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May 25. 2014

Market Review

The U.S. stock market finished the week with solid gains, sending the S&P 500 to a new record high. For the week, the Dow Jones Industrial Average gained 0.7 percent to 16,606.27. The blue-chip index turned positive for the year. The S&P 500 advanced 1.2 percent over the week, breaching the 1,900-point mark for the first time to end on 1,900.53. The Nasdaq rose 2.3 percent over the past five days to 4185.81. Among the key S&P sectors, technology was the best weekly performer, while utilities dragged. The Chicago Board Options Exchange Volatility Index, VIX, dropped 8.7 percent during the five days to 11.36, the lowest level since March 2013. Wall Street’s fear gauge has retreated 47 percent from a 14-month high in February.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that as long as we do not see a strong recovery within our indicator framework, the market looks vulnerable for further consolidation. Moreover, we mentioned that we still remained cautiously bullish since large caps were pulling the major indexes higher. Therefore, new record highs could be achieved quite easily and as long as we do not get the final bearish crossover signals within our mid-term oriented breadth indicators it is too early to issue a strategic sell signal as the market always tends to overshoot. If we have a closer look at our short-term trend indicators, we can see that the Trend Trader Index switched from neutral into bullish territory on Thursday, which was then followed by a small bullish crossover signal from the Modified MACD on Friday. In addition, we saw a decent recovery in the readings of the Advance-/Decline 20 Day Momentum Indicator, which was trading at quite low levels for the last couple of weeks. Despite the fact that our entire short-term trend indicators are back on track, we can still see some bearish divergences in their readings, since the Advance-/Decline 20 Day Momentum Indicator has not confirmed the recent breakout by the S&P 500 and the readings from the Modified MACD should be higher, given the fact that the market just hit a new high last week.

The same is true if we have a look at short-term market breadth. Despite the fact that the Modified McClellan Oscillator Daily is about to bottom out, it still remains bearish from a pure signal point of view, indicating a weak tape structure. Moreover, the amount of new highs on NYSE should be also much higher, especially if we consider the current levels from the S&P 500. For that reason, the High-/Low Index Daily is not confirming the recent breakout by the S&P 500, although the indicator itself still remains bullish from a pure signal point of view. This can be also seen if we focus on the percentages of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Both indicators are telling us that only heavy weighted stocks are pulling most indices higher, whereas the broad market still struggles to get back into a strong short-term oriented up-trend.

The situation on the contrarian side is signaling some relief as the optimism among dumb money (ISEE Call-/Put Ratio and the Global Futures Dumb Money Indicator) slightly decelerated last week. Moreover, we can see that the gauge of the WSC Capitulation Index is giving no reason to worry right now, whereas the option market still remains in quite contrarian/bullish territory. Above all, we are expecting the 21-week bullish cycle next week and, therefore, further short-term strengths might be likely. Only the long-term bearish divergence between the Smart Money Flow Index and the Dow has not been sorted out so far, which is another long-term indication for our cyclical roadmap (Charts of Interest), where we are expecting to see a cyclical bear market starting in mid-summer. All in all, the technical picture of the market has slightly improved compared to last week, but most of the bearish divergences have not been sorted out so far. In our opinion, those bearish divergences could mounting up over the next couple of weeks as large caps tend to push major indexes higher, which is a typical late-stage phenomenon. For that reason, we strongly believe that the market could easily overshoot towards 1,950/1970, which is our preferred price target into mid June. Nevertheless, our indicator framework will give us the ultimate confirmation, when it is time to get out of the market. For that reason, we remain cautiously bullish until we do not see further bearish crossover signals within our oriented indicator framework.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market slightly strengthened last week. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index grew to the middle part of its bullish consolidation area, indicating that the recent pullback risk has diminished. Above all, 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 mid-term oriented uptrend! This can be also seen if we focus on our Sector Heat Map, as riskless money market still has a relative strength score of zero percent. This is indicating that all sectors are still performing on a positive note on a mid-term time frame.

More importantly, mid-term oriented market breadth is still confirming the current mid-term oriented uptrend, although the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain bearish (100) or are trading at outright low bullish levels (150). This is mainly due to the fact that the rest of our mid-term oriented tape indictors have not turned bearish yet. Especially, the Modified McClellan Oscillator Weekly is still showing a quite bullish gap and, therefore, the overall breadth momentum remains positive. Anyhow, the most important mid-term oriented breadth signals are coming from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly. Both measures gained strong bullish ground last week and, therefore, the overall pullback risk we were worried about last week, diminished significantly! For that reason, another rally attempt by the S&P 500 into mid-summer looks likely before major troubles might be due!

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 above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Nevertheless, the relative strength of most risky markets has slightly started to deteriorate. This is another small long-term indication that equities could run into an important top within the next couple of weeks. Anyhow, right now it is too early to get concerned about those facts as the WSC Global Momentum Indicator still remains bullish, 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 have not turned bearish yet, although the gauge from this reliable indicator is trading at outright low levels at the moment. Moreover we can see that the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, indicating still a positive market breadth environment for the time being. Nevertheless, the High-/Low Index Weekly as well as the Modified McClellan Volume Oscillator Weekly are already forming a long-term bearish divergence to the market. Right now it is too early to get concerned about those readings. But given the fact that we are still expecting to see a cyclical bear market later this year (Charts of Interest), we would not be surprised if those bearish divergence will start to mounting up within the next couple of weeks.

Bottom Line

The bottom line: despite the fact that we saw some encouraging improvements within our indicator framework, we cannot ignore the fact that the current rally is slightly running out of steam. This is mainly due to the fact that the broad market is still lagging behind and only large caps are pushing major indexes higher. Therefore, we still got a lot of evidences that the market will follow our cyclical roadmap (Charts of Interest and cycles) where we are expecting that the market will run into a major top into mid-summer. Anyhow, as long as most of our indicators do not turn bearish, it is too early to take the chips from the table as the market always tends to overshoot. Therefore, we stick to our initial price target of 1,950/1,970 into mid-June for now, but we will monitor our indicators quite closely over the next couple of weeks. Stay tuned!