The Dow Jones Industrial Average (DJIA) plunged today -- giving up its perch atop 18,000 and briefly falling into negative year-to-date territory -- despite encouraging jobs data and a modest increase in consumer spending. Pressuring the blue-chip bellwether was Apple Inc. (NASDAQ:AAPL), which -- along with biotechs and tech stocks -- also dragged the Nasdaq Composite (COMP) below 5,000 for the first time since April 20.

Continue reading for more on today's market, including:

• It was a brutal day for drugmakers, including Agios Pharmaceuticals Inc (NASDAQ:AGIO), Celgene Corporation (NASDAQ:CELG), and Inovio Pharmaceuticals Inc (NASDAQ:INO).
• Traders bet bullishly ahead of tonight's big reveal from Tesla Motors Inc (NASDAQ:TSLA).
• A double-digit loss and fresh annual low failed to deter Nokia Corporation (NYSE:NOK) call buyers.
• Plus ... Good news for the job market, one automaker's big spend, and why bulls should be wary of this coffee stock.

The Dow Jones Industrial Average (DJIA - 17,840.52) was off by as many as 260.6 points, and finished on a loss of 195 points, or 1.1% -- just barely in the black for 2015. On a monthly basis, however, the blue-chip index ended 0.4% higher. Twenty-seven of the Dow's 30 components gave up ground, led by AAPL's 2.7% dive. Conversely, American Express Company (NYSE:AXP) tacked on 0.4%, while Wal-Mart Stores, Inc. (NYSE:WMT) and The Coca-Cola Co (NYSE:KO) edged up 0.2% apiece.

The S&P 500 Index (SPX - 2,085.51) dropped 21.3 points, or 1% -- and gave up the 2,100 level -- while the Nasdaq Composite (COMP - 4,941.42) dove below 5,000, ending on a deficit of 82.2 points, or 1.6%. For the month of April, the SPX and COMP rose 0.9% and 0.8%, respectively.

The CBOE Volatility Index (VIX - 14.55) jumped 1.2 points, or 8.7%, to clear its 40-day moving average for the first time since March 31.

5 Items on Our Radar Today:

1. Weekly jobless claims fell to a 15-year low last week, dropping to 262,000 from 296,000, according to the Labor Department. Another encouraging sign of a firming labor market -- private-sector wages climbed 0.7% during the first quarter of 2015, and 2.8% year-over-year through March. (Bloomberg)
2. General Motors Company (NYSE:GM) unveiled plans to invest $5.4 billion in its U.S. manufacturing plants over the next three years. The investment is expected to create 650 new positions, and support 15,000 existing ones. (Reuters)
3. Why bullish bettors could get burnt by this coffee concern.
4. Three stocks that shot higher on strong earnings and positive reactions on the Street.
5. On the flip side, this electronics issue got hammered on earnings, bringing option bears to the table.

Commodities:

Crude oil jumped on a weaker dollar and expectations that U.S. stockpiles will begin decreasing. By the close, oil for June delivery was up $1.05, or 1.8%, to settle at $59.63 per barrel. On a month-over-month basis, the contract was 25.3% higher -- black gold's biggest monthly gain since 2009.

Gold was pressured lower by the drop in weekly jobless claims, as well as an increase in U.S. Treasury yields. At the close, gold for June delivery was down $27.60, or 2.3%, at $1,182.40 per ounce. On a monthly basis, the malleable metal was off 0.1%.

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"...equity markets have had a tendency to become unstable during early stages of a rally above key round-number levels, until finally such instability around these areas disappears. Admittedly, it is the latter that generates complexity, as we have witnessed many instances in which these benchmarks eventually take out round-number resistance for good. But, as we saw last week -- not this time."
-- Monday Morning Outlook, March 30, 2015

"In the interest of keeping it simple, the short-term outlook continues to favor the bulls, with the SPX's 2014 close continuing to act as support in the near term."
-- Monday Morning Outlook, April 6, 2015

From a technical perspective, a theme that has been consistent during the past few weeks is using pullbacks to year-to-date (YTD) breakeven or round-number levels as buying opportunities, while caution (correctly) reigned on rallies to, or just above, key round-number millennium and century marks.

So, during the past two weeks, we advised that the probabilities favored the bulls, with benchmarks such as the Dow Jones Industrial Average (DJIA - 18,057.65), S&P 500 Index (SPX - 2,102.06), and NYSE Composite (NYA - 11,112.69) stabilizing after pullbacks around their respective 2014 closing levels, while the S&P MidCap 400 Index (MID - 1,534.96) simultaneously pulled back to the round 1,500 level.

As we move into April expiration week, we have come full circle, with major indexes such as the Nasdaq Composite (COMP - 4,995.98), DJIA, and SPX trading again just above or below major round numbers that have spelled short-term trouble in the recent past.

For example, COMP advances above 5,000 were quickly met with selling on two separate occasions last month. Since late December, sellers have greeted advances above DJIA 18,000. Moreover, selling soon befell the SPX after moving above the 2,100 century mark on two separate occasions last month, as the index continues to use century marks and half-century marks as significant pivot points amid its grind higher.

The "simple" action for short-term traders would be to lighten up on long positions, or consider adding short positions to your portfolio. "Simple" has indeed trumped "complex" during these last few weeks as buying YTD breakeven support and selling round-number resistance has proven to be a profitable approach.

However, keep in mind that these round numbers have simply served as speed bumps amid a low-volatility, longer-term uptrend. In other words, selling pressure eventually subsides around the round numbers, punishing the shorts and rewarding the bulls.

In fact, short covering has produced a few impressive short-term rallies through round-number resistance, such as the fourth-quarter 2014 short-covering advance that occurred during earnings season and pushed the SPX through the 2,000 millennium mark.

As you can see on the chart immediately below, the shorts have built up positions to the highest level since March 2014, perhaps driven by dollar strength and the resulting downward earnings revisions. We discussed the potential positive implications of the lower earnings expectation bar in last week's commentary. So, at risk of diving into the more complex after "simple" has been working, the fact is that the current sentiment backdrop favors another earnings-related breakout above round-number resistance levels.

Next week will give investors a lot to digest, so it could be a headline-driven environment. The economic calendar is full, beginning with Tuesday's producer price index (PPI) and March retail sales. The number of companies reporting earnings will noticeably increase too, particularly in the financial group, with Wells Fargo (WFC) and JPMorgan Chase (JPM) kicking things off before the open on Tuesday morning. Investors will also be eyeing overseas developments, particularly central bank meetings in China and Europe. Finally, as we alluded to earlier, it is expiration week, with April options expiring on Friday, and CBOE Volatility Index (VIX - 12.58) April options settling Wednesday morning.

With that in mind, the 210 "call wall" on the SPDR S&P 500 ETF Trust (SPY - 210.04) is a level that we will be watching, as this equates roughly to the round-number SPX 2,100 that we discussed earlier. In an ideal world, sellers of the 210-strike calls and puts would like to see the SPY get pinned at 210 on Friday afternoon. Therefore, one scenario for next week is a lot of headline-inducing volatility around this strike, as it acts as a magnet when the SPY drifts too far above or below it. That said, a close above the 210 "call wall" at expiration would build upon the breakout case for the bulls.

Read more:

Indicator of the Week: Why April is a Good Time to Buy Stocks

The Week Ahead: Blue Chips in the Crosshairs

"As we move into this week's trading, the 'keeping it simple' model is now saying 'buy.' In other words, loyal readers of Monday Morning Outlook are fully aware of how round-number, year-to-date percentage returns have generally marked key pivot areas. With that said, multiple equity benchmarks, including the DJIA enter this week at potential year-to-date (YTD) support levels, which could be opportunistic for short-term traders ... If the SPY manages to stay above the 205 strike early in the week, there could be a bit of a tailwind from short covering related to expiring options that are at strikes below the SPY level."
-- Monday Morning Outlook, March 30, 2015

Our short-term "buy" signal in last week's commentary got off to a tremendous start last week, as the S&P 500 Index (SPX - 2,066.96) and SPDR S&P 500 ETF Trust (SPY - 206.43) rallied over 1% on Monday. However, the sharp rally pushed the SPY into a "call wall" at the March 31 expiry 208 strike, from which stocks noticeably reversed direction. In fact, on Wednesday, the SPX dipped back below its December 31 close at 2,058.90 intraday, only to close back above this key level in the last minutes of trading. In the interest of keeping it simple, the short-term outlook continues to favor the bulls, with the SPX's 2014 close continuing to act as support in the near term.

"Wall Street analysts to make their deepest cuts to earnings forecasts since the financial crisis ... Analysts, citing the dollar's strength as a key factor, are predicting that profits at S&P 500 firms for the first quarter will show their biggest annual decline since the third quarter of 2009."
-- The Wall Street Journal (subscription required), March 22, 2015

"With economic data missing the mark, analysts predicting three straight quarters of falling profits and speculation shifting about when the Federal Reserve will boost interest rates, investors are taking steps to protect profits ..."
-- Bloomberg, April 1, 2015

"'In companies with stretched valuations, I've seen customers buy protection or reduce positions going into earnings,' said Jeffrey Yu, head of single-stock derivatives trading at UBS."
-- The Wall Street Journal (subscription required), April 1, 2015

"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?"
-- Monday Morning Outlook, March 16, 2015

Market participants continue to fret over a multitude of uncertainties and headlines that continue to stoke volatility. This past week, for example, many economic reports missed forecasts, and coincident with these releases, voting Federal Open Market Committee (FOMC) members opined that rate hikes were coming. Weaker-than-expected economic data combined with potential upcoming rate hikes did not sit well with investors, causing volatility to spike and equities to erase Monday's gains.

In addition to uncertainty both here (Fed, economy) and abroad (Greece, Middle East), earnings reports will come into focus, with Alcoa Inc (NYSE:AA) marking the unofficial beginning of earnings season with its Wednesday, April 8 release.

Expectations appear to be low heading into earnings season, with a lot of blame being placed on the strong dollar. In fact, downward revisions to earnings expectations during the course of the quarter may be putting a lid on stock prices. However, while the market has not made any headway to the upside, there hasn't been any meaningful downside either, suggesting resilience amid news that could be very capable of pushing stocks lower (negative earnings revisions, Fed fears, weak economic data).

The takeaway is that poor earnings reports are likely factored into the market, as analysts have reacted to earnings-related headwinds, such as a stronger dollar. For bulls, the good news is that companies have a lower earnings bar to hurdle. Undoubtedly, there would be more risk to these earnings reports if analysts stood firm in their estimates, even as negative earnings drivers gathered steam. During this earnings season, look for some companies to attempt to add clarity to their respective earnings releases by presenting data absent currency factors. This is what we saw at the back end of the earnings season that just passed, and those companies' stocks tended to react favorably.

Whether it's earnings season or the Fed, it appears professional investors are indeed taking steps to protect their portfolios, as the ratio of buy-to-open put volume to buy-to-open call volume on exchange-traded funds such as the SPY, PowerShares QQQ Trust (QQQ - 105.12), and iShares Russell 2000 (IWM - 124.65) is increasing. When professional traders are in accumulation mode and stocks push higher, we have sometimes observed that this ratio coincidentally rises too, as put demand (bought as a hedge) increases as equity exposure increases.

At present, the combined buy-to-open put/call volume ratio on these exchange-traded funds is rising, but stocks have not coincidentally rallied. Therefore, we are concluding that steps are indeed being taken to protect portfolios, perhaps due to a perceived risk that earnings could wreak havoc on the market. If this is indeed the case, stocks are being "pre-sold" ahead of earnings, and this could eventually tilt the risk-reward in the bulls' favor, especially if analysts' earnings revisions are proven to be worse than the actual results.

Finally, we are keeping our eyes on the bigger picture. If YTD breakeven support is broken on the SPX, another potential support area is close by at 2,030, home to the index's 10-month moving average. As we have said in a previous report, in the context of the daily headlines that have created volatility by the day, a monthly graph of this index displays an orderly uptrend that has rewarded patient investors.

Read more:

Indicator of the Week: The Importance of a Positive YTD Return Right Now

The Week Ahead: Fed Minutes and Alcoa Inc. Earnings

"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."
-- Monday Morning Outlook, March 23, 2015

"Simplicity is the ultimate sophistication."
-- Leonardo da Vinci

One looks back at last week and asks, "Is it really that simple?" Amid a multitude of complex computer-trading programs designed to trade with an edge, perhaps the most simplistic model triggered a "sell" last week, after multiple equity benchmarks in the U.S. reclaimed round-number levels that again preceded instability. And in the case of the London FTSE 100 (UKX - 6,868.30), its first-ever venture above the millennium 7,000 level was greeted with sellers.

We saw various explanations for the selling -- weaker-than-expected economic data, the Securities and Exchange Commission (SEC) indicating that oversight of high-frequency traders will increase, or a spike in oil attributed to Saudi Arabia attacks on perceived threats in Yemen. However, from a technical perspective, the common denominator was sharp selling from round-number areas after multiple equity benchmarks in the previous week climbed above key millennium marks as follows:

• London's FTSE 100 -- 7K level


• Dow Jones Industrial Average (DJIA - 17,712.66) -- 18K


• Dow Jones Transportation Average (DJT - 8,700.34) -- 9K


• NYSE Composite (NYA - 10,875.14) -- 11K


• Nasdaq Composite (COMP - 4,891.22) -- 5K


• Wilshire 5000 Index (W5000 - 21,846.79) -- 22K

Not to be forgotten, the S&P 500 Index (SPX - 2,061.02) failed again in the 2,100 century zone.

As we said last week, equity markets have had a tendency to become unstable during early stages of a rally above key round-number levels, until finally such instability around these areas disappears. Admittedly, it is the latter that generates complexity, as we have witnessed many instances in which these benchmarks eventually take out round-number resistance for good. But, as we saw last week -- not this time.

As we move into this week's trading, the "keeping it simple" model is now saying "buy." In other words, loyal readers of Monday Morning Outlook are fully aware of how round-number, year-to-date percentage returns have generally marked key pivot areas. With that said, multiple equity benchmarks, including the DJIA enter this week at potential year-to-date (YTD) support levels, which could be opportunistic for short-term traders. Moreover, the S&P MidCap 400 Index (MID - 1,508.51) pulled back to a potential round-number support zone at 1,500.

The Google Finance graph below that displays YTD percentage returns for the SPDR S&P 500 ETF Trust (SPY - 205.74) and DJIA is a nice visual for the importance of YTD breakeven levels having a tendency to mark important pivot areas this year. Does it pivot every time? Certainly not, and we witnessed this in February. So, if you play the "simple" trade and go long, ensure you have a tight leash in case we break away from the simple, and a breakdown occurs.

Last Wednesday's price action may have put a scare into many investors, after the SPX declined 1.5% and closed on its low of the day at 2,061.05. In technical terms, it was an ugly candle. We were curious to see how the market has played out after candles such as these.

Specifically, how has the market behaved in the short term after the SPX loses more than 1.25% AND closes at its low of the day during this bull market? Per the tables below. in the five and 10 days following such a move, the SPX has a slightly increased probability of being higher than the anytime expectation, with the 10-day performance producing the biggest edge.

The data would suggest playing the market higher into the middle of this week and/or the middle of the following week, based on its historical tendency since early 2009. That said, note how the standard deviation of returns is higher than normal too, which would suggest additional volatility. Therefore, a smaller-than-normal allocation might be the best way to manage what could be a more volatile environment in the immediate days ahead.

Finally, let's move into the world of the complex, which might be supportive of the simplistic trade mentioned above. After a weekly expiration Friday this past week and a standard expiration Friday the prior week, this coming Tuesday is quarterly expiration for some options, including the SPY.

Below is the open interest configuration for SPY options that expire tomorrow, March 31. The put open interest is not nearly the size of a standard expiration, but at the same time, the biggest put open interest strikes are double that of the 3/27 weekly options that just expired. Moreover, put open interest outweighs call open interest by a whopping 3.1-to-1 ratio. If the SPY manages to stay above the 205 strike early in the week, there could be a bit of a tailwind from short covering related to expiring options that are at strikes below the SPY level.

But, as is typical whenever we discuss expiration and open interest configurations, news that creates downward pressure on the SPY could generate sharper-than-normal selling as shorting activity increases when the bigger put strikes are violated. This takeaway reinforces the idea that a smaller-than-normal allocation is ideal if you take the simple trade.

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Indicator of the Week: Are We Headed for a Stock Picker's Market?

The Week Ahead: Jobs, Janet, and Micron Technology, Inc. Earnings

"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.

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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.

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"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.

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"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.

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"...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.

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"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.

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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.

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