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January 04. 2015

Market Review

All three U.S. indexes finished the first week of the year in negative territory. For the week, the Dow Jones Industrial Average lost 1.2 percent to 17832.99. The S&P 500 dropped 1.5 percent to 2,058.20 in the holiday-shortened week. The Nasdaq lost 1.7 percent from last Friday’s finish to 4726.8. All key S&P sectors finished in the red for the week, dragged by technology. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, advanced to 17.79.

Short-Term Technical Condition

Obviously, the short-term oriented uptrend of the market slightly deteriorated last week. This is mainly due to the fact that the S&P 500 finished the week within both envelope lines from the Trend Trader Index, indicating some signs of short-term exhaustion. Nevertheless, both envelope lines of the Trend Trader Index are still slightly drifting higher and, therefore, ? from a pure structural point of view – the underlying trend-structure of the market still remains supportive. Basically, we receive the same picture if we focus on the Advance-/Decline 20 Day Momentum Indicator and the Modified MACD. Although the Advance-/Decline 20 Day Momentum remains bullish from a pure signal point of view, its gauge is trading at outright low levels and has, therefore, not confirmed the latest levels from the S&P 500 yet. In addition, we can see that the short-term oriented gauge from the Modified MACD has started to lose momentum recently and, therefore, we would not be surprised to see a bearish crossover signal soon, if we do not see a week of strong gains ahead. Such a situation often occurs when the market is about to enter a period of consolidation. If this is the case, further deterioration within our short-term oriented trend indicators is highly likely.

Right now, we would not take any upcoming bearish (crossover) signals within our short-term oriented trend indicators too seriously, since our entire short- to mid-term oriented market breadth indicators remain outright strong at the moment. Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are far away from flashing any bearish crossover signal, indicating that the underlying breadth momentum of the broad market remains quite constructive at the moment. Furthermore, we can see that the recent weakness is mainly driven by profit taking so far. This is mainly due to the fact that we have only seen a decline in the amounts of stocks which are hitting a fresh yearly high, whereas the amounts of stocks which have been pushed to a new yearly low remain outright depressed. For that reason, the High-/Low Index Daily remains quite bullish for the time being as the smoothed new lows have not shown any signs of strength yet and, therefore, the overall market internals look quite healthy at the moment. This can be also seen if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50), which are trading well above their bearish 50 percent threshold. This telling us that the majority of all NYSE listed stock remains within a strong short-term oriented up-trend!

From a pure contrarian point of view, it looks possible to see a short-lived consolidation period ahead. This is mainly due to the fact that the Global Futures Trading Index as well as the Program Trading Buy-/Sell Spread flashed a sell signal last week, indicating too much optimism on a very short-time frame. Moreover, the Smart Money Flow Index has shown some weaknesses recently, whereas the WSC Capitulation Index has not dropped back into bullish territory so far. As a matter of fact, further down-testing could be likely. On the other hand, we can see that the small fry is heavily buying put options, as the ISEE Call-/Put Ratio Z-Score remains within bullish territory. Therefore, we would be quite surprised to see a stronger pullback ahead, as normally those guys tend to be dead wrong. Above all, we are expecting further tailwinds in January from a pure cyclical point of view. So all in all, given the quite supportive readings within our short-term oriented tape indicators, together with positive cyclical tendencies, we think any upcoming weaknesses should be limited in price and time.

Mid-Term Technical Condition

Above all, the mid-term oriented up-trend of the market continued to strengthen last week as the gauge of our reliable Global Futures Trend Index increased 200 basis points to 87 percent. As a matter of fact, the gauge of the Global Futures Trend Index is just shy trading below the extreme bullish 90 percent threshold. This can be seen as quite encouraging technical trend signal. Normally, as long as the Global Futures Trend Index remains above its 60 percent threshold, any upcoming short-term oriented weaknesses should be limited in price and time. Furthermore, the WSC Sector Momentum Indicator is still signaling that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This indicates that from a pure price point of view, the mid-term oriented trend of the market remains well intact. This can be also seen if we have a closer look at our Sector Heat Map. Apart from energy, the relative strength score of all major sectors is trading well above the riskless money market and, therefore, the underlying mid-term oriented up-trend of the S&P 500 still remains quite broad based at the moment.

More importantly, mid-term oriented market breadth is still confirming the mid-term oriented up-trend and, therefore, it is too early get bearish from a strategic point of view. The Modified McClellan Oscillator Weekly continued to show a narrowing bearish gap, indicating that the underlying tape momentum of the market is recovering. Furthermore, the current trend participation still looks quite broad based as the the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain well above their bearish threshold. Above all, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly still remain quite bullish, although their gauges have lost some momentum recently. This is telling us that the underlying demand remains outright supportive at the moment, as mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts. As a matter of fact the risk of a sharp correction remains outright low at the moment, as it would be quite unusual to see such an event with such bullish readings in both indicators. Although the current technical environment looks quite bullish for the time being, we should not forget the fact that most of our mid-term oriented breadth indicators are trading well below their recent highs and are, therefore, showing a huge long-term bearish divergence to the market. Right now, those divergences can be definitely ignored as the readings within those indicators remain quite supportive, plus the mid-term oriented up-trend of the market has not been broken yet!

Long-Term Technical Condition

The long-term technical condition of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, whereas most local equity indexes around the world have not managed to reach a new high yet. If we focus on our global momentum heat-map, we can see that especially emerging markets and commodities have a lower momentum score than risk-less money market and, therefore, the WSC Global Momentum Indicator remains well below its bullish threshold. Nevertheless, U.S. equities remain the most attractive region from a pure asset allocation point of view, as their relative strength score is far away from being bearish and is additionally leading all other risky markets! Above all, we have seen further improvements in long-term oriented market breadth, as our Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly gained more bullish ground last week. This indicates that the market internals are slightly getting back on track. This is definitely an important fact if we consider the current levels form the S&P 500. Last but not least, the percentage of stockss which are trading above their long-term oriented moving average (200) remain constructive, although they could be stronger in our point of view. So all in all, we have seen further improvements within our long-term oriented indicator framework and, therefore, we stick to our long-term bullish outlook. Nevertheless, we would like to see further improvements within their readings over the next couple of weeks, since the bearish divergences within our long-term tape indicators have not been sorted out so far.

Bottom Line

Given the weak readings within our short-term oriented trend indicators, in combination with quite concerning readings from our contrarian indicators, a period of consolidation is likely. But given the fact that our entire short- to mid-term breadth indicators remain outright supportive, together with quite solid readings within our mid-term oriented trend-indicators, we think any upcoming weaknesses should be limited in price and time! Therefore, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a significant drop within short-term market breadth. Stay tuned!