory does seem to have some validity. When January has been positive, then 83% of the time the index has gained points from February through the end of the year -- averaging a return of 9.68%. When January was negative, then the average return was only 2.54%, with barely half of the returns positive.

This year, January is pretty flat -- so, barring a huge move next week, this next table isn't really relevant. It's still pretty interesting. It shows the larger the move in January, the more prophetic the January Barometer. When January has gained 4% or more, then the rest of the year has averaged a gain of almost 12%. When the first month of the year has been down at least 4%, then the rest of the year doesn't even average a 1% gain, and has been positive just half the time. When looking at this table and the table above, it seems January has tended to set the tone for the rest of the year.

Trading and the January Barometer: Okay, so we know that January has been a pretty good predictor for the rest of the year. Is there anything we can do? Well, knowing what we know now, let's go back to 1950 and pretend we had $100 to invest. How would we have done trading the January Barometer? The chart below shows what that $100 would be worth today using three different strategies (I begin the chart in 1990 since the lines were pretty even up to then, and it makes the chart a lot easier to read).

The first strategy (the black line) is simply buying the Dow on Jan. 1, 1950, and holding it through 2014. Today, it would be worth about $8,900. The red line is if we bought the index on Jan. 1 of each year, then sold it if January was down. Otherwise, we held it for the entire year. In that case, our $100 would have grown to just $6,300. Knowing that underperformance was coming didn't help us much. Typically, the market still gained, so we'd be better off owning it. The last strategy is based off the last table, and, in that case, we bought the index on Jan. 1, and sold it at the end of January -- only if January was down at least 4%. In that case our $100 would be worth $9,100, barely beating a simple buy-and-hold strategy.

This last table just shows the annualized return realized from each of the strategies above. I would conclude that knowing about the January Barometer would not help an investor. Using that last strategy of selling the index when January was down big gained less than half of a percent in annualized return. However, this analysis does not take into account dividends or trading costs. Add those in, and I'm sure the buy-and-hold strategy is superior.

Editor's Note: The charts and commentary above originally cited the S&P 500 Index (SPX), but the data was compiled using the Dow Jones Industrial Average (DJIA). We regret the error.

This Week's Key Events: FOMC in Focus; Blue-Chip, Tech Earnings Roll In
Schaeffer'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 Dallas Fed's manufacturing survey will kick off the week. Microsoft (MSFT), Ashland (ASH), D.R. Horton (DHI), Seagate Technology (STX), Texas Instruments (TXN), and Zions Bancorporation (ZION) will release earnings.

Tuesday

• Tuesday's packed docket includes durable goods orders, the S&P/Case-Shiller home price index, new home sales, and the consumer confidence index. Additionally, the Federal Open Market Committee (FOMC) will begin its two-day policy setting meeting. 3M (MMM), AT&T (T), Caterpillar (CAT), DuPont (DD), Pfizer (PFE), Procter & Gamble (PG), United Technologies (UTX), Apple (AAPL), Yahoo (YHOO), AK Steel (AKS), American Airlines (AAL), Amgen (AMGN), Bristol-Myers Squibb (BMY), Coach (COH), Corning (GLW), Electronic Arts (EA), Freeport-McMoRan (FCX), Illumina (ILMN), Juniper Networks (JNPR), Lockheed Martin (LMT), Novartis AG (NVS), Peabody Energy (BTU), U.S. Steel (X), VMware (VMW), and Western Digital (WDC) will step under the earnings spotlight.

Wednesday

• Crude inventories and the FOMC policy announcement come out on Wednesday. Boeing (BA), Facebook (FB), AmerisourceBergen (ABC), Anthem (ANTM), Biogen Idec (BIIB), Cirrus Logic (CRUS), Citrix Systems (CTXS), EMC Corporation (EMC), Fiat Chrysler (FCAU), General Dynamics (GD), Hess (HES), International Game Technology (IGT), International Paper (IP), Las Vegas Sands (LVS), Meritor (MTOR), Progressive (PGR), QUALCOMM (QCOM), Steel Dynamics (STLD), T. Rowe Price (TROW), Tractor Supply (TSCO), and Vertex Pharmaceuticals (VRTX) will report earnings.

Thursday

• On Thursday, weekly jobless claims and pending home sales are slated for release. Visa (V), Alibaba (BABA), Amazon (AMZN), Google (GOOGL), B/E Aerospace (BEAV), Blackstone (BX), Broadcom (BRCM), Celgene (CELG), Colgate-Palmolive (CL), ConocoPhillips (COP), Deckers Outdoor (DECK), Dow Chemical (DOW), Ford (F), Gigamon (GIMO), Harley-Davidson (HOG), hhgregg (HGG), InvenSense (INVN), JDS Uniphase (JDSU), JetBlue Airways (JBLU), Microchip Technology (MCHP), NetSuite (N), Nokia (NOK), Potash Corp./Saskatchewan (POT), PulteGroup (PHM), QLogic (QLGC), Ryland (RYL), Sherwin-Williams (SHW), Stanley Black & Decker (SWK), Thermo Fisher Scientific (TMO), Time Warner Cable (TWC), and Viacom (VIAB) will step into the earnings confessional.

Friday

• Friday's economic calendar includes the advance reading on fourth-quarter gross domestic product (GDP), the employment cost index, the Chicago purchasing managers index (PMI), and the University of Michigan's consumer sentiment survey. Chevron (CVX), AbbVie (ABBV), Altria Group (MO), Eli Lilly (LLY), ImmunoGen (IMGN), Ingersoll-Rand (IR), MasterCard (MA), Mattel (MAT), Novo Nordisk (NVO), NuStar Energy (NS), Tyson Foods (TSN), Weyerhaeuser (WY), and Xerox (XRX) will release earnings.

And now a sector of note...

Utilities
Bullish

The utilities sector has been a strong performer on the charts, as evidenced by the record peak the PHLX Utility Sector (UTY) tagged just last week. Additionally, of the 10 utility stocks we follow, eight are currently trading above their 80-day moving average. Even more impressive, these securities have gained, on average, nearly 28% over the last 52 weeks. Nevertheless, just 37% of covering analysts rate these stocks a "buy." With bonds rallying in the wake of the European Central Bank's (ECB) stimulus announcement, utilities could benefit from a lower-rate environment -- and a round of upgrades could create additional tailwinds.

In a similar vein, the Utilities SPDR ETF (XLU) has advanced more than 29% over the last year -- and hit an all-time high last Thursday -- and is currently sitting atop several layers of potential support. Specifically, the exchange-traded fund (ETF) is north of the $45 level, which corresponds with its 2007 peak. Also, the same area is roughly double XLU's March 2009 low and triple its October 2002 low, hinting at possible triple-barreled technical support. If the shares can sustain their momentum, additional buying power could result from short sellers and/or option bears throwing in the towel. After all, 31.8% of XLU's float is sold short, and its SOIR of 5.14 ranks in the 92nd annual percentile.

It was another volatile week on Wall Street, with the Dow exploring a range of nearly 680 points. The blue-chip barometer suffered five straight losses until Friday's relatively modest rebound, due to plummeting crude prices, a shocker from the Swiss National Bank, and disappointing earnings out of the financial sector. Looking ahead, the European Central Bank (ECB) will take the spotlight during the holiday-shortened week, and Schaeffer's Senior VP of Research Todd Salamone expects volatility expectations to remain elevated.

• The significance of CBOE Volatility Index (VIX) options expiration.
• The support levels and moving average on our radar.
• A long-term ray of hope from the VIX futures spread?

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: The Impact of VIX Options and the ECB
By Todd Salamone, Senior VP of Research

"If what lies ahead in the immediate days for the stock market is anything like we observed this past week, expect choppiness to be the order of the day ... Like last year, indexes are respecting round numbers and year-to-date (YTD) breakeven points."

"Next week is expiration for most options ... January SPDR S&P 500 ETF Trust (SPY - 204.25) options ... expire next week. If the market advances, resistance from heavy call open interest relative to put open interest occurs at the 205 and 210 strikes ... Note the enormous put open interest at the 200 strike ... if negative news hits the market, this strike could be a magnet, as short positions would have to be re-established."

"... it appears hedged money could be parking cash elsewhere and taking a 'wait and see' approach, with the SPX trading in the 2,000 area, the official start of earnings season next week, and Federal Open Market Committee (FOMC) and European Central Bank (ECB) meetings scheduled for later this month. Regardless of the motivation for low-hedging activity, we continue to advise having a hedge or short (put) exposure in place, especially with earnings season and the FOMC and ECB meetings just around the corner."

- Monday Morning Outlook, Jan. 10, 2015

"$VIX high today 23.34 (double the 11.82 December low is 23.64)"

"$SPY $200 magnet update: 8 of past 12 30-min intraday bars touch $200 and 16 of past 25 30-min bars touch $200 $PremiumSellerDream"

-@ToddSalamone on Twitter, Jan. 14-15, 2015

Last week's trading played out as we expected -- choppy, as the SPDR S&P 500 ETF Trust (SPY - 201.63) opened the week lower and rallied strongly to the call-heavy 205 strike Tuesday morning, before declining again. The balance of the week was range-trading around the 200-strike "magnet" following the release of poor retail sales data before the market opened Wednesday morning.

Heavy call and put open interest at the January 2015 200 strike was present throughout expiration week, so adjustments by sellers of these options likely influenced this narrow range around $200 (see the SPY January open interest configuration graph below the SPY 30-minute chart).

Last week, we observed that various equity benchmarks peaked around last year's closing levels, and these are levels that we continue to watch as potential short-term resistance points. This past week can be summed up by round-number century and millennium levels coming into play as supportive. For example, the S&P 500 Index (SPX - 2,019.42), PowerShares QQQ Trust (QQQ - 100.82), S&P 400 MidCap Index (MID - 1,430.89), and Wilshire 5000 (W5000 - 21,244.68) found floors around 2,000, 100, 1,400, and 21,000, respectively.

In fact, it was in late August, or about five months ago, that the SPX first touched 2,000, which is where the index is parked now. Its peak last month was 5% above this major millennium mark, while at its trough in October, the SPX was 7% below the 2,000 area. From this vantage point, using the October and December trough and peak as reference points, there is roughly equal risk-reward.

That said, the SPX must break important support areas that are in play now before the October lows can be tested. For instance, the index comes into this week around the 2,000 millennium mark and its 120-day moving average -- a trendline we discussed last week as being supportive during multiple pullbacks since 2013 (exception being the October decline).

Additionally, SPX 1,980 could prove important as we enter the second half of the month, as it is the site of the index's 10-month moving average. Note on the graph below that the SPX has not experienced a monthly close below its 10-month moving average since January 2012, when it crossed back above this trendline. The moving average acted as a cap on rally attempts during the five months prior to the January 2012 breakout.

We expect volatility expectations to remain elevated above 20, with monetary policy decisions from the Bank of China and the European Central Bank (ECB) on the calendar next week. With last week's surprise move from Switzerland's central bank to no longer cap-tie its currency to the euro, market participants will be paying close attention to these overseas central bank meetings.

Additionally, January CBOE Volatility Index (VIX - 20.95) futures options expire Wednesday morning, which means the last day to trade January VIX options is Tuesday. Currently, the VIX is trading just below 23.64, which is double last month's low at 11.82. As you can see in the chart below, the "double low" area marked the mid-December peak and, so far, this month's peak. It is likely, especially with a major call influence at the 23 and 24 strikes (see the January VIX open interest graph below the VIX chart), that the VIX settles below 23-24 on Wednesday morning.

But what happens after Wednesday is up in the air, as the ECB meeting occurs the following day, and could have the biggest impact on world markets, given that there is a lot of speculation on whether or not more stimulus action will be announced.

Additionally, any VIX January calls that are meant to be portfolio hedges will be expired by the time the ECB meets. In fact, of the 3.7 million call contracts outstanding, 2.0 million, or 56%, are due to expire on Wednesday. VIX put open interest will also fall off a cliff, as 1.4 million VIX put contracts, or 63% of puts outstanding, will expire on Wednesday. So, unless the expired calls are immediately replaced, the amount of portfolio protection outstanding will decrease substantially.

Despite reports that market participants are concerned about rising volatility in 2015, and are subsequently buying portfolio protection via VIX calls, we are not seeing such activity. A lack of portfolio protection, either because hedged money is reducing equity exposure or because portfolio protection is viewed as wasteful, is a risk to the market. And such a risk is all the more reason to have portfolio protection in place, as we advised last week, despite equity benchmarks sitting on support levels. If you wait to buy portfolio insurance on a break of support, it will likely be even more expensive than it is currently.

Indicator of the Week: VIX Futures Spread
By Rocky White, Senior Quantitative Analyst

Foreword: The S&P 500 Index (SPX) has pulled back sharply from its peak close reached on Dec. 29. As expected, the CBOE Volatility Index (VIX), which typically moves in the opposite direction of stocks, has spiked. However, the longer-dated VIX futures contracts did not see the magnitude of the spike that the front-month futures contract saw. As a result, the front-month VIX futures contract traded above the VIX futures contract four months away.

The VIX is a measure of how expensive options are for the SPX. When markets are in turmoil and/or there's a lot of uncertainty, then options become expensive (and the VIX increases). Evidently, VIX futures traders are expecting less expensive options in four months. I would conclude from this that they are expecting markets to calm down a bit going forward. This week I'm taking a look at prior times the long-dated VIX futures fell below short-dated futures to see if VIX futures traders have had a tendency of correctly predicting calmer markets going forward.

5-Day Futures Spread Goes Negative: In the chart below, the "5-Day Spread Percent" is a five-day average of the difference in the four-month VIX futures and front-month futures as a percentage of the VIX level. When the red line falls below zero, it means the longer-dated futures contract is below the front-month contract. The yellow circles on the SPX line mark times the spread percent fell below zero, but only if it's the first reading below zero in at least a month.

Taking a quick look at the chart shows the last five signals before the one last week were all at or near short-term market bottoms. However, the market has been strong over that period and any dot you'd place on the chart since 2009 would probably be a pretty good buying opportunity. There were also some signals before 2009 that would have been terrible buying opportunities.

Quantified Results: The tables below summarize SPX results after those signals on the chart above, and then for the index anytime since 2006, for comparison. You can see the average return at two and four months after a signal is lower than typical returns, despite a higher percentage of the returns being positive.

The average negative return four months after a signal is more than 30% in four months. There are only two negative returns, but this explains why the average return is lagging. It looks as though there has been a lot more volatility after a signal, compared to normal -- especially to the downside.

With the signals occurring during different market environments, I'm not sure I would want to conclude much from the results in the tables above. Below is a table showing the returns after each of the signals. You can see the two signals that happened in 2008 led to huge losses.

I also show where the SPX was on the day of the signal, relative to its two-week high. Using this to measure the pullback, it seems the recent signal was on a very minor pullback. I bolded the five signals with the smallest pullbacks (or every one less than 5%, if that sounds better). No huge losses occurred after these particular pullbacks, and each time the SPX was positive four months later. So, at least we have that going for us.

This Week's Key Events: Blue-Chip Earnings, Housing Data in Focus
Schaeffer'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

• Markets will be closed on Monday in observance of Martin Luther King, Jr. Day.

Tuesday

• On Tuesday, the National Association of Home Builders will release its housing market index. IBM (IBM), Johnson & Johnson (JNJ), Halliburton (HAL), Morgan Stanley (MS), Advanced Micro Devices (AMD), Baker Hughes (BHI), Cree (CREE), Delta Air Lines (DAL), MGIC Investment Corp (MTG), Netflix (NFLX), Petmed Express (PETS), and Regions Financial (RF) will step into the earnings confessional.

Wednesday

• The report on housing starts and building permits comes out on Wednesday. American Express (AXP), UnitedHealth (UNH), eBay (EBAY), TD Ameritrade (AMTD), Discover Financial (DFS), F5 Networks (FFIV), Fifth Third (FITB), Kinder Morgan (KMI), Logitech (LOGI), Northern Trust (NTRS), Sallie Mae (SLM), SanDisk (SNDK), United Rentals (URI), U.S. Bancorp (USB), and Xilinx (XLNX) will report their earnings data.

Thursday

• Weekly jobless claims, Markit's flash purchasing managers' manufacturing index (PMI), and crude inventories come out on Thursday. Across the pond, the ECB will announce its policy decision. Verizon (VZ), Travelers (TRV), Starbucks (SBUX), Alaska Air Group (ALK), Altera (ALTR), Capital One Financial (COF), Covidien (COV), Cypress Semiconductor (CY), E*TRADE Financial (ETFC), Fairchild Semiconductor (FCS), Huntington (HBAN), Intuitive Surgical (ISRG), Janus Capital (JNS), Johnson Controls (JCI), KeyCorp (KEY), Southwest Airlines (LUV), Skyworks Solutions (SWKS), Travelzoo (TZOO), United Continental Holdings (UAL), and Union Pacific Corp (UNP) will step into the earnings spotlight.

Friday

• Friday's economic calendar includes the existing home sales report and the Conference Board's index of leading economic indicators. General Electric (GE), McDonald's (MCD), Bank of New York Mellon (BK), Honeywell (HON), Kimberly-Clark (KMB), and Rockwell Collins (COL) will release their earnings data.

And now a sector of note...

Utilities
Bullish

The utilities sector has been a strong performer on the charts over the long term. Of the 10 utility stocks we follow, eight are currently trading above their 80-day moving average. Even more impressive, these securities have gained, on average, nearly 27% over the last 52 weeks. Nevertheless, just 37% of covering analysts rate these stocks a "buy," suggesting upgrades could be in the cards. What's more, short-term put open interest outweighs call open interest, per the average Schaeffer's put/call open interest ratio (SOIR) of 1.03. A capitulation among these skeptical options bettors could create tailwinds.

In a similar vein, the Utilities SPDR ETF (XLU) has advanced more than 27% over the last year, and is currently sitting atop several layers of potential support. Specifically, the exchange-traded fund (ETF) is north of the $45 level, which corresponds with its 2007 peak. Also, the same area is roughly double XLU's March 2009 low and triple its October 2002 low, hinting at possible triple-barreled technical support. If the shares can sustain their momentum, additional buying power could result from short sellers and/or option bears throwing in the towel. After all, 31.8% of XLU's float is sold short, and its SOIR of 5.29 ranks in the 93rd annual percentile.

It was a wild week of trading on Wall Street, with markets making big moves in both directions. Although bulls gave a valiant mid-week effort amid a brief respite in oil's rout and stimulus speculation from overseas, one particular metric in Friday's jobs report unsettled investors -- and sent the major market indexes back into the red for 2015. As Schaeffer's Senior VP of Research Todd Salamone explains, there was a "method to the madness," and offers up a number of reasons why last week's volatile price action could continue heading into January options expiration.

• The short-term vulnerabilities facing the market
• The under-the-radar moving average we're keeping a close eye on
• If history is any guide, the current D.C. backdrop could bode well for bulls

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: More Evidence on the Importance of Round-Number, Half-Century, and YTD Breakeven Levels
By Todd Salamone, Senior VP of Research

"On the sentiment front, we have continued to see a lack of hedging from institutions in recent weeks. An extremely popular hedge for institutions and hedge funds are CBOE Volatility Index (VIX ) calls. The VIX 20-day buy-to-open call/put ratio is down to 1.0 -- the lowest level since April 5, 2012. In other words, there aren't a lot of people buying hedges on their portfolios right now. These low-hedging ratios could leave stocks vulnerable to headline news...

"As we enter 2015, there will be a lot of factors affecting the market. The Fed will continue to remain in focus, as investors try to glean just when exactly rates will be increased and by what amount."

- Monday Morning Outlook, Jan. 3, 2015

"$QQQ ytd b/e is $103.25- Reached this level at three hours ago and it has essentially been sideways movement since"

"$SPX YTD B/E is 2,058.90 - has stalled here for the past 1-1/2 hours"

"YTD breakeven levels on $SPY, $QQQ, $MID prove to be significant - sideways action yesterday followed by this morning's selloff"

-@ToddSalamone on Twitter, Jan. 8-9, 2015

If what lies ahead in the immediate days for the stock market is anything like we observed this past week, expect choppiness to be the order of the day. If you are a trader, this would suggest putting smaller dollars into each trade and either shortening or lengthening your time frame, whichever you prefer. Shorten your time frame to take advantage of quick, whipsaw movements. If you lengthen your time frame and put less dollars at risk, you can loosen your stops and target bigger returns, therefore reducing the risk of getting whipsawed out of trades.

From a price-level perspective, there was a method to the madness, which gives us reason to believe that more of this could lie ahead. Like last year, indexes are respecting round numbers and year-to-date (YTD) breakeven points.

For example, in just three trading days, the S&P 500 Index (SPX - 2,044.81) moved from the round-number 2,000 millennium level to its half-century mark of 2,050, which is just below the 2014 close. Long-time readers of Monday Morning Outlook are aware of the SPX's uncanny behavior around half-century levels, which tend to act as key pivot or hesitation points. Note the sideways intraday action around 2014's close that followed the "hurry up and get there" buying in the 30-minute graph below. Thursday's sideways action was promptly followed by a Friday morning sell-off.

As a side note, we found it interesting that the SPX's low last week occurred around its 120-day moving average, a trendline that is not on the radar of many technicians, but has been important nonetheless. Note on the chart below how it has marked major short-term buying opportunities in seven of the last eight pullbacks since mid-2013. All pullbacks that have been supported by this trendline have been followed by an advance to new highs. If past is prologue, the SPX will make another run at 2,100 in the coming days.

The below table gives you closing levels for 2014 for some major equity benchmarks that we follow, along with last week's closing lows and closing highs. The purpose of this table is to highlight the importance of round numbers and half-century marks, plus year-to-date breakeven levels that could be influential in the days, or even weeks and months, ahead.

Next week is expiration for most options, although the expiration of CBOE Volatility Index (VIX - 17.55) options does not occur until Wednesday, Jan. 21 -- the week after next. The below graph is the current open interest configuration for January SPDR S&P 500 ETF Trust (SPY - 204.25) options that expire next week.

Note the enormous put open interest at the 200 strike, which acted as support last week. The furious rally from this level may have been driven, in part, by the unwinding of short positions related to this put open interest. Said another way, the further the SPY was above this strike and the closer we moved to next week's expiration, sellers of those puts that desire to be hedged were able to unload some of their short positions, as the probability decreased of these puts finishing in the money. That said, if negative news hits the market, this strike could be a magnet, as short positions would have to be re-established.

If the market advances, resistance from heavy call open interest relative to put open interest occurs at the 205 and 210 strikes, which equates to roughly SPX 2,050 -- the half-century mark that is situated just below 2015's YTD breakeven -- and 2,100, a round-number level that is just above the late-December high.

As it stands currently, SPY premium sellers would love to see a pin at 205 next Friday, as this is where the maximum number of calls and puts would expire worthless, which is the aim of a premium seller. In fact, the maximum number of call and put contracts that expired worthless occurred during the expiration of standard December options last month.

Bigger picture, hedging activity remains well below the levels of 2014. As we mentioned last week, if market participants that are normally hedged have chosen to forego hedging but are still holding long equity positions, this leaves the market more vulnerable than normal to negative headlines, as a lack of portfolio protection puts the market at the mercy of panic sellers.

Per the chart below, courtesy of our friends at Trade-Alert, total call open interest on VIX options has declined sharply since the first 10 months of 2014. It might not be a huge surprise to contrarians that the VIX climbed to its second-highest and fourth-highest readings in a year during only a three-week period between mid-December and early January, coincident with VIX call buyers steadily leaving the building.

Another, albeit different, takeaway to the relatively low equity-hedging activity is that hedged players could be building cash positions or playing ball elsewhere, reducing the need for equity protection. Since the SPX hit the 2,000 level in late August, there has been a steady decrease in VIX call open interest. And, since mid-November, SPY put open interest, which is another hedging vehicle, has decreased. Could hedged players be reducing equity exposure in lieu of cash, bonds, currency, commodity, or other macro plays? If this is the case, it is a market headwind.

If indeed hedged players are reducing exposure, who or what is supporting the market? It appears the shorts have begun to throw in the towel (see the chart immediately below). If you are a bull, you want to see more of this, especially if hedged players are on the sidelines or playing elsewhere, as short covering is a supportive factor. But this supportive factor diminishes as short interest continues to decline. The good news is that short interest on SPX component names remains well above the 2011 and 2012 extreme lows, but another upturn in short interest would be ominous without hedged players looking to buy into market weakness.

So, ideally, bulls would like to see stocks move higher coincident with a buildup in portfolio protection and still-heavy short interest levels, as this would be a sign that the deep-pocketed hedged players are accumulating equities and buying protection along the way. The recent stock market advance, however, seemed to be driven by short covering. Heavy short interest keeps pullbacks in check and supports breakouts to new highs, but we are at a lower level of short interest relative to a couple of months ago.

For now, it appears hedged money could be parking cash elsewhere and taking a "wait and see" approach, with the SPX trading in the 2,000 area, the official start of earnings season next week, and Federal Open Market Committee (FOMC) and European Central Bank (ECB) meetings scheduled for later this month.

Regardless of the motivation for low-hedging activity, we continue to advise having a hedge or short (put) exposure in place, especially with earnings season and the FOMC and ECB meetings just around the corner.

Indicator of the Week: Third Year of a Presidential Cycle
By Rocky White, Senior Quantitative Analyst

Foreword: It is pretty well-documented that the third year of a four-year presidential cycle is historically bullish. That's good news for the upcoming year, as 2015 is such a year. There are a few theories as to why this is. Maybe investor confidence is increased after midterm elections when the new Congress takes office? Another possibility is that U.S. presidents begin eyeing the next election in their third year, and promote market-friendly policies to boost their chances for re-election (or their party's chance for re-election if it's the president's second term). Of course, it's also possible that it's simply random. Whatever the reason, the consistency of positive returns over the last 60 years in the president's third year is quite impressive.

Third-Year Presidential Cycle: The table below summarizes the yearly returns on the S&P 500 Index (SPX) for each of the presidential cycle years going back to 1949. The average return in the third year of the cycle is 17.1%. That outpaces any of the other years by far. The other years all average between 6% and 7% gains. Out of 16 years, the third year of the cycle was negative only one time. That was actually just four years ago, in 2011, and the SPX was just barely negative, down 0.003% that year. The Dow Jones Industrial Average (DJIA) has actually been positive all 16 years in the third year of the cycle (the Dow gained 5.5% in 2011).

The chart below emphasizes how much more bullish the third year has been compared to the others. It shows the average SPX return path for each cycle year. The third-year average returns blows away the other years right off the bat and never looks back. On average, the SPX has boasted a 15% gain in July during the third year of the cycle!

The table below quantifies the first-half and second-half returns for each of the presidential cycle years. It's good news -- at least for the next six months -- that the third year is especially bullish in the first half of the year. The SPX averages a 13% return and has been positive in each of the 16 years. The second half of the year has averaged a much tamer 3.86%.

This Week's Key Events: Alcoa Gets the Earnings Party Started
Schaeffer'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 week begins with Alcoa's (AA) unofficial kickoff to earnings season.

Tuesday

• On Tuesday, the U.S. Treasury budget data and the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) are scheduled for release. CSX Corporation (CSX), DragonWave (DRWI), KB Home (KBH), and Progress Software (PRGS) will step into the earnings confessional.

Wednesday

• Wednesday's packed docket includes retail sales, import and export prices, business inventories, the Energy Information Administration's (EIA) weekly stockpiles report, and the Fed's Beige Book. JPMorgan Chase (JPM) and Wells Fargo (WFC) will release their quarterly earnings data.

Thursday

• Weekly jobless claims, the producer price index (PPI), the Empire State manufacturing survey, and the Philadelphia Fed manufacturing survey come out on Thursday. Bank of America (BAC), Intel (INTC), Citigroup (C), Lennar (LEN), BlackRock (BLK), Charles Schwab (SCHW), Fastenal Company (FAST), PPG Industries (PPG), Schlumberger (SLB), and Taiwan Semiconductor (TSM) will head into the earnings spotlight.

Friday

• Friday's economic calendar includes the consumer price index (CPI), industrial production data, and the Thomson Reuters/University of Michigan consumer sentiment index. Goldman Sachs (GS), Comerica (CMA), PNC Financial Services (PNC), Private Bancorp (PVTB), SunTrust Banks (STI) will report their earnings data.

And now a sector of note...

Retail
Bullish

The consumer discretionary sector was the top-performing sector in November and December, rallying more than 6% and outperforming the broader SPX. However, as this recent column from The Wall Street Journal illustrates, pessimism remains prevalent. Despite the retail outperformance, "there is reason to believe other signs don't bode well for retail stocks" ahead of earnings season. Echoing this, of the 71 retail stocks we follow, nearly two-thirds are trading above their 80-day moving average, yet less than half of analysts offer up "buy" ratings. Plus, the average short interest-to-float ratio among these equities is 12.8%, which would take more than six sessions to cover, at average daily trading volumes. All things considered, retail stocks could be poised to run higher on potential short-covering activity and/or a round of analyst upgrades.

Meanwhile, the SPDR S&P Retail ETF (XRT) touched its all-time high of $97.15 on Thursday, and the shares are sitting atop several layers of previous resistance, including: $88, twice its 2011 lows; the round-number $90 level, roughly double its 2007 and 2010 resistance level at $45, and representing a 10% premium to XRT's mid-October closing low of $81.93; $92, roughly 20% above XRT's 2014 low; and $93, 50% above its 2013 low. Plus, the fund could find added support atop its 40-day trendline, which contained its recent dip, and it should be noted that XRT is now more than 10% higher year-over-year -- a feat that eluded XRT since mid-December.

It was an interesting -- albeit relatively quiet -- holiday-shortened week on Wall Street. The major market indexes flirted with record highs and wrapped up a stellar 2014, but ended the week and the month mostly lower. So, what's in store for 2015? Schaeffer's Senior Equity Analyst Joe Bell, CMT, outlines some potential market-moving events for the short- and long-term, while our Senior Quantitative Analyst Rocky White breaks down historical first-quarter returns.

• The technical pattern on the radar
• The sentiment stat that favors the bulls
• A closer look at a pair of bullish streaks on the SPX and Dow

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: What We're Watching at the Start of 2015
By Joe Bell, CMT, Senior Equity Analyst

After a lot of ups and downs, patient long-term investors were rewarded with a pretty nice year in 2014. The S&P 500 Index (SPX - 2,058.20) netted a profit of 11.4%, the Dow Jones Industrial Average (DJI - 17,832.99) gained 7.5%, and the tech-heavy Nasdaq Composite (COMP - 4,726.81) surged 13.4%. Small-cap underperformance was one of the big stories of 2014, with the Russell 2000 Index (RUT - 1,198.80) managing only a 3.5% profit. The other big story was the bond rally that almost no economist predicted. Higher rates were assumed to occur by almost everyone, but after a 23% gain in 2014, we once again see how dangerous it can be to blindly follow crowd sentiment.

Although the equity market had a nice year in 2014, the same can't be said for the past week. The momentum that carried us during the second half of December came to a screeching halt during this holiday-shortened week. Although volume was dreadfully low, we saw the bulk of the weekly loss occur on the final day of the year. After an early bounce to open the first day of 2015, selling gave way and the S&P ended the week with a notable 1.5% decline.

Typically, the second half of December has been bullish, and this year was no exception. Despite their underperformance during much of 2014, small-caps led the advance off the mid-December bottom. During this week's decline, it is also important to note that small-caps underperformed during the pullback as well.

After briefly making a new all-time high on Wednesday, the RUT finished Friday 1.9% off its weekly high. This retreat left the index back below the 1,200 mark, which is near the site of its March and June 2014 peaks. On a shorter-term basis, the 1,180-1,190 area is the site of former resistance in September, November, and December 2014. This could be a logical area of support from buyers who are looking for an entry point. (Click chart to enlarge.)

The S&P didn't quite make it to the 2,100 level before reversing course mid-week. The Dow briefly eclipsed the big 18,000 level this week, but finished well below this round number by Friday's close. (If you didn't catch it already, Schaeffer's Senior Quantitative Analyst Rocky White did an interesting study on the significance of round numbers in last week's Monday Morning Outlook; be sure to check it out.)

As Schaeffer's Senior VP of Research Todd Salamone discussed in last week's MMO, the S&P MidCap 400 Index (MID - 1,451.31) broke out above the 1,450-1,460 area in December, a level that represents the neckline of a bullish inverse "head and shoulders" formation. This past week, MID has pulled back to this former level of resistance, which could now be a potential level of support. This will be an area to watch in the weeks ahead. (Click chart to enlarge.)

On the sentiment front, we have continued to see a lack of hedging from institutions in recent weeks. An extremely popular hedge for institutions and hedge funds are CBOE Volatility Index (VIX - 17.79) calls. The VIX 20-day buy-to-open call/put ratio is down to 1.0 -- the lowest level since April 5, 2012. In other words, there aren't a lot of people buying hedges on their portfolios right now. These low-hedging ratios could leave stocks vulnerable to headline news, and may be somewhat related to the quick-trigger selling we experienced late last week.

Another hedging indicator we monitor is the 20-day buy-to-open put/call ratio of the SPX, SPDR S&P 500 ETF Trust (SPY - 205.43), PowerShares QQQ Trust (QQQ - 102.94), and iShares Russell 2000 ETF (IWM - 118.93). These are some of the more popular hedges on portfolios, and traditionally there are more puts than calls purchased on these exchange-traded funds (ETFs). This ratio is now at its lowest level since June 2014. June was not a short-term top in the market, but the momentum from May definitely slowed a bit around this time.

Taking a step back, the major market trend is still higher, and there is one sentiment indicator that bulls should be encouraged by: the 10-day equity-only buy-to-open put/call ratio on the SPX, which rolled over recently from a high level, and made a sizeable move downward this week. When this ratio rolls over, it has tended to coincide with strong upward price action, as bearish sentiment gives way to bullish sentiment and cash flows off the sidelines.

As we enter 2015, there will be a lot of factors affecting the market. The Fed will continue to remain in focus, as investors try to glean just when exactly rates will be increased and by what amount. Policymakers have continually stated that their decisions will be data-dependent, and most market participants are not anticipating a rate hike until at least the second half of 2015.

Oil will continue to grab the headlines, as prices have plummeted during the past several months. Russia's uncertain economy, Greece's political chaos, Europe's economic issues, and China's slowdown all could create market-moving headlines in the coming months. The strong U.S. dollar and its impact on U.S. multinational companies will also be something to keep an eye on in 2015. Finally, when will this downtrend in Treasury rates end? Just remember that sometimes trends last longer and go further than most people believe.

In the short term, the market gets back in the swing of things this week with a lot of economic data on tap. On Wednesday, the ADP employment data, crude inventories report, and Federal Open Market Committee (FOMC) meeting minutes will be released, and on Thursday comes the weekly jobs figures. We will end the week with the December monthly jobs report. All of these data points have the possibility to create volatility as participants start getting back to the market after the busy holiday season.

Indicator of the Week: Seasonality & Streaks Heading into 2015
By Rocky White, Senior Quantitative Analyst

Foreword: Happy 2015. The rally that started in 2009 continued last year, and we find ourselves in the midst of a couple of bullish streaks. There's an impressive quarterly winning streak on the S&P 500 Index (SPX) and a similarly impressive yearly streak on the Dow Jones Industrial Average (DJI). I'll talk a little about these below. First, though, I give some numbers on how stocks have typically performed in the first quarter.

First-Quarter Seasonality: This table summarizes the quarterly returns on the SPX over the past 50 years. The fourth quarter has been the best quarter when looking at the average return and the percentage positive. I would say the next-best quarter has been the first quarter, averaging a 2.31% gain and positive 60% of the time.

The chart below shows the average first-quarter path to that 2.31% return I just mentioned. According to the chart below, the best times for short-term traders to buy over the next three months is around Jan. 24, or at the very end of February (these points are marked on the chart). The market has tended to really take off around these times.

While the first quarter hasn't been too bad over the long run, recently, it has been especially good for stocks. The table below summarizes the quarterly returns over just the last five years. As you can see, the first quarter is the only quarter positive in each of the last five years, averaging a gain of 6.72%.

Streaks: While the first quarter for the SPX is on a five-year win streak, the index in general hasn't seen a negative full quarter since 2012. Specifically, the fourth quarter of 2012 is the last time the index lost points in a quarter. We have SPX data back to 1928, and this is just the fourth time we've seen eight straight positive quarters.

The table below shows some data on the past streaks. One notable point is that a streak never ended at eight quarters. In the other three occurrences, the streak lasted at least two more quarters. In two of the three prior streaks, the SPX underperformed over the next year (3.85% and 2.98% is less than the typical yearly return for the SPX). But then the last time the quarterly streak made it to eight, in 1996, stocks exploded higher with the index gaining over 30% in the next 12 months.

While the SPX has an eight-quarter winning streak, the Dow streak is only three quarters. The Dow lost points in the first quarter of 2014. However, the Dow does have a six-year winning streak to its credit, which the SPX can't boast (the SPX was down a fraction of a percent in 2011).

Going all the way back to 1900, it's only the second time the large-cap index was up six years in a row. The only other time was 1991 through 1996. That streak went on for a total of nine years, ending in 2000, the bursting of the dot-com bubble. Hopefully, when the current streak ends, it's a much softer landing.

This Week's Key Events: Fed Minutes, Payrolls On Tap
Schaeffer'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 week kicks off with the motor vehicle sales report. There are no notable earnings on tap.

Tuesday

• On Tuesday, the Institute for Supply Management's (ISM) non-manufacturing index and factory orders are slated for release. Commercial Metals Company (CMC), Lindsay Corp (LNN), and Sonic (SONC) will step into the earnings confessional.

Wednesday

• ADP's national employment report, the Federal Open Market Committee's (FOMC) meeting minutes, the international trade balance, and weekly crude inventories come out on Wednesday. Micron Technology (MU), Greenbrier (GBX), Monsanto (MON), and SUPERVALU (SVU) will release their earnings.

Thursday

• Weekly jobless claims and the Fed's consumer credit report will be released on Thursday. Apollo Education Group (APOL), Bed Bath & Beyond (BBBY), Constellation Brands (STZ), Global Payments (GPN), Ruby Tuesday (RT), and Schnitzer Steel (SCHN) will announce earnings.

Friday

• The Labor Department's monthly report on nonfarm payrolls and the unemployment rate comes out on Friday, along with wholesale inventories. Infosys (INFY), Acuity Brands (AYI), and AZZ Incorporated (AZZ) will step under the earnings spotlight.

And now a sector of note...

Retail
Bullish

The retail sector has been in the headlines recently, with holiday shopping only recently concluding. While signs suggest retail sales figures will most likely meet forecasts, expectations are not exactly at euphoric levels, even as the SPDR S&P Retail ETF (XRT) carves out new all-time highs. In fact, the exchange-traded fund (ETF) notched its loftiest mark on record -- $97.15 -- this past week. What's more, the shares are currently sitting atop several layers of previous resistance, including $90.12 -- a 10% premium to XRT's mid-October closing low of $81.93. Plus, the round-number $90 level is roughly double the ETF's 2007 and 2010 resistance level at $45, and could now reverse roles to act as support. It should be noted, the $97 area could serve as a short-term speed bump, as it is 20% above multiple lows near $81 the ETF has panned since April.

On the sentiment front, two-thirds of the 69 retail stocks we follow are trading above their 80-day moving average. Nevertheless, the typical short interest-to-float ratio among these equities is nearly 13%, which would take more than five sessions to cover, given average daily trading volumes. Also, fewer than half of the brokerage firms covering these names have handed out "buy" ratings. All things considered, retail stocks could be poised to run higher on potential short-covering activity and/or a round of analyst upgrades.