Daily Gains Letter

stock advisors


What the Worst Start to the Year for the Stock Market Since 2005 Means

By for Daily Gains Letter | Jan 17, 2014

2014 Trading Begins Worse Than 2005Out of the first seven trading days of 2014, the S&P 500 declined on five of those days, marking the worst start to the year for the stock market since 2005. This phenomenon has raised many questions. Looking at this, investors are asking how the returns on the S&P 500 will look this year. Why? Because in 2005, the S&P 500 only increased by 2.87%.

In 2005, the months of July and November were good for the S&P 500; the index increased by more than 3.5% in each of those months. On the other hand, January, March, and April were the worst-performing months that year. In these months, the S&P 500 declined by more than two percent. (Source: StockCharts.com, last accessed January 15, 2014.)

Will the S&P 500 follow the same trajectory in 2014 as it did in 2005?

As it stands, I believe the S&P 500 may perform worse than it did in 2005. As I’ve mentioned in these pages many times before, there are many factors that are leading me to believe this can happen; for example, we are seeing a surge in optimism towards stocks—stock advisors are the most bullish they’ve been since the last market sell-off. As well, the U.S. economic growth isn’t really surprising when you look much deeper into the details, and most importantly; the Federal Reserve has announced that it will start to reduce its asset purchases (quantitative easing). When combined, these phenomena could bring the S&P 500’s performance down this year.

Regardless, you have to keep one of the most important lessons of investing in mind: don’t predict tops and bottoms. The … Read More


Bears Becoming Bulls En Masse as Optimism Rises

By for Daily Gains Letter | Jan 15, 2014

Bears Becoming BullsIncreasing optimism is dangerous for key stock indices. Sadly, this is exactly what we’re seeing in the markets right now. It is very evident wherever you look. Stock advisors are saying, “Just buy stocks, and you will do alright.” Investors feel good about stocks. Those who were bearish on the key stock indices since the crash in 2008 and 2009 are also turning bullish—the bears are declining in numbers each week; it’s becoming especially difficult for them to keep their pessimistic stance these days.

One of the key economic indicators that I follow when looking at the optimism in key stock indices is called the Chicago Board Options Exchange (CBOE) total options put/call ratio.

This indicator, at the very core, shows the ratio of volume of puts and call options. When there are more call options, this ratio stands below one. When there are more put options than call options, the ratio stays above one. Currently, this ratio stands at 0.6—a level last seen in 2011. Since at least 2007, this ratio of call options to put options has reached this level only a handful of times, as you can see in the chart below.

CBOE Options Put-Call Ratio Chart

Chart courtesy of www.StockCharts.com

When call options increase, it means investors are bullish towards the key stock indices. When the put options increase, it means investors believe the key stock indices will experience pressures ahead. The current put/call ratio suggests investors are not worried.

Another indicator I look at to assess the optimism on key stock indices is margin debt—the amount of stock purchased on borrowed money. When margin debt is high, this shows that … Read More