June 12. 2016

Market Review

U.S. stocks finished lower for the week. The Dow Jones Industrial Average declined 0.7 percent to 17,865.34 from last Friday’s close. The S&P 500 dropped 0.9 percent for week to 2,096.07. The Nasdaq tumbled 1.3 percent in five trading days to 4,894.55. Among the key S&P sectors, financials were the worst weekly performer and telecoms the best. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose above 17 for the first time since mid-May.

Short-Term Technical Condition

Despite the fact that the market finished the week with stronger losses, the short-term oriented uptrend of the market remains well in force. To be more precise, the S&P 500 is still trading 24 points above the bearish threshold from the Trend Trader Index. This is telling us that from a pure price point of view, the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.072. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they have not shown a threatening bearish crossover signal yet. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is still trading on quite encouraging bullish levels and, therefore, it is too early to bet on a major trend reversal for the time being. Nevertheless, its gauge should a bit higher if we consider the current levels from the S&P 500 and, therefore, it could be possible that the S&P 500 might need a few attempts to break sustainable above its previous high.

If we focus on our short-term market breadth indicators, we can see that the recent pullback had hardly any major impact as the readings from most of our tape indicators still remain quite supportive at the moment. Especially the High-/Low Index Daily as well as the Nyse New Highs minus New Lows Indicator are indicating that the last week’s decline was mainly driven by a few heavy weighted stocks rather than by the broad market. Another indication is the fact that we only saw a small reduction in the number of stockss which are hitting a fresh yearly high, plus the number of stockss which have been pushed to a new yearly low remained quite depressed. The same is true if we have a look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact that their readings have come down recently, the gauges of both indicators are trading well above their 50 percent bearish threshold, indicating that the majority of all NYSE-listed stocks are per definition in a short-term oriented uptrend. Above all, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain even more bullish ground last week, indicating that the underlying tape momentum remains quite positive! So all in all, the current uptrend of the market looks quite healthy at this point in time!

If we focus on our contrarian indicators, we can see that the Smart Money Flow Index is still indicating a new all-time high scenario for the Dow, whereas the WSC Capitulation Index dropped significantly for the week, which is another indication for an outright risk-on market environment for the time being. Above all, overall market sentiment also remains supportive at the moment. On the other hand, we can see that some of our option based indicators (WallStreetCourier Index Oscillator Weekly, the Equity Options Call-/Put Ratio Oscillator Weekly and the Global Futures Put-/Volume Ratio) are giving quite contradicting signals at the moment and, therefore, we would not be surprised at all if we see increased volatility ahead, before further sustainable gains can be expected.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market remains outright bullish at the moment. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index keeps trading above its extremely 90 percent bullish threshold and is, therefore, still confirming the current break-out attempt from the S&P 500. Moreover, it is worth mentioning the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any short-term driven consolidation period/pullback should be limited in price and time (of course only in combination with quite solid readings in mid-term market breadth, which is the case right now). Consequently, further gains into summer can be expected. Above all, we can see that the WSC Sector Momentum Indicator is also trading at quite positive levels, indicating that most sectors within the S&P 500 remain in a solid mid-term oriented up-trend 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 remains at low levels, whereas utilities, materials and consumer staples remain the strongest sectors for the time being.

Another main reason why we believe that the market continues to rally is due to the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued its bullish ride, indicating that the overall tape momentum remains quite positive for the time being. Moreover, mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading far above their bearish counterparts. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators remain outright bullish (100/150). This indicates that the total upside participation within the market still looks quite broad based, which is another indication that it might be a bit too early to take the chips from the table!

Long-Term Technical Condition

The long-term uptrend of the market remains 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 85 percent of all global markets remain within a long-term oriented uptrend. Unchanged compared to last week, we can see that the relative strengths of all risky markets could be definitely a bit stronger but right now it is a way too early to get concerned about that fact. This is mainly due to the fact that long-term market breadth is giving no reason to worry and, therefore, we think that the current long-term uptrend of the market is not in danger at all. 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

With quite solid readings all across the board, we strongly believe to see a strong break-out towards new record highs soon, although a few attempts might be necessary. Consequently, we think that the consolidation period which started in mid-April will come to a happy end soon as the corrective top building process transformed into a healthy consolidation period. Moreover, we can see that market sentiment remains quite depressed, leaving enough room for positive surprises into summer. For that reason, we would advise conservative members to hold/increase their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!