July 13. 2014

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 0.7 percent over the week to end at 16,943.81. The S&P 500 slumped 0.9 percent to 1,967.57 for the five days. The Nasdaq dropped 1.6 percent for the week to 4,071.87. Both the S&P 500 and the Nasdaq recorded their worst weekly hit since April 2014. Utilities and consumer staples were the only gainers among the S&P?s 10 major sectors. The Chicago Board Options Exchange Volatility Index, a measure of investor uncertainty, ended at 12.08, leaving it 17 percent higher on the week.

Short-Term Technical Condition

Last week, the market was in consolidation mode after it had hit a fresh multi-year high two weeks ago. Anyhow, the recent consolidation caused a small deterioration in the readings of our short-term oriented trend indicators, as the Modified MACD flashed a small bearish crossover signal last week. As already mentioned in our previous Market Comments, we are not taking a bearish Modified MACD too seriously, as long as we do not see further bearish crossover signals within our other short-term oriented trend- or breadth indicators. From a pure price point of view, the short-term oriented uptrend of the market has not been broken yet, as the S&P 500 is still trading 14 points above the bearish threshold from the Trend Trader Index (1,953). In addition, it was quite good to see that the Advance-/Decline 20 Day Momentum Indicator kept trading well above its bearish threshold, indicating that the underlying trend momentum of the market remains intact for the time being. All in all, the short-term uptrend of the market remains quite bullish biased and, therefore, we think it is still too early to get concerned about the recent weaknesses we saw last week.

It is not quite unusual, that some of our short-term trend indicators turn bearish during times, when the market is taking a breather or has entered a consolidation period. In such a situation, short- to mid-term market breadth will give guidance if any upcoming short-term bullish trend break will lead to stronger losses or if renewed strengths can be expected. Normally, a consolidation period is considered to be healthy one as long as short-term to mid-term market breadth does not completely turn bearish, indicating that the market internals remain quite healthy. Right now, short-term market breadth still looks quite constructive, although the impact of the pullback from last week has definitely left its mark on our tape indicators. The Modified McClellan Oscillator Daily flashed a bearish crossover signal on high levels last week, plus most NYSE listed stocks closed below their 20 day simple moving average, indicating a weakening upside participation. Nevertheless, we can see that the current consolidation is mainly driven by profit taking so far. This is mostly due to the fact that the as 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. For that reason, the High-/Low Index Daily has not flashed a bearish crossover signal so far, as the smoothed new lows have not shown any signs of strength yet. Therefore, as long as we do not see further trend breaks on a 50 day basis, in combination with a strong increase in the amount of new lows or a bearish crossover signal within our High-/Low Index Daily, it is too early to get bearish for the short-term as the current consolidation period still looks constructive by its nature.

The same is true if we focus on our contrarian indicators. Right now, the S&P 500 does not look ready for a larger correction above 5 percent as the WSC Capitulation Index is still trading at outright low levels, giving an all-clear signal for the time being. Furthermore, we can see that the recent consolidation period has scared a lot of investors, as the amount of puts surged into bullish contrarian territory. Another encouraging fact is that we saw a lot of smart buying last week, indicating that big institutional investors have used the recent weaknesses to build up exposure. All in all, given the quite bullish readings within our short-term indicator framework, we think that the current consolidation period should be limited in price and time although we would not be surprised to see increased volatility/down-testing ahead.

Mid-Term Technical Condition

Despite the fact that the market remains vulnerable for further consolidation, equities do not appear to be at risk of entering a high double digit drop or even a new cyclical bear market at the moment! This is mainly due to the fact that the mid-term oriented uptrend of the market remains well intact at the moment. Especially, the Global Futures Trend Index is far away from being bearish, although its gauge dropped into the upper range of its bullish consolidation area. However, 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. Moreover, we can see that the WSC Sector Momentum Indicator remains outright strong, showing that most underlying sectors within the S&P 500 remain in a strong mid-term oriented up-trend. 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 energy and health care remain/are the strongest sectors for the time being.

More importantly, mid-term oriented market breadth is still confirming the mid-term oriented up-trend and, therefore, further strength into late July/early August can be expected. If we focus on the Modified McClellan Oscillator Weekly we can see that the underlying breadth momentum of the market still remains quite constructive. Another positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from those indicators are still trading well above their bearish counterparts, signaling that the market internals look quite healthy at the moment. Last but not least, the percentage of NYSE listed stocks which are trading above their mid-term oriented moving averages (100/150) have not turned bearish yet and, therefore, the broad upside participation remains intact for the time being. Nevertheless, the recent pullback has clearly produced some small bearish divergences within our mid-term oriented tape indicators. Given the fact that the market only declined 0.9 percent last week, the impact within our mid-term breadth indicators was quite significant. Especially, the amounts of advancing issues as well as up-volume are receding from quite high levels. Also the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) have been pulled back quite significantly, especially if we consider the recent price action from last week. Right now it is a bit too early to get concerned about those facts, as our entire mid-term oriented breadth indicators still remain quite bullish from a pure signal point of view. For that reason, it is too early to call for an important market top right now. Moreover, there is no top without a distributive top-building process. A classical top building process can take a couple of weeks, whereas the first stronger pullback (4-6 percent) after a major high is just part of a larger distribution top. After such a pullback, the market usually strongly bounces back (above or slightly below) to its former high, although most of our mid-term and even sometimes our long-term oriented trend- as well as breadth indicators are already faltering! As long as we do not see such patterns in combination with a weakening tape structure it is too early to take the chips from the table. Nevertheless, we keep watching our indicators closely within the next couple of weeks, as we are still expecting to see a cyclical bear market this year (Juglar Cycle and Charts of Interest).

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 a technical bull market, whereas the WSC Global Momentum Indicator shows that 97 percent of all global markets have not broken below their long-term uptrend yet. Nevertheless, we can see that the overall momentum is deteriorating as the relative strength score from all risky markets are trading below their 50 percent threshold. This might be another 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 long-term market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average remain bullish (at least from a pure signal point of view), plus the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, showing that the long-term breadth momentum remains intact. Above all, 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.

Bottom Line

The bottom line: the situation compared to last week remains unchanged. Despite the fact that the market looks vulnerable for further down-testing/consolidation, our bullish outlook has not been changed so far. Furthermore as long as our mid- to long-term oriented indicator framework remains bullish (at least from a pure signal point of view) and as long as we do not see a typical top-building process pattern, we think it is too early to call for a major market top right now. Therefore, we think that the market could easily overshoot towards 2,000 into late July/early August, before major troubles might be due! For that reason, we would advise our conservative members to hold their equity position, while aggressive short-term traders should buy the dips as long as our short-term indicator framework does not turn completely bearish. Stay tuned!