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Market Analysis

5/16/2015

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When analyzing the market as a whole there are several important factors to note:
Trend: Getting a feel for trend is very important. Trend differs in all time-frames, meaning that short term trend may be different from long term trend. 
Trend can be quantified as up or down by looking at moving averages. The most Popular and widely watched moving averages are the 50&200day MA.

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S&P 500 Daily
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S&P 500 Weekly
Sentiment: Sentiment is hard to quantify. There are several different polling organizations, the most popular being the American Association of Investors Intelligence (AAII)  Sentiment can also be gauged from social media sites such as stocktwits/twitter. Put/Call ratios (the VIX indicates the ratio of puts:calls on the S&P 500 and tends to spike when there is fear in the market.) The thing about sentiment, is that as an indicator it is most useful at extremes. Whenever the crowd is uniformly united in optimism or pessimism,  the opposite move tends to happen. 

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VIX Daily
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VIX Weekly
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Stocktwits SPY (S&P 500 ETF) Sentiment
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Extreme Spike in Call Buying
Macro:  The strength of the economy is important as it effects Investor sentiment as well as the Federal Reserves Interest rate policy. Rising rates are generally seen as Bearish for stocks as it makes fixed income products more attractive. Rising rates are a tool that the federal reserve often uses when it feels that the economy is growing unsustainably fast and needs to 'cool down.' Rising rates also make it harder for companies to borrow money. Perversely negative economic news can lift asset prices because it makes the fed less likely to raise interest rates. There's a weird hyper-focus on rates in the financial media, so as a consequence it greatly affects market movements.
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US 10yr T-Bill Yield or 'interest rate' Daily
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US 10yr T-Bill Yield or 'interest rate' Weekly
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Goldman Sachs Gloabal Economic Surprise Index currently making three-year lows
Using this information we can see that the trend of the S&P 500 is up. This is Bullish
Sentiment is mostly neutral, however there was recently an unusually large spike in call options buying indicating that many people are expecting short term higher prices. Sentiment is mixed so I am personally considering this Neutral
Although still below most moving averages, recently Yield on t-bills has recently been heading higher. Some of the short term moving averages have crossed longer term moving averages indicating that rates are rising. Rising rates in bonds generally for equities is Bearish

I have illustrated the three majorly important factors one must pay attention to when analyzing the general conditions of the marketplace. Each area has produced conflicting results. Perhaps this is why sentiment is predominately neutral indicating overwhelming uncertainty of future market direction. 'Fear' as indicated by the VIX is off the all time lows of September 2014 but is still very suppressed.
Market analysis can be subjective but  in attempting to remove as many human/emotional factors as possible we discover a market giving mixed signals. If you ever find yourself uncertain remember that cash is a valid position. Wealth preservation and keeping your losses small is the cornerstone of this business. 
When analysing the market, always keep your eyes on the core: Trend, Sentiment, Macro
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    R. J. Sullivan IV

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