September 07. 2014

Market Review

All three U.S. major averages posted modest gains for the week. The Dow Jones Industrial Average gained 0.2 percent from the prior Friday’s close to end at 17,137.36. The S&P 500 added 0.2 percent for the holiday-shortened week to a record 2,007.71. The weekly win streak is the longest since November for the Dow and S&P and both averages recorded their fifth consecutive weekly gains. The Nasdaq added 0.1 percent from the week-ago close to 4,582.90. Most key S&P sectors ended in positive territory for the week, led by consumer staples. The CBOE Volatility Index, a measure of investor uncertainty, finished at 12.09.

Short-Term Technical Condition

Apparently, the short-term oriented trend of the market remains quite unchanged compared to last week as the market posted only small gains for the week. From a pure price point of view, the short-term oriented uptrend remains intact as long as the S&P 500 keeps trading above 1,971, which represents the bearish envelope line from the Trend Trader Index. Furthermore, we can see that the underlying trend-structure of the market remains quite positive, as both envelope lines of this reliable indicator are still drifting higher. This indicates that the market is still posting higher highs and higher lows, which is a typical pattern for a strong short-term oriented uptrend. This is also confirmed by the Advance-/Decline 20 Day Momentum Indicator, which is far away from being bearish. Only the bullish readings from the Modified MACD are a bit weak-kneed at the moment and, therefore, any stronger down-day could easily produce a bearish crossover signal within that indicator. Such a situation often occurs, when the price action of the market has slowed down for a couple of trading days. Nevertheless, as long as our other short-term oriented trend-indicators remain quite bullish, would not take a bearish Modified MACD too seriously (for now) as it would only indicate some signs of exhaustion. The situation would be slightly different if we saw further trend breaks within our short-term oriented trend-indicators in combination with deteriorating short-term oriented market breadth!

Right now, our entire short-term tape indicators remain supportive, although we can see a lot of non-confirmation within their readings. Especially, the Modified McClellan Oscillator Daily is indicating that the overall breadth momentum is slowing down, as its short-term oriented gauge is showing some form of exhaustion. This can be also seen if we focus on the percentage of stockss which are trading above their short-term moving averages (20/50). Both indicators remain bullish from a pure signal point of view, but their readings should be much higher if we consider the current level from the S&P 500. This is telling us that the participation within the current rally remains a bit weak-kneed. Basically, the same is true if we focus on the High-/Low Index Daily and the NYSE New Highs-/New Lows Indicator. Although the amount of new lows remains subdued, their bullish counterparts should be much higher if we consider the current levels from the S&P 500. With such weak, but bullish readings within our short-term oriented breadth indicators, it is highly likely that the market continues to crawl higher on a very slow pace. Therefore, we keep ignoring those bearish divergences, as long as we do not see any major/further bearish crossover signals within our short-term oriented trend- as well as breadth indicators!

According to our contrarian indicators, the situation also remains quite supportive for the time being. This is mainly due to the fact that the WSC Capitulation Index has not shown any signs of strengths yet, whereas the option market is still giving an all-clear signal for now. Only the Smart Money Flow Index is still showing a huge long-term bearish divergence to the Dow, which can be seen as red flag on the horizon. As already mentioned above, as long as the trend remains intact, it is too early to get concerned about those facts.

Mid-Term Technical Condition

Especially, the mid-term uptrend of the market remains well intact and is, therefore, giving no reason to worry right now. This is mainly due to the fact that our reliable Global Futures Trend Index keeps trading above its extremely bullish 90 percent threshold and is, therefore, confirming the current levels from the S&P 500. Moreover, it is worth to mention that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses should be limited in price and time (if additionally mid-term market breadth remains strong). Above all, the WSC Sector Momentum Indicator is indicating that most sectors within the S&P 500 remain in a strong mid-term uptrend, and, therefore, the current up-trend of the market looks quite healthy at the moment. If we have a closer look at our Sector Heat Map, we can see that technology and health care are/remain the strongest sectors within the S&P 500, whereas utilities and consumer staples remain the weakest ones.

More importantly, mid-term oriented market breadth still looks quite constructive and is, therefore, confirming the current mid-term oriented uptrend of the market. Nevertheless, we still can see a lot of bearish divergences within our mid-term oriented tape indicators and, therefore, the current uptrend looks a bit weak-kneed. Apart from the Modified McClellan Oscillator Weekly most of our mid-term oriented tape indicators finished the week nearly unchanged. The percentage of stockss which are trading above their mid-term moving averages (100/150) remain above their 50 percent bullish threshold, but like last week, their gauges should be much higher if we consider the current level from the S&P 500. This is signaling that the current rally is not really broad based in its nature. Basically, the same is true if we focus on the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators remain supportive, but their bullish gauges should be much stronger, if we consider the current level from the S&P 500. However, as long as the mid-term oriented uptrend 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.

Long-Term Technical Condition

The long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in force and, therefore, our long-term bullish outlook has not been changed so far. The WSC Global Momentum Indicator is trading at 70 percent, indicating that most local equity indices around the world markets (all denominated in USD) are still in a long-term oriented uptrend, plus the Global Futures Long Term Trend Index is still indicating a technical bull market. If we have a closer look at our Global Relative Strengths Indicator, we can see that the Global Emerging Markets remain the most attractive markets from an asset allocation point of view, whereas Commodities remain quite weak.More importantly, 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 57 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: the short-term situation remains unchanged compared to last week. Despite the fact that we can see a lot of non-confirmations within our short-term tape indicators, our bullish outlook has not been changed so. This is mainly due to the fact that our indicator framework still looks constructive for the time being and we do not fight an existing up-trend, which is still confirmed by bullish market breadth (at least from a pure signal point of view). Moreover, we got nearly the same set-up on a mid-term time horizon. As a matter of fact, we would advise our conservative members to hold their equity position as we do not fight an existing uptrend. Stay tuned!
The bottom line: the short-term situation remains unchanged compared to last week. Despite the fact that we can see a lot of non-confirmations within our short-term tape indicators, our bullish outlook has not been changed so. This is mainly due to the fact that our indicator framework still looks constructive for the time being and we do not fight an existing up-trend, which is still confirmed by bullish market breadth (at least from a pure signal point of view). Moreover, we got nearly the same set-up on a mid-term time horizon. As a matter of fact, we would advise our conservative members to hold their equity position as we do not fight an existing uptrend. Stay tuned!