December 08. 2013

Market Review

Last week, all three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average declined 0.4 percent, to close the week at 16,020.20. The 30-stock gauge recorded its first weekly loss in nine. The S&P 500 lost less than 0.1 percent over the five days to finish at 1,805.09. The Nasdaq rose less than 0.1 percent from the week-ago close to finish at 4,062.52. The tech-heavy index posted its fourth-straight weekly gain and is trading at levels last seen in September 2000. Three out of the ten main industries in the S&P 500 advanced for the week, led by utilities. The CBOE Volatility Index (VIX), a gauge of investor uncertainty, fell below 14.

Short-Term Technical Condition

The underlying short-term oriented trend of the market remains bullish biased, although the current technical picture of the market has started to deteriorate. From a pure price point of view, the market remains in a short-term uptrend since the S&P 500 is still trading 23 points above the bearish threshold (1,782) from the Trend Trader Index. Nevertheless, the overall market momentum is deteriorating as the Modified MACD has been clearly pushed into bearish territory last week and the gauge from the Advance-/Decline 20 Day Momentum Indicator is trading at outright low bullish levels and has, therefore, not confirmed the latest level from the S&P 500. To evaluate if any upcoming short-term oriented trend-break will lead to stronger losses or if the market will just take a healthy breather, short-term market breadth is key area of focus.

Normally, if the market is about to take a healthy breather or enters a consolidation period, short-term oriented market breadth should regain strengths and/or existing bearish divergences within their readings should be sorted out, helping the market to push higher afterwards. Despite the fact that nearly our entire short-term oriented breadth indicators remain bullish from a pure signal point of view we can already see some signs of exhaustion/non-confirmation, which can be seen as a first warning sign on the horizon. Especially, the Modified McClellan Oscillator Daily has continued to gain more bearish ground last week and overall short-term oriented up-volume did not improve at all, indicating a weak demand. Furthermore, we can see that the amount of NYSE-listed stocks which have hit a fresh yearly high last week have dropped significantly, whereas the amount of new lows have started to increase. That is the main reason, why the readings from the High-/Low Index Daily look quite weak, although the indicator itself still remains bullish from a pure signal point of view. Only the percentage of stockss which are trading above their short-term oriented moving averages (20/50) are still strong, indicating that the short-term oriented uptrend of most NYSE-listed has not been broken yet.

If we focus on our contrarian indicators, we can see a lot of red flags on the horizon. Especially, our Smart Money Flow Index (long-term chart) has not reached a new high yet and is, therefore, showing a huge bearish divergence to the Dow, indicating troubles ahead. At the same time, the small fry has aggressively started to chase the market on the upside, as our Global Futures Dumb Money Indicator as well as the readings from the Odd Lots Purchases/Nyse Volume is trading at quite optimistic levels. Another concern for contrarians are the low put/call ratios (Daily Put/Call Ratio All CBOE Options and the Global Futures Put/Volume Ratio), indicating complacent among the crowd, whereas our reliable WSC Capitulation Index has shown some strength on low levels recently. All in all, the ingredients for a pullback are increasing right now, as the current short-term oriented up-trend of the market is quite weak-kneed. However, as long as we do not see further short-term oriented trend breaks in combination with further bearish short-term market breadth indicators, we think it is a bit too early to switch into the bearish camp. Furthermore, it is not unusual that the market runs into a minor low in the first half, before the classic year-end rally starts.

Mid-Term Technical Condition

The mid-term oriented up-trend of the market remains intact so far, although we also can already see some signs of exhaustion as the gauge our reliable Global Futures Trend Index is just shy trading above its bearish trading range area and is, therefore, forming a huge bearish divergence if we consider the current level from the S&P 500. This is another indication, that we might face quite challenging times within the next couple of weeks. Only the WSC Sector Momentum Indicator is still holding up quite well, as most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet.

More importantly, mid-term oriented market breadth still remains quite bullish, as the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are far away from being bearish, plus there are still more advancing issues than declining ones and mid-term up-volume is still dominating mid-term oriented down-volume. Nevertheless, we have seen a sharp drop in the amount of advancing issues last week, which can be also seen as a red flag/bearish divergence on the horizon. This coincides with the fact that the Modified McClellan Oscillator Weekly has also gained more negative ground last week. Despite the fact that the current mid-term oriented technical picture of the market remains intact so far, we already can see some signs of fatigue which could lead to a stronger correction within the next couple of weeks if our mid-term oriented trend- as well as breadth indicators continue to lose some steam. Normally, if a stronger correction is at hand, the market is entering a longer lasting top building process in combination with deteriorating indicators all across the board. Those are basically the technical signs we are watching out for, within the next couple of weeks.

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 well in-force, and, therefore, our long-term bullish outlook has not been changed so far. The global trend participation remains quite broad base as the moment as the WSC Global Momentum Indicator is trading at 70 percent, indicating that the vast of all global market ETFs around the world are 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 U.S. is about to catch up fast in relative terms. If we focus on long-term market breadth, we can see that the percentage of stockss which are trading above their 200 day simple moving average remain outright bullish, as 72 percent of all NYSE listed stocks remain in a long-term uptrend at the moment. Furthermore, the High-/Low Index Weekly remains quite strong although the amount of new long-term highs have stalled recently. Only the Modified McClellan Volume Oscillator Weekly still remains bearish from a pure signal point of view.

Bottom Line

The bottom line: as long as we do not see further short-term oriented trend breaks in combination with further deteriorating short-term market breadth and/or a spiking WSC Capitulation Index, we stick in the bullish camp for the short-term. Moreover there is still a good chance for a year-end rally, as the market is following a typical December pattern so far. Nevertheless, we would advise our aggressive traders not too chase the market too aggressively as the current short-term oriented up-trend is quite weak-kneed at the moment. Despite there are already some further indications for a bigger correction on a mid-term time frame, our long-term bullish outlook has not been changed so far. Stay tuned!