December 28. 2014

Market Review

U.S. stocks rallied for Christmas holiday shortened-week, with the Dow Jones Industrial Average and S&P 500 Index closing at record highs. For the week, the Dow Jones Industrial Average gained 1.4 percent, to 18,053.71. The blue-chip index closed at a record for the 38th time this year. The S&P 500 rose 0.9 percent from last Friday’s close to 2,088.77. Its 52nd record close this year. The Nasdaq advanced 0.9 percent over the week to 4,806.86. The technology-laden index closed at its highest level since March 2000. Eight out of the 10 key S&P sectors ended in positive territory for the week, led by utilities. The CBOE Volatility Index, a measure of investor uncertainty, fell to 14.5.

Short-Term Technical Condition

Right in line with our recent outlook, U.S. stocks continued to push strongly higher last week. Not surprisingly, the short-term oriented up-trend of the market continued to gain more bullish ground last week. This is mainly due to the fact that the S&P 500 closed 46 points above the bearish threshold from the Trend Trader Index. Therefore, from a pure price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not drop below 2,041. In addition, both envelope lines of the Trend Trader Index have started to show some signs of strengths recently, indicating that ? from a pure structural point of view ? the underlying trend structure of the market turned positive again! Above all, we saw a quite encouraging bullish crossover signal from the Modified MACD last week, whereas the gauge from the Advance-/Decline 20 Day Momentum Indicator managed to stay above its bearish threshold! So all in all, the underlying short-term oriented uptrend of the market continued to strengthen, although the bearish divergence within the Advance-/Decline 20 Day Momentum Indicator has not been sorted out yet, as its gauge should be much higher if we consider the current levels from the S&P 500.

However, this bearish divergence can be completely ignored at the moment. This is mainly due to the fact that our entire short-term oriented breadth indicators turned outright bullish last week and are, therefore, strongly confirming the current short-term oriented uptrend of the market! Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed quite cheering bullish crossovers signal at the beginning of last week, indicating that the market internals are strengthening on a fast pace. In addition, we can see that the recent recovery turned out to be extremely broad based as the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have been pushed back to quite encouraging levels! Above all, we have seen a strong reduction in the number of stockss which are hitting a fresh yearly low, together with an increase of stocks which have been pushed to a new yearly high. Therefore, the bullish gauge from the High-/Low Index Daily continued to gain more bullish ground last week and is, therefore, clearly confirming the current levels from the S&P 500!

From a pure contrarian point of view, there are hardly any red flags on the horizon. This is mainly due to the fact that most of our bearish (biased) option based indicators (All CBOE Options Put/Call Ratio, OEX Options Call-/Put Ratio Oscillator, Uptick-/Downtick Ratio Daily and the Global Futures Trading Index) from last week got back to normal levels. Only the Smart Money Flow Index is still showing a quite bearish divergence, as it has not confirmed its recent high of the Dow yet. As a matter of fact, the WSC Capitulation Index has not gotten back into bullish territory yet as it measures the underlying momentum of the Smart Money Flow Index. But given the strong readings within our short-term oriented trend- as well as breadth indicators, those bearish facts can be ignored at the moment.

Mid-Term Technical Condition

The technical picture on a mid-term time frame also improved last week as the gauge from the Global Futures Trend Index was pushed back above its bullish 60 percent threshold last week. This can be seen as a quite constructive trend-signal, as long as the indicator is trading above 60 percent. In such a situation, the market is highly likely to punch its way higher as the underlying trend structure of the market tends to be quite supportive. As a matter of fact any upcoming short-term oriented pullback should be limited in price and time. Above all, 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 showed also some strong signs of improvements last week and, therefore, further gains into early January are highly likely at the moment. Especially, the Modified McClellan Oscillator Weekly continued to show signs of recovery and is, therefore, about to flash a bullish crossover signal soon. This indicates that the underlying market breadth momentum is regaining strength, albeit on quite low levels. More importantly, most of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen last week, and have, therefore, confirmed the recent high or are about to do so. This can be seen as an outright strong confirming tape signal as the current rally looks quite broad based. Such a broader tape confirmation can also be seen if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both indicators continued to gain more bullish ground last week and, as a matter of fact, they have started to reduce their bearish divergence we mentioned last week! If we focus on the underlying demand, we can see that both, mid-term oriented advancing issues as well as mid-term oriented up-volume have been pushed back to quite encouraging bull market levels and, therefore, the current year-end rally looks outright healthy! As we saw a lot of bearish divergences within our mid-term oriented tape indicators last week, we mentioned the possibility that the current rally could turn out to be just part of a complex multi-week top building process into early Q1 2015. As most of those bearish divergences have been sorted out recently, such a scenario is getting less likely. Nevertheless, we should not forget that overall NYSE volume tends to slow down during the year end and, therefore, the overall price/tape action of the market is not as significant as within normal trading days. As a matter of fact, we will monitor our indicator framework quite closely within the first weeks of January, for more confirmation.

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. Nevertheless, we can see that the global bull market remains quite selective as only 28 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. From a pure asset allocation point of view, U.S. equities remain the place to be as they are still leading all other risky markets in terms of relative strength. More importantly, long-term oriented market breadth remains quite supportive and is, therefore, confirming the current long-term oriented up-trend of the market. This is mainly due to the fact that the percentage of stockss which are trading above their long-term oriented moving average (200) as well as long-term new highs continued to gain more bullish ground last week. At the same time, the Modified McClellan Volume Oscillator Weekly is about to flash a bullish crossover signal soon, indicating that the underlying tape momentum of the market is about to get back on track. As a matter of fact our long-term bullish outlook has not been changed so far.

Bottom Line

After we had seen the expected early December pullback, the predicted year-end rally pushed major US indexes to new record highs. As a matter of fact, the market is moving right in line with our cyclical roadmap. More importantly, with broader strengths within our short- to mid-term oriented trend- as well as breadth indicators, we think further gains into January are highly likely. Therefore, aggressive market timers should use any upcoming weakness to build up exposure, whereas conservative members should hold their equity position. Stay tuned!