October 06. 2013

Market Review

Once again, all three major U.S. averages finished the last week with a mixed performance. For the week, the Dow Jones Industrial Average fell 1.2 percent to close at 15,072.58. The S&P 500 slid 0.1 percent to close at 1,690.5. This was the second straight week of losses for both the Dow and S&P 500. The Nasdaq, in contrast, added 0.7 percent for the week to end at 3,807.75. It was the Nasdaq’s fifth straight up week, as it trades near levels last seen in September 2000. Among the key S&P sectors, consumer staples were the best weekly performer, while health care dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell below 17.

Short-Term Technical Condition

The recent consolidation period caused a deterioration of the short-term uptrend of the market, as the Modified MACD has been pushed into bearish territory last week, while the Trend Trader Index dropped into neutral territory. Nevertheless, both envelope lines of the Trend Trader Index are still rising, which indicates that the short-term uptrend of the market still remains intact from a structural point of view. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which has not turned bearish so far. In general, it is not unusual that our entire short-term trend indicators are trading in bearish territory, after a longer lasting consolidation period. However, a consolidation period is considered to be healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening.

Despite the fact that the current consolidation period caused a bearish crossover signal within our Modified McClellan Oscillator Daily, overall short-term market breadth still looks quite constructive from a pure signal point of view. Especially the High-/Low Index Daily as well as the Nyse New Highs minus New Lows Indicator are telling us that the current consolidation period is mainly driven by profit taking so far, since we have only seen a decline in the number of stockss which are hitting a fresh yearly high whereas the number of stockss which have been pushed to a new yearly low remain quite depressed. Furthermore, there was a quite encouraging increase in the amount of new highs in the last couple of trading sessions, indicating that the market internals are slightly strengthening. As long as we do not see a strong increase in the amount of new lows which would lead to a bearish crossover signal within our High-/Low Index Daily, the market internals remain bullish biased. The same is true if we have a look at the percentage of stockss which are trading above their short-term oriented moving average (20/50). Despite the fact that the 20 days oriented indicator has slightly closed above its bearish threshold, the 50 days gauge has not shown any signs of weaknesses yet, as it remained stable at 61 percent. Short-term down-volume did not spike at all last week, despite the fact that Dow Jones Industrial Average lost 1.2 percent. The main reason for this is that mega caps are continuing to underperform, whereas the Russell-2000 and Nasdaq are still relatively stable, indicating that the broad market still remains bullish biased.

After we have seen the expected increased volatility last week, in combination with some stronger losses in some major large-cap indices, the consolidation period has started to have its designated impact on short-term optimism, which is needed to trigger a stronger counter trend rally. The option market has started to become slightly more bearish, as the gauge of our reliable Daily Put-/Call Ratio All CBOE Options Indicator has gradually moved out of its extremely bearish territory. Furthermore, the small-fry is about to throw in the towel, as the Odd-Lot Differential Index has reached its highest level since end of July. Moreover, we can see that the Global Futures Dumb Money Indicator has started to decrease, plus the Global Futures Large Block Index Oscillator and the Global Futures Fear Indicator has dropped into contrarian territory. In addition, we have seen a lot of smart buying last week, as our reliable Smart Money Flow Index did not confirm the latest decline in the Dow Jones Industrial Average, indicating that there is a good chance for a stronger counter trend rally within the next couple of trading days. Another interesting fact is that the gauge of our WSC Capitulation Index did not show any strength at all, indicating that the current market environment is still constructive.

Mid-Term Technical Condition

Despite the fact that, the Global Futures Trend Index dropped 200 basis points for the week, the gauge of this reliable indicator is still trading on the upper end of its bullish consolidation area and, therefore, the current mid-term oriented uptrend remains well intact. For that reason, we think that the current consolidation period still remains constructive. The case would be different if we would see a stronger decline of its readings below 60 percent. In addition, the WSC Sector Momentum Indicator is far away from being bearish, indicating that most sectors within the S&P 500 are per definition still in a strong mid-term oriented uptrend.

However, mid-term market breadth is still a key area of focus, as it still remains quite mixed/weak at the moment. Despite the fact that the short-term oriented gauge of the Modified McClellan Oscillator Weekly has stabilized on low levels, the indicator itself still remains bearish from a pure signal point of view. Moreover, mid-term oriented up-volume as well as mid-term advancing issues are slightly bearish at the moment, which is one of our biggest concerns at the moment. Only the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) remain quite bullish at 67 and 69 percent, respectively. As already mentioned last week, as long the mid-term oriented up-trend remains strong or as long as we do not see a further deteriorating within mid-term oriented market breadth, we keep ignoring those bearish signals for now. Nevertheless, the current readings of our mid-term oriented breadth indicators should be much higher given the fact that the S&P 500 is slightly trading below its all time high. If any upcoming bounce/rally won’t bring their gauges back to bull market levels, there is a good chance to see a more significant setback, once the mid-term up-trend starts to deteriorate!

Long-Term Technical Condition

The technical picture for the long-term remains bullish at the moment and, therefore, we have not changed our positive outlook so far. The global trend participation remain is improving at remains bullish as the WSC Global Momentum Indicator has increased by 400 basis points to 58 percent, indicating that the vast of 41 global ETFs market are back in a strong long-term uptrend, while the Global Futures Long Term Trend Index is still indicating a technical bull market. Moreover, according to our Global Relative Strengths Indicator, Europe is the leading market in terms of momentum while the Global Emerging Markets are catching up fast. If we focus on long-term market breadth, we can see that the number of stockss which are trading above their 200 day simple moving average is trading at outright bullish levels and the High-/Low Index Weekly still remains bullish from a pure signal point of view. Only the Modified McClellan Volume Oscillator Weekly remains negative, although there is stabilization on low levels visible.

Bottom Line

The bottom line: as short-term market breadth still looks constructive for now, in combination with fresh buy signals from our contrarian indicators, we think the consolidation period is close to end. In the best case we could see a stronger bounce that could bring the market back to former highs, as long as short-term market breadth remains constructive. Moreover, we studied the past performances around government shutdowns and we have found that that on average the S&P 500 has come under modest downward pressure before, during, and immediately after shutdowns, but rebounded by 10 days after the government got back to work. Nevertheless, we would advise our aggressive traders to watch our short-term trend-/breadth indicators carefully, as the current set-up could change quite quickly. Moreover, as long as our mid-term oriented trend indicators remains strong we would advise our conservative members to hold their equity exposure. Stay tuned.