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February 23. 2014

Market Review

U.S. stocks finished quite mixed for the week. The Dow Jones Industrial Average dipped 0.3 percent during the holiday-shortened week to end at 16,103.30. The S&P 500 slipped 0.1 percent for the week to finish at 1,836.25. The Nasdaq gained 0.5 percent over the week to 4,263.41, its third straight weekly gain. Health care and utilities led gainers among the S&P?s 10 major sectors. The Chicago Board Options Exchange Volatility Index (VIX), the gauge of S&P 500 options known as the VIX, finished at 14.68.

Short-Term Technical Condition

Despite the fact that the market finished nearly unchanged for the week, the improvements in the readings of our short-term oriented trend indicators have been developing quite strongly. As per last week’s report, the short-term up-trend of the market remains well intact, as the gauges of our entire short-term trend indicators (Trend Trader Index, Modified MACD and the Advance-/Decline 20 Day Momentum) are trading well above their bullish thresholds. The S&P 500 closed 48 points above the bearish threshold from the Trend Trader Index, plus both envelope lines of this reliable indicator have also started to bottom out. This is a typical pattern for a healthy uptrend as the market is making higher highs and higher lows measured on a 20 days’ time frame. The Modified MACD 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. For that reason, heavy losses would be necessary to trigger a bearish crossover signal within that indicator, which is another positive indication that further rallying can be expected. Moreover we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator formed a bullish divergence as its gauge reached the highest level since mid-January, although the market finished nearly flat for the week.

More importantly, the current short-term uptrend is strongly being confirmed by short-term market breadth, as the High-/Low Index Daily is far away from being bearish, short-term up-volume is trading well above short-term down-volume, plus our reliable Modified McClellan Oscillator Daily has not shown any signs of weaknesses yet. Furthermore, it was quite encouraging to see that during the whole week, the amount of new highs on NYSE remained quite strong, although the market finished nearly unchanged for the week. This is telling us that the market internals are strengthening and, therefore, the recent languishing trading action of the market can be seen as a healthy breather. The same is true if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Especially, the percentage of stockss which are trading above 20 day simple moving average grew to 72 percent, the highest level since early January 2014. This indicates that the underlying trend structure of the market is extremely broad based at the moment! All in all, this is telling us that the S&P 500 will have enough power to break through its strong resistance level at 1,850 on a mid-term time frame.

From a contrarian point of view, we do not see any threatening signals around. After the big sell-off a couple of weeks ago, the option market has turned from extreme optimism to neutral levels, which can be seen as quite constructive. Furthermore, WSC Capitulation Index is giving an all-clear signal as its gauge is trading at outright low levels at the moment, whereas we do not see any bearish divergences within our Smart Money Flow Index. Moreover, the recent sell-off has damped the optimism among dumb money, whereas a lot of purchasing power should come back into the market since a lot of bears switched into the bullish camp last week. Nevertheless, it could be possible to see increased volatility/down-testing, as we are expecting the 9-week crash cycle next week. Nevertheless, we think that any upcoming weaknesses should be seen as a good chance to increase exposure.

Mid-Term Technical Condition

The situation on a mid-term time frame also continued to improve last week, as the gauge of our reliable Global Futures Trend Index soared 12 percent to 88, and is, therefore, about to break above its extreme bullish 90 percent threshold, although we just saw a quite weak market action last week! Moreover, the 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 Heat Map, we can see that the relative strengths score of riskless Money Market remains at zero percent. This is telling us that the risk appetite among investors remains quite high and, therefore, we are expecting further strengths into Q2.

More importantly, the current mid-term oriented uptrend is strongly confirmed by mid-term market breadth, as the amount of advancing issues as well as mid-term oriented up-volume continued to push higher for the week. These are quite important facts as a healthy uptrend should always be supported by strong volume and a large number of rising stocks! Moreover, we can see that the current trend participation remains quite broad based if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (100/150), while the Modified McClellan Oscillator Weekly has not shown any signs of major weaknesses yet!

Long-Term Technical Condition

The long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Furthermore we can see that the relative strength of commodities has risen significantly and, therefore, it might be possible to see a positive surprise in that asset class within the next couple of weeks. However, only the WSC Global Momentum remains quite bearish, as most global equity markets (especially emerging markets) are still underperforming riskless money market. More importantly, long-term oriented market breadth is still confirming the current long-term oriented uptrend of the market, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish. Additionally, the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Only the Modified McClellan Volume Oscillator Weekly still remains bearish, indicating that the overall long-term demand has started to weaken. As already mentioned last week, we would not be surprised to see further deterioration within our mid- to long-term oriented indicators over the next couple of weeks, as we are still expecting to see a cyclical bear market later this year.

Bottom Line

The bottom line: with broadening strengths in our short-term to mid-term oriented trend- as well as breadth indicators, we believe to see further strengths into Q2. Despite the fact that it could be possible to see another washout day next week, we think that aggressive traders as well as conservative members should buy into any upcoming weaknesses. From a cyclical point of view (Charts of Interest), we stick to our preferred price target of 1,950/1,970 into Q2, whereas afterwards the chances of a cyclical bear market remain outright high. Stay tuned!