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December 25. 2016

Market Review

All three major U.S. averages finished the week with small gains. For the week the Dow Jones Industrial Average eked out a small gain of 0.5 percent to end at 19,933.81. The blue-chip index logged its seventh straight weekly gain, the longest winning streak in two years, and is up just over 14 percent for the year. The S&P 500 returned 0.3 percent for the week to finish at 2,263.76. The broad index has risen nearly 11 percent this year. The Nasdaq advanced 0.3 percent for the week to finish at 5,462.69. Over the year, the tech-heavy index gained 9 percent. Among the key S&P sectors, financials and technology were the best weekly performer, while materials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.6.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 41 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher on a very fast pace. This is another indication for a stronger short-term oriented uptrend. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains quite bullish, although it continued to lose momentum last week. As this indicator tends to be a leading one, the continuation of the recent sideways-trading is quite likely. If we focus on the readings from the Modified MACD, we can see that they are also quite stretched at the moment and about to flash a bearish crossover signal soon. Therefore, it looks like that the current short-term oriented up-trend is losing some steam (at least from a pure trend point of view), which is another piece of evidence that the recent consolidation period is likely to continue for a while.

Analyzing short-term market breadth, we get the same setting. Currently, our entire short-term oriented tape indicators remain supportive, but we can see a lot of non-confirmation within their readings. Particularly, the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed exhaustions last week (the Modified McClellan Volume Oscillator Daily even flashed a bearish crossover signal) and are, thus, signaling that the overall breadth momentum is currently slowing down a bit. This view is also confirmed if we have a look at the percentage of stockss which are trading above their short-term oriented moving average (20/50). Despite the fact that they are still trading at quite encouraging levels (65/70 percent) they have lost some steam recently. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total number of stockss hitting a fresh 52 weeks high lost some steam recently. Consequently, the High-/Low-Index Daily weakened last week, but is still trading at quite solid levels. So in the end, there was hardly any real recovery within the short-term oriented tape structure visible, although the market finished slightly higher for the week. As a consequence, the current underlying technical condition of the market is also signaling that further bullish biased sideways-trading on a very short time frame looks quite likely.

The situation on the contrarian is also indicating that a lot of good news has been already factored into prices. Despite the fact that some of our option based oscillators managed to recede from quite negative levels, most of them remain weak or even bearish (All Options Call-/Put Ratio Oscillator Weekly, Equity Options Call-/Put Ratio Oscillator Weekly, All CBOE Options Put-/Call Ratio, Global Futures Put-/Volume Ratio Oscillator and the Uptick-/Downtick Ratio). This view is also confirmed by market sentiment or the Smart Money Flow Index, which remains quite bullish but has also shown some non-confirmation recently. As a matter of fact, we do not think to see another strong/impulsive and sustainable break-out from the S&P 500 on a very short time frame ahead.

Mid-Term Technical Condition

The mid-term oriented technical condition of the market shows the same picture as we have on a short-term time frame. The mid-term status of the market remains nearly unchanged compared to last week and is, therefore, giving no reason to worry right now. To be more precise, our reliable Global Futures Trend Index is still trading in the middle of its bullish consolidation area. Worth mentioning is the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming consolidation period should be limited in price and time (in combination with strong readings in mid-term oriented market-breadth). This view is also confirmed by the WSC Sector Momentum Indicator, which measures how many key sectors remain in a mid-term oriented up-trend (46 percent currently). So from a pure price point of view, most key sectors keep drifting higher and, therefore, the underlying trend-condition of the S&P 500 looks quite healthy at the moment. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of most sectors remains above the one from riskless money market. Only health care and consumer staples have a lower scoring and, therefore, it is too early to bet on a sustainable trend-change in that sector.

On top of that, mid-term oriented market breadth is also confirming the current mid-term oriented scenario. All of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions or have not shown any signs of bearish divergences yet! Additionally, the Modified McClellan Oscillator Weekly continued to narrow its bearish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon. This picture is also supported by the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both gauges are trading on very strong bullish levels, which is another indication that the underlying tape structure of the market remains quite broad-based at the moment. Such a broader tape confirmation can also be seen if we concentrate on mid-term oriented advancing issues as well as mid-term oriented up-volume. Both indicators are trading either well above their bearish counterparts (Upside-/Downside Volume Index Weekly) or increased significantly (Advance-/Decline Index Weekly) recently. Based on the fact that our entire mid-term oriented market breadth indicators are trading at quite bullish/supportive levels, our strategic bullish outlook remains unchanged so far.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. However, we can see that the global bull market still keeps quite selective as only 45 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being (same as in the previous week). Focusing on the on the WSC Global Relative Strength Index, we can see, that the relative strength of most risky markets decreased for the week, although most of them keep trading above the one from U.S. Treasuries. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their (200) day simple moving average remained nearly unchanged at very high bullish levels. Plus the Modified McClellan Volume Oscillator Weekly continued to gain more bullish ground last week. In this context, also long-term new highs are still strong (although they decreased for the week), whereas long-term new lows continued to decrease. This can be seen as another positive long-term tape signal. Therefore, our long-term oriented High-/Low Index Weekly continued to strengthen and increased its gap. This indicates that the long-term tape of the market remains well intact.

Bottom Line

Our bullish outlook remains unchanged compared to last week. However, on a very short-time frame we expect to see further consolidation at work. However, given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a bit too early to get concerned about the technical condition of the market. As a consequence, our bullish outlook has not been changed so far. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside! Stay tuned!