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September 22. 2013

Market Review

All three U.S. major averages rallied last week. The Dow Jones Industrial Average rose 0.5 percent from the prior Friday’s close, to end at 15,451.09. The blue-chip index set an all-time high on Wednesday. The S&P 500 soared 1.3 percent for the week to end at 1,709.91. The broad index is up 4.7 percent for September, rebounding from its worst month since May 2012. The Nasdaq climbed 1.4 percent to finish at 3,774.73. All three major U.S. averages finished in the black for the third-straight week. Most key S&P sectors ended in positive territory for the week, led by industrials and utilities. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 13.

Short-Term Technical Condition

On track with our recent call, the market continued to push higher into late September, whereas major key indices reached new record highs. Not surprisingly, the short-term uptrend of the market remains outright bullish, since the S&P 500 is trading 45 points above the bearish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines from the Trader Index are strongly driving higher, indicating that the market is making higher highs and higher lows, which is a typical pattern for a healthy uptrend. The Modified MACD has continued to show a widening bullish gap in the last couple of trading sessions, after it had flashed a bullish crossover signal three weeks ago, plus the gauge of Advance-/Decline 20 Day Momentum Indicator is trading at the highest level since end of July, despite the fact that it had lost some bullish ground at the end of the week.

More importantly, the current short-term uptrend is widely being confirmed by short-term market breadth (High-Low Index Daily, Modified McClellan Oscillator Daily, Stocks above their 20/50 SMA). Last week, we have seen an encouraging surge in the number of stockss which are hitting a fresh 52 week?s high, in combination with one of the lowest readings of stocks which are dropping to a fresh 52 week?s low, indicating an intensify intensifying tape structure. This can be also seen, if we have a look at the High-/Low-Index Daily. The gauge of this indicator has been pushed to the highest level since end of July, which can be seen as a quite constructive tape signal. In addition, the gauges of our Modified McClellan Oscillator Daily have shown no weaknesses so far, the percentage of stocks which are trading above their 20 day simple moving average have reached their highest level since mid July, plus the percentage of stocks which are trading their 50 day simple moving average have grown to 64 percent, indicating that the broad market has strengthen enormously!

If we focus on our contrarian indicators, the recent rally has pushed the Daily Put/Call Ratio All CBOE Options and the Odd-Lot-Differential Indicator into excessive optimism zones, leaving the markets quite vulnerable to short-term oriented disappointments. Normally it takes either a sharp wash-out day or a short period of consolidation to work off such a high optimism. On the other hand, a lot of purchasing power has come back into the market, since a lot of bears have switched into the bullish camp last week. Moreover, our reliable WSC Capitulation Index has dropped to normal levels, plus we are expecting the bullish 16 week cycle next week. However, the current readings of our short-term oriented indicators are telling us that it is still too early to get bearish yet and as long as we do not see a short-term trend break or a huge decline in short-term oriented market breadth we think to see further strengths ahead, although we would not be surprised to see a short-lived period of consolidation and/or increased volatility ahead.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market has continued to strengthen, as the gauge of reliable Global Futures Trend Index soared 17 percent points for the week to end at 81, and is, therefore, strongly confirming the latest level we have seen from the S&P 500. Moreover, our reliable WSC Sector Momentum Indicator is still trading on the upper end of its scale, indicating that the entire underlying sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend! If we have a closer look at our Sector Rotation Strategy Heat Map, we can see that the relative strengths score of riskless Money Market has finally dropped to zero percent, telling us that the risk appetite among investors is extremely high at the moment and, therefore, we could expect to see further strengths into Q4.

Mid-term oriented market breadth remains bullish biased, as the, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) have risen to 75 percent, indicating an intensifying tape structure, as the upside participation within the whole market is extremely broad-based! The Upside-/Downside Volume Index Weekly still remains bullish from a pure signal point of view, whereas Advance-/Decline Index Weekly the remains quite neutral at best. As per last week?s report, only the Modified McClellan Oscillator Weekly has not turned bullish yet, although its gauges have slightly started to stabilize on quite low readings last week. Despite the fact that most of our mid-term oriented market breadth indicators are bullish from a pure signal point of view, we would like to see further improvements within their gauges. Especially, the readings from the Upside-/Downside Volume Index Weekly as well as the Advance-/Decline Index Weekly are still a bit too weak, if we compare them with the current level from the S&P 500. However, as long as the mid- (to long) term oriented uptrend continues to strengthen, we keep ignoring those bearish divergences, as the chances remain quite good that those will be wiped out over a longer time horizon. For that reason, our mid-term oriented bullish outlook has not been changed so far. Nevertheless, we will monitor our mid-term oriented trend-/as well as breadth indicators carefully over the next couple of weeks, as a deterioration within their readings would be the first indication for a modest correction within the ongoing bull-market.

Long-Term Technical Condition

As per last week?s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in-force,, therefore, our long-term bullish outlook has not been changed so far. However, the most important long-term oriented trend signal is coming from the WSC Global Momentum Indicator, which has passed its bullish threshold last week, indicating that more than 50 percent of all global ETFs which are covered by the Global Tactical ETF Portfolio have started to gain strong momentum. This can be also seen if we have a closer look at the WSC Global Relative Strengths Indicator. The relative strength of most risky assets have been pushed back above the bullish zero percent threshold, indicating that the risk appetite among global investors has picked up enormously. From an asset allocation point of view, bargain hunters should focus on Commodities and or Emerging Markets, whereas trend followers should still stick with Europe. More importantly, long-term oriented market breadth remains quite ok and is, therefore, confirming the long-term uptrend of the market. The percentage of stocks which are trading above their 200 day simple moving average continued to increase, while the readings of the High-/Low Index Weekly are not giving any reasons to worry right now. At the same time, the Modified McClellan Volume Oscillator Weekly has shown some strength, although its readings remain slightly bearish from a pure signal point of view.

Bottom Line

The bottom line: on a very short-time frame, the market is slightly overbought and, therefore, the pace is likely to slow down a bit in the next couple of trading sessions. However, since the short-term uptrend of the market has not been broken yet, our short-term bullish outlook has not been changed so far. Moreover, with broadening strengths within our mid- to long-term trend-indicators, our bullish long-term outlook has not been changed so far. Nevertheless, we will monitor the developments of our mid-term oriented trend-/breadth indicators quite carefully over the next couple of weeks. Stay tuned!