August 21. 2016

Market Review

Although all three major averages reached all-time highs on Monday, U.S. stocks finished another week nearly unchanged. For the week, the Dow Jones industrial Average closed 23.9 points lower, or 0.1 percent, at 18,552.57. The S&P 500 finished at 2,183.87 and ended the week roughly where it started. The Nasdaq eked out a small gain of 0.1 percent to finish at 5238.38. The tech-index recorded its eighth straight week of gains. Among the key S&P sectors, energy was again the best weekly performer, while utilities dragged. The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, closed slightly lower for the week, near 11.4.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that we expected to see further consolidation on a very short-time frame. In fact, after the false break-out attempt by the S&P 500 on Monday morning, the broad index ended almost where it had started three week ago. Consequently, it is not a big surprise at all that the technical condition of the market remains almost unchanged compared to last week. If we have a closer look at the Trend Trader Index, we can see that the price driven short-term oriented up-trend of the market has not been broken yet as the S&P 500 is still trading about 15 points above the bearish threshold from that reliable indicator. Furthermore, we can see that both envelope lines have not shown any signs of a major rounding top yet and, therefore, the pure price driven short-term oriented up-trend of the market looks quite intact for the time being. Nevertheless, we can see that the underlying trend-momentum of the market remains quite weak and, therefore, we do not think to see a stronger break-out immediately. This becomes quite obvious if we focus on the Modified MACD, which has not turned bullish so far. Additionally, we can see that the Advance-/Decline 20 Day Momentum Indicator is far away from confirming the current levels from the S&P 500, although it remains bullish from a pure signal point of view. So in the end, our short-term oriented trend indicators are telling us that that the chances for a significant move in both directions look quite capped at the moment.

Basically, the same is true if we focus on short-term oriented market breadth. The overall short-term oriented tape momentum looks quite exhausted as the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not turned bullish yet. On the other hand, we can see that the market internals still look quite solid at the moment and, therefore, the risk of a significant short-term oriented pullback remain quite limited at the moment. This becomes quite obvious if we focus on the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) as both gauges are far away from being bearish at the moment. On the other hand we can also see that they should be a bit higher, if we consider the current levels from the S&P 500. Basically, the same is true if we focus on the NYSE New Highs ? New Lows Indicator or the High-/Low Index Daily, as the total amount of new highs remains constructive but not confirmative. As a consequence we think to see further sideways-trading within the next couple of trading sessions.

Even from a pure contrarian point of view, we do not see the risk of a major break-out in both directions at the moment. Overall market sentiment as well as the option market remains in neutral territory. The absolute level from SMFI remains supportive, but if we analyze its latest development is also suggesting further consolidation down the road. Only the Uptick-/Downtick Ratio is flashing a negative signal which is in contrast to the readings from the WSC Capitulation Index, which just dropped back into its bullish territory on Friday.

Mid-Term Technical Condition

However, the mid-term oriented uptrend of the market still looks outright healthy at the moment and, therefore, it is still a bit too early to issue a strategic sell signal at the moment. As per last week?s report, the Global Futures Trend Index keeps trading above its extremely bullish 90 percent threshold and is, therefore, confirming the current levels from the S&P 500. As already mentioned a couple of times, as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses tends to be limited in price and time (only in combination with confirmative market breadth readings). Moreover, we can see that the entire sectors within the S&P 500 remain in a powerful mid-term oriented uptrend as the WSC Sector Momentum Indicator has reached quite encouraging bullish levels recently. As a matter of fact, the underlying price trend of the S&P 500 looks quite solid at the moment. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of riskless money market is still trading at 0 percent. In such an environment, all sectors tend to perform positive on an absolute basis.

More importantly, mid-term oriented market breadth is still strongly confirming the current mid-term oriented uptrend of the market. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week, indicating that the underlying market breadth momentum remains quite supportive. More importantly, most 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 and have, therefore, not shown any signs of bearish divergences yet! Basically, the same is true if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both gauges kept trading at quite encouraging bullish levels, which is another signs 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 focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts. As a matter of fact we think it might be a way too early to call for a major market top at the moment.

Long-Term Technical Condition

The long-term uptrend of the market remains well intact 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 80 percent of all local equity markets around the world remain in a long-term oriented uptrend at the moment. Moreover, we can see that the relative strength of most risky markets keeps trading above the one from U.S. Treasuries which is another indication for a risk-on market environment. Above all we can see that long-term market breadth is giving no reason to worry right now and, therefore, we think that the current long-term uptrend of the market is not in danger at all (at least for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stockss which are trading above their longer-term oriented moving averages (200)!

Bottom Line

Our outlook remains unchanged compared to last week. On a very short time frame, the market looks quite vulnerable for further bullish biased consolidation or for a sentiment driven washout day. Nevertheless, with quite supportive/bullish indicators (especially on a mid- to long-term time horizon) all across the board, we have not seen any typical signs for a major top-building process yet. As a consequence, our bullish outlook has not been changed so far. Therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should definitely remain in the bullish camp. Stay tuned!