November 01. 2015

Market Review

Not surprisingly, all three major U.S. averages finished the week with small gains. For the week the Dow Jones Industrial Average eked out a small gain of 0.1 percent to end at 17,663.54. The blue-chip index gained 8.5 percent over the month. The S&P 500 added 0.2 percent for the week to finish at 2,079.36. For the month, the benchmark index gained 8.3 percent. The Nasdaq advanced 0.4 percent for the week to finish at 5,053.75. Over the month, the tech-heavy index gained 9.4 percent. All three averages recorded their biggest monthly gains since October 2011. The monthly point gains for both the S&P 500 and Dow are the biggest on record. Among the key S&P sectors, health care was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 15.

Short-Term Technical Condition

Although we saw a small consolidation last week, the short-term uptrend of the market remains well intact. This is mainly due to the fact that the S&P 500 closed 59 points above the bearish threshold from the Trend Trader Index. This indicates that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 2,022. Furthermore, we can see that both envelope lines of this reliable indicator are still strongly drifting higher. This is telling us that within the last couple of weeks, we saw higher highs and higher lows, which is another typical pattern for a strong short-term oriented uptrend. This bullish short-term uptrend is also supported by the readings of the Modified MACD, which showed an increasing bullish gap last week. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite encouraging levels, although it did not confirm the levels from the S&P 500 on Friday.

Right now, it is a bit too early to get concerned about those facts as our entire short-term market breadth indicators are still confirming the current short-term oriented uptrend of the market. The current trend participation of all NYSE listed stocks remains quite bullish, as the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain well above their bearish 50 percent threshold. In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not turned bearish yet, indicating that the underlying breadth momentum of the broad market remains constructive at the moment. The same is true, if we focus on the High-/Low-Index Daily as its bullish gauge is trading above its bearish counterpart. This is mainly due to the fact that the total amount of all NYSE-listed stocks, which reached a fresh 52 weeks high, have recovered during the last couple of weeks. Nevertheless, if we focus on the absolute level of the High-/Low-Index Daily as well as on the percentage of stockss which are trading above their short-term oriented moving averages (20/50), we can see that they have formed a small bearish divergence. This is mainly due to the fact that the bullish gauge from the High-/Low Index Daily and the percentage of stockss which are trading above their short-term oriented moving averages (20/50) should be much stronger, if we consider the current levels from the S&P 500. However, this is not a big concern at all, but might be another indication that the recent consolidation period might be not over on a very short time frame.

The situation on the contrarian side also showed some signs of improvements last week. Apart from the fact that the gauges from the All CBOE Options Call-/Put Ratio Oscillator, the Program Trading Buy/Sell Spread and the WSC Index Oscillator Weekly still remain bearish, we can see that the Smart Money Flow Index has shown some signs of bullish confirmation recently. This indicates that big institutional investors have started to increase their exposure, as they probably are betting on the year-end rally. Moreover we can see that the market has priced in a lot of bad news already, leaving the market better positioned to rally on positive surprises! Above all we can see that the WSC Capitulation Index is still signaling an all-clear environment for now. So from a contrarian point of view it looks like that further consolidation might be possible, before the year-end rally will bring some relief.

Mid-Term Technical Condition

On a mid-term time frame, the most important trend signal is coming from the WSC Sector Momentum Indicator, which clearly turned bullish last week. This indicates that sectors within the S&P 500 have started to get back on track (which is in-line with our bullish call). This can be also seen if we focus on our Sector Heat Map, as relative strength score of riskless money marked dropped significantly for the week. Anyhow, from a pure technical point of view, the current rally can be still categorized as a bullish consolidation period as the Global Futures Trend Index is still trading below its extremely bullish 90 percent threshold. As a matter of fact, the indicator is also showing a small bearish divergence to the current levels from the S&P 500. As already mentioned last week, such a bearish divergence can be ignored as long as the gauge keeps trading above 60 percent and as long as the readings within our mid-term oriented tape indicators remain constructive.

Therefore, it was good to see that mid-term oriented market breadth continued to show major signs of improvements! To be more precise, the Modified McClellan Oscillator Weekly managed to turn bullish, whereas the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) continued to strengthen last week, indicating an intensifying tape structure. Nevertheless, their absolute levels (100/150) remain depressed and are, therefore, also forming a bearish divergence at the moment. As matter of fact, we do not think that the market might have enough power at the moment to rally towards new record highs. On the other hand we can see that the recent consolidation is absolutely healthy, as we saw a quite encouraging bullish crossover signal within the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly! Therefore, we strongly believe that the current consolidation period will definitely turn out to be constructive in the long run.

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Nevertheless, we can see a strong recovery in the relative strength score of almost all risky markets. Above all, we can see that the gauge from the WSC Global Momentum stabilized at quite low readings. This indicates that most local equity markets around the world have started to bottom out recently. This is another piece of evidence that equities are getting back on track. This can be also seen if we focus on long-term market breadth as the Modified McClellan Volume Oscillator Weekly showed a decreasing bearish gap last week. Additionally, we saw that the percentage of stockss which are trading above their long-term oriented moving averages and the High-/Low Index Weekly showed also some signs of improvements last week.

Bottom Line

The bottom line: the technical picture of the market remains quite unchanged compared to last week. With broadening strengths all across the board, we think to see further gains into Q4. Nevertheless, we do not think that the market will rally towards new record highs immediately as we need to see stronger readings within our mid-term oriented indicators first. Thus, it could be possible to see a period of consolidation ahead, before further gains can be expected. However, our bullish outlook remains unchanged and, therefore, we would advise conservative members to hold their equity position. Stay tuned!