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March 13. 2016

Market Review

As highlighted in our latest call, U.S. stocks ended another week with gains. The Dow Jones Industrial Average gained 1.2 percent from the week ago close to finish at 17,213.31. The S&P 500 advanced 1.1 percent for the week to close at 2,022.19. The Nasdaq rose 0.7 percent over the past five trading days to end at 4,748.47. All three main indexes posted their fourth straight weekly gain. All key S&P sectors finished higher for the week, led by materials and utilities. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded below 17.

Strategy Review

After we had successfully predicted/side-stepped the January correction, it was one of our key calls that 1,810 represented an important low, as our indicator framework was telling us that the market had definitely hit rock bottom. As a consequence, we advised our members to get back into the market quite quickly afterwards. Moreover, we said that from a pure seasonal point of view (Presidential Cycle), it could be possible that such a low/bottom could also only act as basis for another stronger rally (even towards new highs) into April, before we might could see another significant correction leg into summer, which could then represent a major bottom in risky assets. As those historical patterns should only be seen as a rough guideline instead of a precise trading plan, our indicator framework remains key area of focus. So if our cyclical roadmap (Presidential Cycle) is correct, the current rally should produce a growing number of bearish divergences within our indicator framework over the next couple of weeks. If this is not the case, any upcoming weaknesses should just be seen as common 3-5 percent pullback within an ongoing bull-market.

Short-Term Technical Condition

Not surprisingly, the short-term oriented uptrend of the market remains well intact as the readings from our entire short-term oriented trend-indicators continued to strengthen significantly last week. As the latest advance took place on a very fast pace, we can see that the S&P 500 is now trading almost 86 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 1,936.97. Furthermore, we can see that both envelope lines of this reliable indicator continued to increase on a fast pace, 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. This bullish short-term uptrend is also widely supported by the readings of the Modified MACD, which showed an increasing bullish gap last week, indicating further gains ahead. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at the highest level for months and is, therefore, clearly confirming the recent levels from the S&P 500.

Basically, the same is true if we focus on short-term oriented market breadth. Especially, 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 breadth momentum of the broad market remains outright strong at the moment. This important fact is also confirmed by the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50), as their gauges strongly trade far above 50 percent. As a matter of fact both gauges are, therefore, definitely confirming the current rally from the S&P 500, as the current participation of all NYSE listed stocks within the recent rally looks quite broad based. Additionally, we saw stable readings in the total amount of all NYSE-listed stocks which reached a fresh 52 weeks high, in combination with very low readings of new 52 weeks low! As a consequence, the High-/Low-Index Daily strengthened its bullish signal, although its bullish gauge could be a bit higher in our point of view.

If we focus on our contrarian indicators, we can see that the Smart Money Flow Index is still indicating that the current rally could push the Dow towards new highs, whereas the WSC Capitulation Index is still indicating an outright risk-on market environment for the time being. Above all, overall market sentiment remains supportive although a lot of bears have already switched into the bullish camp over the past weeks. On the other hand, we can see that some of our short-term oriented option based indicators (WallStreetCourier Index Oscillator Weekly, the Equity Options Call-/Put Ratio Oscillator Weekly and the OEX Call-/Put Ratio Oscillator Weekly) have started to show elevated levels of greed among speculative investors. If we consider the pace of the recent recovery, such an outcome is not a big surprise at all. Thus, it could be possible to see a shorter period of consolidation ahead before further gains can be expected. Another interesting fact is that the quite long-term oriented NYSE Member Debt in Margin Accounts Indicator has started to form a quite bearish divergence to the market as its gauge fell to quite low levels. Given the fact that this indicator is quite long-term oriented, we received another piece of evidence for our cyclical roadmap. However, given the outright strong bullish readings within our remaining short-term oriented indicators, it is a way too early to get concerned about that fact.

Mid-Term Technical Condition

Another reason why we are quite sure about that is the fact that the mid-term oriented uptrend of the market also continued to strengthen last week. Especially, the gauge from our reliable Global Futures Trend Index grew into the upper part of its bullish consolidation area and, therefore, the current rally looks definitely sustainable! Moreover, if we analyze the current trend participation of all major key sectors within the S&P 500, we can see that most industries continued to show a strong form of positive momentum last week. This is mainly due to the fact that the gauge from the WSC Sector Momentum has shown also some positive momentum recently, although it still remains bearish from a pure signal point of view. To be more precise, this is telling us that the momentum score from riskless money market dropped significantly within our Sector Heat Map last week, whereas the momentum score from the S&P 500 remains quite depressed. This is due to the fact, that there is an increased selectivity among major key sectors, which is another long-term confirmation for our cyclical roadmap (at least for the time being). However, as already mentioned above, right now it is a bit too early to get concerned about that fact.

Another main reason why we believe that the downside potential of the market remains quite capped is due to the fact that mid-term oriented market breadth still remains quite supportive for the time being. To be more precise, we can see that the overall tape momentum remains quite positive as the Modified McClellan Oscillator Weekly continued to show a small increasing bullish gap last week. Moreover, it was good to see that mid-term oriented advancing issues as well as mid-term oriented up-volume also added more bullish ground last week. Normally, as long as both indicators (Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly) remain supportive the risk of a stronger pullback is extremely limited. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both indicators strengthened for the week and have, therefore, turned bullish (100) or about to do so soon (150). This indicates that the total upside participation within the market is gearing up on a mid-term time horizon, which is absolutely necessary if the market wants to achieve sustainable gains.

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. Also the WSC Global Momentum remains quite unchanged compared to last week. So all in all, this is another piece of evidence that equities are slightly 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 bullish crossover 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

The technical picture of the market remains quite unchanged compared to last week. With broadening strengths all across the board, we think to see further gains into Q1. On a very short-time frame it could be possible to see a period of consolidation ahead, before further gains can be expected. However, our bullish outlook remains unchanged and, therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!