August 14. 2016

Market Review

U.S. stocks finished the week nearly unchanged. For the week the Dow Jones Industrial Average eked out a small gain of 0.2 percent to finish at 18,576.47. The S&P 500 finished at 2,184.05 and ended the week roughly where it started. The Nasdaq recorded a weekly gain of 2.3 percent to end at 5,232.89. The technology-laden index posted its longest weekly win streak since 2012. Among the key S&P sectors, energy was the best weekly performer, while materials dragged. The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, traded near 11.5.

Short-Term Technical Condition

In line with our recent outlook, the market was in consolidation mode last week. However, from a pure price point of view the short-term oriented uptrend of the market remains intact as long as the S&P 500 does not drop below the lower threshold from the Trend Trader Index at 2,165. 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 solid uptrend, at least from a pure price point of view. The situation is different if we analyze the overall trend momentum of the market. Especially, the weak readings from the Modified MACD are still indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this indicator dropped significantly the last weeks, indicating that the recent consolidation period is highly likely to continue next week.

Despite the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain slightly more bearish ground last week, overall short-term market breadth still looks quite constructive at the moment. Especially, the High-/Low Index Daily as well as the Nyse New Highs minus New Lows Indicator are telling us that the current consolidation period is mainly driven by profit taking so far, since we have only seen a decline in the number of stockss which are hitting a fresh yearly high whereas the number of stockss which have been pushed to a new yearly low remain quite depressed. Moreover, we can see that the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) managed to close clearly above their 50 percent bearish threshold. As a matter of fact, the overall tape structure still looks quite bullish biased at the moment. Nevertheless, their absolute levels (20/50) should be a bit higher if we consider the current level from the S&P 500. So all in all, the picture of the short-term oriented breadth indicators is telling us that the current consolidation period is not completely over yet.

On the contrarian side, the situation is almost unchanged compared to last week. From an absolute level, the Smart Money Flow Index remains outright bullish as it gauge reached also a new high last week. Nevertheless, we can see that its gauge continued to trade sideways which is another indication that the recent consolidation period might continue for a while. Basically, the same is true if we focus on the on the Uptick-/Downtick Ratio and the WSC Capitulation Index as both indicators are now signaling a risk-off market environment at the moment. So from a pure contrarian point of view we would not be surprised if the (bullish biased) consolidation period is likely to continue next week.

Mid-Term Technical Condition

Despite the fact that further consolidation can be possible on a very short time frame, equities do not appear to be at risk of facing a stronger pullback at the moment. This is mainly due to the fact that the reading from the Global Futures Trend Index remains outright bullish. Right now the indicator keeps trading above its extremely bullish 90 percent threshold. As long as this is the case, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. This is not the case right now. In addition, we can see that the gauge from the WSC Sector Momentum Indicator increased its bullish signal and has, therefore, reached the highest levels for months. This indicates that the majority of sectors within the S&P 500 remains in a solid mid-term oriented uptrend and has, therefore, clearly confirmed the latest record high from the S&P 500. 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 zero percent, indicating that all sectors within the S&P 500 should continue to perform positive on an absolute basis.

Another main reason why we believe that the downside potential of the market remains extremely capped 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 to show a widening bullish gap last week, indicating that the overall tape momentum remains quite positive for the time being. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading above their bearish counterparts, it is a bit too early to get concerned about the current level of the market. Once more, 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. 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 where holding up quite well and, therefore, they remain outright bullish. 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 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 quite 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 and, therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should definitely remain in the bullish camp. Stay tuned!