February 28. 2016

Market Review

Right in line with our latest call, U.S. stocks rose for a second week. For the week, the Dow Jones Industrial Average added 1.5 percent to 16,639.97. The S&P 500 rose 1.6 percent from the week ago close to 1,948.05. The Nasdaq climbed 1.9 percent during the week to finish at 16,639.97. Among the key S&P sectors, materials and industrials were the best performers for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, was near 19.8.

Strategy Review

In our last week’s comment, we highlighted the fact that it was time for conservative members to get back into the market as our indicator framework was telling us that the market had definitely hit rock bottom. Moreover, we said that from a pure seasonal point of view (Presidental Cycle), it could be possible that such a low would only act as basis for another stronger rally (even towards new highs) into April before further troubles might be due. In fact, after the strong rally from last week most of our indicators continued to improve significantly and, therefore, the market is following those historical patterns quite closely. Nevertheless, we should not forget that those historical patterns should just be seen as a rough guideline instead of a precise trading plan. As a matter of fact, our indicator framework will give us further guidance where the market is heading.

Short-Term Technical Condition

If we focus on our short-term oriented trend indicators, we can see that the market continued to gain more bullish ground last week. This is mainly due to the fact that the S&P 500 managed to close 63 points above the bearish threshold from the Trend Trader Index. This indicates that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 1,885. Furthermore, we can see that both envelope lines of this reliable indicator have started to bottom out as well. This is telling us that within the past 20 days we saw higher highs and higher lows, which is another typical pattern for a strong short-term oriented uptrend. This bullish short-term uptrend is also widely supported by the readings of the Modified MACD, which showed an increasing bullish gap last week. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite encouraging levels and has, therefore, clearly confirmed the recent levels from the S&P 500!

Moreover, it was good to see that short-term oriented market breadth again showed some strong signs of improvements, although not all of our tape indicators have turned bullish yet. The most encouraging tape signal is still coming again from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators increased significantly compared to the last weeks. This indicates that the broad market is gaining momentum on a very fast pace. This can be also observed if we take a look on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both indicators have reached the highest level for months. Basically, the same is true if we take a look at the NYSE New HighsNew Lows Indicator. There we can see that there was a tremendous reduction in the total amount of new lows, indicating that the market internals are strengthening. As a matter of fact, the bearish gauge from the High-/Low-Index Daily continued to decrease significantly and is, therefore, also confirming the recent gains from last week. So all in all, the recent rally is widely confirmed by positive readings within our short-term market breadth indicators. As a matter of fact, we think that the recent gains will definitely turn out to be more sustainable in their nature. Thus we received further confirmation (at least on a very short time frame) that we have seen the worst already!

The situation on the contrarian side remains supportive. As already mentioned last week, a lot of investors are forced to get back into the market and they are, therefore, acting as an additional catalyst for the current rally. Moreover, we can see that our reliable Smart Money Flow Index remains outright bullish, which is another quite encouraging sign that the current rally will definitely turn out to be more sustainable in its nature. Apart from that fact, we can see that our remaining contrarian indicators remain quite neutral for the time being.

Mid-Term Technical Condition

On a mid-term time horizon, the technical trend-condition of the market still looks a bit weak at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index has not managed to pass its bullish 60 percent threshold yet. As already mentioned a couple of times, from a formal point of view, the current correction cycle will not be over as long as its gauge keeps trading below that important threshold. Therefore, it was good to see that its gauge has shown a strong form of momentum recently as it climbed to 51 percent last week. Consequently, it has clearly confirmed the recent gains. More importantly, if this trend continues it might be just a question of time until we receive a bullish signal within that indicator. Not surprisingly, from a pure price point of view, the market still remains in a mid-term oriented down-trend as the WSC Sector Momentum Indicator has not turned bullish yet. This is telling us that the momentum score of most sectors within the S&P 500 still keeps trading below the momentum score of riskless money market within our Sector Heat Map. Nevertheless, it was good to see that the momentum score of riskless money market lost some steam recently.

More importantly, mid-term oriented market breadth continued to show signs of recovery and, therefore, we received further confirmation for our up-trend scenario. Especially, the Modified McClellan Oscillator Weekly showed a decreasing bearish gap, plus the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) also showed quite encouraging signs of recovery last week (although both indicators still remain bearish from a pure signal point of view). Moreover, it was quite good to see that mid-term oriented up-volume increased significantly last week, indicating that more volume was flowing in advancing stocks than in declining ones. Basically, the same is true if we focus on the Advance-/Decline Index Weekly, which flashed a small bullish crossover signal. Nevertheless, the absolute levels of those important tape indicators still remain a bit depressed, which is not a surprise at all if we consider the fact that the market might just have hit a final low recently.

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Nevertheless, we can see a strong recovery in the relative strength score of almost all risky markets. Above all, we can see that the gauge from the WSC Global Momentum showed small signs of strength at quite low readings. This indicates that most local equity markets around the world have started to get back on track recently. This is another piece of evidence that equities are getting back on track. This can be also seen if we focus on long-term market breadth as the Modified McClellan Volume Oscillator Weekly showed a decreasing bearish gap last week. Additionally, we saw that the percentage of stockss which are trading above their long-term oriented moving averages and the High-/Low Index Weekly showed also some signs of improvements in the past last weeks.

Bottom Line

After we have successfully side-stepped the latest correction, it was one of our key calls that 1,810 represents the final low of the recent correction cycle. After we had received the final confirmation two weeks ago, we advised our members to get back into the market again. Since then we have seen a strong improvement within our indicator framework and, therefore, our bullish outlook remains unchanged (as we think we have seen the worst already, especially if we consider the recovery/strong improvements/bullish crossovers within our tape indicators). Nevertheless, if we consider the pace of the recent recovery, we think there is a good chance to see at least one more wash-out day or even a short period of consolidation. In our opinion, such a period should be limited in price and time and, therefore, any dips should be used to increase exposure. Stay tuned!