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August 31. 2014

Market Review

U.S. stocks finished the week with solid gains. The Dow Jones Industrial Average rose 0.6 percent from the week-ago close to 17,098.45. The S&P 500 climbed 0.8 percent for the week to 2003.37. Both, the S&P and the Dow notched for their fourth up week in a row. The Nasdaq gained 0.9 percent over the week to 4,580.2, up 4.8 percent for August. Utilities led gainers among the S&P?s 10 major sectors. The CBOE Volatility Index, a measure of investor uncertainty, ended at 11.98.

Short-Term Technical Condition

As per last week’s report, the short-term up-trend of the market remains well intact, as the gauges of our entire short-term trend indicators (Trend Trader Index, Modified MACD and the Advance-/Decline 20 Day Momentum) are trading well above their bullish thresholds. The S&P 500 closed 39 points above the bearish threshold from the Trend Trader Index, plus both envelope lines of this reliable indicator have started to drift higher! This is a typical pattern for a healthy uptrend as the market is making higher highs and higher lows measured on a 20 days’ time frame. The Modified MACD continued to show a widening bullish gap in the last couple of trading sessions, after it had flashed a bullish crossover signal three weeks ago. For that reason, heavy losses would be necessary to trigger a bearish crossover signal within that indicator, which is another positive indication that further rallying can be expected! Moreover it was good to see that the gauge from the Advance-/Decline 20 Day Momentum Indicator has clearly confirmed the latest high by the S&P 500, as its gauge reached the highest level since months.

More importantly, short-term oriented market breadth continued to show strong signs of improvements and is, therefore, strongly confirming the current short-term oriented uptrend of the market. The Modified McClellan Oscillator Daily gained more bullish ground last week, indicating that the underlying momentum of the broad market remains quite strong. Moreover, we saw a strong reduction in the total amount of all NYSE-listed stocks which reached a fresh yearly low, whereas the total amount of new highs remains quite unchanged compared to last week. This indicates that the broad market continued to strengthen last week, although the amount of new highs could be higher given the fact that the S&P 500 reached a new all-time high last week. This can be also seen, if we have a closer look at the High-/Low-Index Daily. The bullish gauge of this indicator continued to strengthen last week and is, therefore, quite bullish from a pure signal point of view. Nevertheless, its readings should be a bit higher, if we consider the current levels from the S&P 500. If we focus at the underlying short-term trend structure of the market, we can see that the current trend participation improved last week, as the percentage of stockss which trading above their short-term oriented moving averages (20/50) continued to gain more bullish ground. Furthermore it was good to see that the bearish divergence within the 50 days’ time frame started to diminish, although it has not been sorted out so far.

From a pure contrarian point of view, the situation remains almost unchanged compared to last week. The market is still working off its predominant bearish sentiment within the option market and, therefore, further strength/sideway trading is likely. This view is also supported by the WSC Capitulation Index, which definitely dropped by half of its rise and is, therefore, flashing an all-clear scenario at the moment. Another important signal is coming from market sentiment. The amount of bulls soared to the highest level for months and, therefore, a lot of purchasing power should come back into the market. In general high bullish sentiment readings tend to be quite supportive within a short-term time horizon, whereas on a mid to long-term time frame it can be seen as a red flag on the horizon. Only the Smart Money Flow Index is not confirming the current levels from the Dow, whereas the small fry (ISE Call-/Put Ratio Daily) still remains a bit too optimistic in our point of view. But given the fact that most of our contrarian indicators remain quite supportive, we keep ignoring those threatening trend breaking signals for now.

Mid-Term Technical Condition

On a mid-term time frame, the most important trend signal is coming from the Global Futures Trend Index, which was pushed back above its outright strong bullish 90 percent threshold on Friday. Therefore, this reliable indicator is now clearly confirming the break-out by the S&P 500 and more importantly, it has sorted out all its bearish divergences we worried about last week. With such strong readings, equities do not appear to be at risk of entering a high double digit drop at the moment and, therefore, any upcoming short-term oriented pullback should be limited in price. As a matter of fact, moderate members should build up exposure again as further rallying into September can be expected. 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 have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas health care and technology remain the strongest sectors for the time being.

More importantly, mid-term oriented market breadth showed also some signs of improvements last week. Especially, the Modified McClellan Oscillator Weekly showed a decreasing bearish gap last week, whereas percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) continued to gain more bullish ground last week, indicating an intensifying tape structure. Right now, 60 percent of all NYSE listed stocks are trading above their 100 day simple moving average and 57 percent of them are above their 150 day simple moving average. Although those ratios are clearly bullish, we think they should also be much higher if we compare them with the current readings from the S&P 500. The same is true if we focus on the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Both indicators remain quite bullish from a pure signal point of view, although their readings still show a huge bearish divergence at the moment. However, as long as the mid-term oriented uptrend continues to strengthen/remains strong, we keep ignoring those bearish divergences for now, as the chances remain quite good that those will be wiped out over a longer time horizon. For that reason, we think it is time for conservative members to get back into the market again, although we will monitor the developments within our mid-term indicator framework quite closely within the next couple of weeks!

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 that the current bull market still remains in force from a technical point of view. Furthermore, it was good to see that the WSC Global Momentum Indicator stabilized at 70 percent, indicating that the majority of all global market indexes still have not broken below their long-term uptrend yet. Another encouraging trend signal is coming from the WSC Global Relative Strengths Index as most risky markets managed to pass their 50 percent bullish threshold last week. This indicates that the overall risk appetite among investors is increasing (at least on low levels). From a pure asset allocation point of view, Global Emerging Markets is leading the race, whereas Europe is still struggling. Apart from the Modified McClellan Volume Oscillator Weekly, our entire long-term oriented breadth indicators remain constructive, although we still see a lot of bearish divergences in their readings. Especially, the amount of long-term oriented new highs continued to deteriorate, although the High-/Low Index Weekly itself remains quite bullish. Basically, the same is true if we focus on the percentage of stockss which are trading above their 200 day simple moving average. Right now, only 58 percent of all NYSE-listed stocks are per definition within a long-term oriented uptrend and, therefore, overall trend participation looks quite weak-kneed. Right now it is a bit too early to get concerned about those facts but we will monitor their developments quite closely over the next couple of weeks.

Bottom Line

The bottom line: with broadening strengths within our indicator framework, we think to see further strength into September. For that reason, we would advise our aggressive traders to keep their long-position as long as our short-term indicator framework remains constructive. On a mid-term time horizon the technical market condition also improved significantly and, therefore, the threatening correction/pullback risk has diminished. As a matter of fact, we would advise our conservative members to build up exposure again as we do not fight an existing uptrend. Nevertheless, we would issue a strategic sell signal immediately, if the current mid-term trend-/breadth condition of the market turns negative again as capital appreciation is the most important driver for success. Stay tuned!