December 01. 2013

Market Review

U.S. stocks closed out the holiday-shortened week in positive territory again. The Dow Jones Industrial Average gained 0.1 percent for the week to finish at 16,086.41. The blue-chip index advanced 2.6 percent for the month. The S&P 500 gained 0.1 percent for the week as well to close at 1,805.81. The broad index rose 1.9 percent in November. The Nasdaq advanced 1.9 percent for the week to end at 4,059.89 and climbed 2.8 percent for the month. All three indices were up for a third month, and the Dow and S&P were both up for an eighth week, the longest such streak for the S&P 500 since January 2004, and since January 2011 for the Dow. The Nasdaq was up for a third week. 2 out of the 10 main industries in the S&P 500 advanced for the week, led by technology. The gauge of S&P 500 options, known as the VIX, closed at 13.7 and declined 0.4 percent for November.

Short-Term Technical Condition

On Friday, the S&P 500 closed 29 points above the bearish threshold from the Trend Trader Index, indicating that the market is per definition in a strong short-term up-trend as long as the broad equity benchmark does not drop below 1,776. Furthermore, we can see that both envelope lines of this reliable indicator are strongly increasing as well, which can be seen as another encouraging trend-confirmation-signal for market technicians! Moreover, the gauge of the Advance-/Decline 20 Day Momentum Indicator was able to push back into bullish territory last week, indicating that the underlying price momentum of the market has slightly started to regain some strength recently. The Modified MACD still remains bullish from a pure signal point of view, but we can see that both trend lines of this reliable indicator are quite stretched at the moment and, therefore, we would not be surprised to see a bearish crossover signal soon. Such a situation often occurs, when the market price action of the market has slowed down for a couple of trading days. Anyhow, as long as our other short-term oriented trend-indicators remain bullish, would not even take a bearish Modified MACD too seriously as it would only indicate some signs of short-term exhaustion. As already mentioned last week, to evaluate if any upcoming further trend-deterioration or trend-breaks will have a stronger impact on the market, short-term market breadth is a key area of focus.

Right now, our entire short-term oriented breadth looks absolutely healthy, as there are hardly any stocks around which are hitting a fresh 52 week’s low and additionally the amount of new highs are confirming the recent break-out by the S&P 500. Short-term up-volume is trading well above short-term down-volume, plus our reliable Modified McClellan Oscillator Daily has managed to flash a bullish crossover signal last week, indicating that the market internals have strengthened! If we have a closer look at the underlying short-term trend structure of the market, we can see that the current trend participation remains quite broad based as percentage of stockss which trading above their short-term oriented moving averages (20/50) are far away from being bearish and, therefore, further gains into deeper December can be expected.

If we focus on our contrarian indicators, we can see that Smart Money has slightly started to sell into strengths, as the SMFI has not confirmed the latest high from the Dow Jones Industrial Average. If this divergence starts to mounting up within the next couple of weeks, it can be definitely seen as a leading signal for a bigger correction. This would coincide with the fact that the option market as well as dumb money is chasing the market aggressively on the upside. Right now, it is still too early to get concerned about those readings since short-term market breadth remains outright strong at the moment. Nevertheless, we would not be surprised to see a growing number of breadth divergences within the next couple of weeks since the SMFI tends to be correct in the long-run. Anyhow, for now our bullish short-term outlook has not been changed so far, since the readings from our short-term oriented trend- as well as breadth indicators remain strong. Furthermore, our reliable WSC Capitulation Index has not shown any signs of strengths yet and, therefore, we strongly believe to see further gains into deeper December.
If we focus on our contrarian indicators, we can see that Smart Money has slightly started to sell into strengths, as the SMFI has not confirmed the latest high from the Dow Jones Industrial Average. If this divergence starts to mounting up within the next couple of weeks, it can be definitely seen as a leading signal for a bigger correction. This would coincide with the fact that the option market as well as dumb money is chasing the market aggressively on the upside. Right now, it is still too early to get concerned about those readings since short-term market breadth remains outright strong at the moment. Nevertheless, we would not be surprised to see a growing number of breadth divergences within the next couple of weeks since the SMFI tends to be correct in the long-run. Anyhow, for now our bullish short-term outlook has not been changed so far, since the readings from our short-term oriented trend- as well as breadth indicators remain strong. Furthermore, our reliable WSC Capitulation Index has not shown any signs of strengths yet and, therefore, we strongly believe to see further gains into deeper December.

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading within the upper end of its bullish consolidation area. Normally, as long as the Global Futures Trend Index remains above its 60 percent threshold, any upcoming weaknesses should only be seen as a temporary consolidation period/pullback within the ongoing bull market. 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 in a strong mid-term oriented uptrend. This can be also seen if we focus on our Sector Heat Map, as consumer discretionary and industrials remain the strongest sectors within the S&P 500, whereas technology and financials have started to regain momentum. This positive rotation towards those sectors can be seen as quite constructive for now, as they have a quite high weighting within the S&P 500. Nevertheless, we can see that the sector selectivity within the S&P 500 is increasing, as the momentum score of most sectors remains weak or have continued to deteriorate for the week. Such a strong selectivity within our Sector Heat Map has often been an early warning sign for a bigger correction, since only a couple of sectors are pulling the S&P 500 higher.

Right now, we keep ignoring this fact as mid-term oriented market breadth still looks healthy from a pure signal point of view. Especially, last week’s move has pushed the percentage of stockss which are trading above their mid-term oriented moving average (100/150) back to encouraging 71/73 percent, telling us that the upside participation within the whole market is still extremely broad-based and, therefore, further rallying on a mid-term time horizon can be expected! Despite the fact that the Modified McClellan Oscillator Weekly still remains bearish from a pure signal point of view, we can see that it might be just a question of time until this indicator will get back on track, indicating a strengthening tape structure. This can be also seen if we focus on the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators remain quite bullish from a pure signal point of view and they have, therefore, confirmed the latest move by the S&P 500! Despite the fact that we have received some early indications for a bigger correction, the current mid-term technical picture of the market remains quite bullish and, therefore, we think to see further gains into deeper December.

Long-Term Technical Condition

Our long-term bullish outlook has not been changed so far, since our entire long-term trend-indicators (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths Indicator) remain strong. If we have a look at our long-term oriented WSC Global Momentum Indicator, we can see that the current stock market advance remains in force globally, as roughly 70 percent of all global market ETFs (all denominated in USD) continued to show strong momentum versus riskless money market. The same is true, if we have a look at our Global Relative Strengths Indicator. As per last week’s report, Europe remains the most attractive region, while the U.S. has started to regain momentum. More importantly, the long-term uptrend of the market is quite confirmed by long-term oriented market breadth as the High-/Low Index Weekly remains bullish from a pure signal point of view and the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish. Moreover, we have seen further improvements in long-term market breadth, as the Modified McClellan Volume Oscillator Weekly and the number of stockss which are hitting a fresh 52 weeks’ high have continued to strengthen for the week.

Bottom Line

The bottom line: our short-term bullish outlook has not been changed so far, since the short-term up-trend of the market is well supported by short-term market breadth. After the S&P 500 managed to close above 1,805, the next resistance area is around 1,820/1,830, which represents our next price target into deeper December. Despite there are already some small indications for a bigger correction on a mid-term time frame, our bullish outlook has not been changed so far as our mid-term oriented trend- as well as breadth indicators still remain quite strong. Stay tuned!