March 20. 2016

Market Review

U.S. stocks finished another week of gains with the major averages closing nearly 1 percent higher or more for the week, their fifth-straight week of gains since November. The Dow Jones Industrial Average added 2.3 percent during the week to 17,602.30. The S&P 500 rose 1.4 percent from the prior Friday’s close to 2,049.56. Both the S&P 500 and the Dow ended in positive territory for the year, while the Dow logged six days of gains in a row ? the longest winning streak since early October. The Nasdaq added 1.0 percent during the week to 4,795.65. Among the key S&P sectors, industrials were the top gainer and health care the only decliner on the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held just above 14 after briefly falling below to touch its lowest since November.

Short-Term Technical Condition

Right in line with our recent outlook, U.S. stocks continued to gain more bullish ground last week, pushing the major key indices back into positive territory for 2016. Apparently, the short-term oriented trend of the market remains almost unchanged compared to last week, as the readings from our entire short-term oriented trend indicators remain extremely bullish at the moment. To be more precise, the S&P 500 is still trading around 80 points above the bearish threshold from the Trend Trader Index, indicating that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 1,970. As per last week?s report, we can see that both envelope lines of this reliable indicator continued to drift higher on a very fast pace, which is another strong technical pattern for a powerful short-term oriented uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they have not shown any signs of a threatening bearish crossover signal yet. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator closed at quite encouraging bullish levels, indicating a continuation of the current risk-on trading environment.

More importantly, this view is also strongly confirmed by short-term market breadth as the current trend participation of all NYSE listed stocks within the current rally looks extremely healthy at the moment. Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) continued to grow further into deep bullish territory, indicating an outright supportive trend-structure at the moment. To be more precise, about 79/81 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average, the highest numbers we have seen for months. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of weaknesses yet, indicating that the underlying breadth momentum of the market remains positive. Another encouraging fact is that we have seen a strong pick-up in the total amount of all NYSE-listed stocks which reached a new yearly high, in combination with one of the lowest readings of stocks which dropped to a new yearly low! As a consequence, the High-/Low Index Daily strengthened its bullish signal for the week. In our opinion, with such strong signals all across the board, it is highly unlikely that the recent rally will run out of fuel on a very short time frame. As a consequence, we think that the market is heading towards new record into late March/early April, which is more or less in line with our cyclical roadmap.

This view is widely confirmed by our contrarian indicators. The Smart Money Flow Index continued to strengthen its outright bullish divergence to the Dow, indicating that big institutional investors are still on a buying spree. This can be also observed if we focus on the WSC Capitulation Index, which is still indicating an extremely risk-on environment for the time being! Only some option driven oscillators (All CBOE Options Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, Global Futures Put-/Volume Ratio and the WSC Index Oscillator Weekly) remain or turned negative, indicating extreme short-term optimism. In such a situation it is not unusual to a see a washout day or at least a short period of consolidation. But given the quite strong short-term trend- as well as breadth indicators, we think that upcoming consolidation should be limited in price and time.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market continued to strengthen significantly and is, therefore, giving no reason to worry right now. This is mainly due to the fact that our reliable Global Futures Trend Index grew almost above its strong bullish 90 percent threshold on Friday. For that reason, the actual reading of this reliable indicator is forming a huge bullish divergence to the current levels from the S&P 500. As a matter of fact, we received even more confirmation for our new highs scenario! Basically, the same is true if we analyze the current trend participation of all major key sectors within the S&P 500. There we can see that most industries continued to show a strong form of positive momentum last week. This is mainly due to the fact that the gauge from the WSC Sector Momentum almost turned bullish last week. This can be also seen if we focus on our Sector Heat Map, as the momentum score from riskless money market dropped significantly last week! In our view, this is another indication that the risk appetite among investors remains quite high and, therefore, we are expecting to see new record highs in late March/early April.

More importantly, this mid-term oriented up-trend is also widely confirmed by our mid-term oriented market breadth indicators and, therefore, we do not think to see a major trend break ahead. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150) gained more bullish ground last week, indicating an absolutely broad based participation at the moment. Moreover, both gauges (100/150) have been pushed to their highest level since June 2015 and are, therefore, confirming the current level from the S&P 500! In addition, we can see that the Modified McClellan Oscillator Weekly strengthened its bullish gap, indicating that the underlying breadth momentum of the market keeps on growing. Another encouraging mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly. Both indicators are telling us that it is a way too early to get bearish from a strategic point of view as both indicators are far away from flashing any bearish crossover signal yet. Normally, as long as both, mid-term oriented advancing issues as well as mid-term oriented up-volume are trading above their bearish counterparts, the underlying tape structure of the market remains outright bullish. For that reason, we strongly believe that there is still enough room for an overshoot above latest highs we have seen, before troubles might be due!

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Nevertheless, we can see a strong recovery in the relative strength score of almost all risky markets. Above all, we can see that the gauge from the WSC Global Momentum showed also stronger signs of recovery, albeit on quite low levels. This indicates that most local equity markets around the world are also participating within the current rally, although it might take a while until the global bull market is getting back on track (if we consider the absolute value of that indicator). However, the most important fact is that long-term market breadth in the U.S. still remains constructive for the time being. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly as well as the percentage of stockss which are trading above their long-term oriented moving averages continued to strengthen their bullish signals, whereas the High-/Low Index Weekly showed also some signs of improvements in the past last weeks. Nevertheless, we should not forget that their readings should be much stronger if we consider the current levels form the S&P 500. Right now, we think this is not a big deal at all, but those bearish divergences might become a burden for the market later in Q2.

Bottom Line

The technical picture of the market remains quite unchanged compared to last week. With broadening strengths all across the board, we think to see further gains into late Q1. On a very short-time frame it could be possible to see a period of consolidation ahead, before further gains can be expected. However, given the fact that the current risk/reward looks outright attractive at the moment, we would advise our conservative members to hold their equity position, while aggressive short-term traders should keep buying the dips. Stay tuned!