March 23. 2014

Market Review

U.S. stocks rose for the week, sending the major indexes to their biggest gains in a month. For the week, the Dow Jones Industrial Average climbed 237.10 points, or 1.5 percent, to 16,302.77. The S&P 500 rose 1.4 percent to 1,866.52 over the five days. Both gauges capped their best week since Feb. 14. The Nasdaq Composite added a weekly gain of 0.7 percent to 4,276.79. Financials led gainers among the S&P?s 10 major sectors. The Chicago Board Options Exchange Volatility Index (VIX), a gauge for U.S. stock volatility, fell the most since February, sinking 16 percent to 15 for the week. The index, also known as VIX, is still up 9.3 percent this year.

Short-Term Technical Condition

Despite the fact that the market finished the week with decent gains, the improvements in the readings of our short-term oriented trend indicators have been developing moderately. Apart from the fact that the Trend Trader Index flashed a neutral trend scenario last week, we still have not seen any bullish crossover signal within our reliable Modified MACD so far, showing that the market still remains vulnerable on a very short time frame. Despite the fact that the Advance-/Decline 20 Day Momentum Indicator still remains bullish from a pure signal point of view, the gauge of this indicator declined for the week. Therefore, this indicator is not confirming the current level from the S&P 500, indicating that the current consolidation period is not completely over yet.

Nevertheless, the current consolidation period still remains constructive in its nature as we saw some small improvements within our short-term oriented breadth indicators last week. The percentage of stockss which are trading above their 20 day moving averages have slightly been pushed back above the bullish 50 percent threshold, whereas on a 50 day basis we even saw some improvements on a quite solid level, indicating a strengthening tape structure. This can be also seen if we focus on the number of stockss which have reached a new 52 weeks high or low, respectively. The number of stockss which are hitting a fresh yearly high have not shown any signs of weaknesses yet and, therefore, the bullish gauge of our High-/Low Index Daily drifted slightly higher for the week. Moreover, it was good to see that on Friday we saw a strong spike in the number of stockss hitting a fresh 52 weeks high, although the market lost some steam in the last hours of trading, indicating increased demand. Nevertheless, the total amount of new highs should be a bit higher if we consider the current levels from the S&P 500, whereas the Modified McClellan Oscillator Daily did not manage to turn bullish so far. This is telling us that the current consolidation period is not completely over yet and, therefore, the risk for a second down-leg is still given, before further strengths can be expected!

From a pure contrarian point of view, this scenario looks quite possible as our reliable Smart Money Flow Index has not confirmed the recent bounce from last week, indicating that the big players on Wall Street were selling into strengths. On the other hand we can see that Dumb Money is chasing the market aggressively higher, plus our reliable WSC Capitulation Index has not dropped by half of its rise yet and is, therefore, still indicating a risk-off scenario on a very short time frame. So all in all, our short-term outlook remains quite unchanged compared to last week and, therefore, as long as the market does not manage to close significantly above 1,875 (in combination with a strengthening tape structure), we think the risk of a second down-leg is still given if the market breaks below 1,835. If that is the case, a washout towards 1,815 and worst case 1,795 is the most likely scenario, before further gains can be expected.

Mid-Term Technical Condition

Despite the fact that the market remains vulnerable for a second down-leg into late March, equities do not appear to be at risk of entering a high double digit drop, as the mid-term uptrend of the market remains intact for the moment. The gauge of the Global Futures Trend Index remains within its bullish consolidation area and as long as it is trading above its 60 percent threshold, any upcoming weaknesses should only be seen as a temporary consolidation period within the ongoing bull market. 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. And, therefore, any upcoming pullback should be limited in price and time! This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas health care and industrials remain the strongest sectors for the time being.

More importantly, mid-term oriented market breadth remains quite bullish and is, therefore, strongly confirming the mid-term oriented trend of the market. The Modified McClellan Oscillator Weekly has not flashed a bearish crossover signal so far, plus the amount of advancing issues and mid-term oriented up-volume are still trading above their bearish counterparts. The same is true, if we have a closer look to the percentage of stockss which are trading above their mid-term oriented moving averages (100/150), which slightly improved last week. Nevertheless, the readings of the Upside-/Downside Volume Index Weekly should be much stronger, given the fact that the S&P 500 is trading on the upper end of its trading range. Anyhow, for now we keep ignoring this fact, but we would not be surprised if the bearish divergences within our indicator framework are increasing over the next couple of weeks, as we are still expecting a bear market later this year (Charts of Interest and Cycles). But for now, we stick to our recent call where we are expecting that the market is likely to rally towards 1,920/1,950 into Q2, before the bears might spoil the party.

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 quite strong 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. Moreover, the WSC Global Momentum Indicator still remains bullish on low levels, indicating that most risky markets remain in a long-term uptrend. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover, we can see that the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, plus the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, indicating a quite healthy tape structure at the moment.

Bottom Line

The bottom line: basically, the technical set-up has not really changed compared to last week and, therefore, the risk for a second pull-back is still given. All in all, we would not be surprised to see further declines until 1,815 (and in extreme circumstances 1,795), if we see a break below 1,835 from the S&P 500. Therefore, aggressive traders can take some profits if we see a break below 1,835 or start slightly buying into weaknesses if they want to act contrarian. Conservative members should hold/increase their equity position as we still think that the S&P 500 could rally towards 1,950 into mid/late Q2 before a cyclical bear market might be due. Stay tuned!