December 29. 2013

Market Review

All three major U.S. averages finished the holiday-shortened week with solid gains. The Dow Jones Industrial Average added 1.6 percent to close the week at 16,478.41. The blue-chip benchmark advanced for a second week and is up more than 25% in the year-to-date. The Dow is on track for its biggest annual gain since 1996. The S&P 500 increased 1.3 percent to 1,770.61 for the week, its second weekly gain as well. The benchmark equity gauge has advanced 29 percent in 2013, putting it on course for its biggest annual rally since 1997. The Nasdaq climbed 1.3 percent to 4,156.59 and has soared 38 percent in 2013. Most key S&P sectors finished higher, led by materials, while utilities ended in the red. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, closed at 12.46. The gauge has dropped 31 percent this year, the largest annual decline since 2009.

Short-Term Technical Condition

Last week we highlighted the fact that it is highly likely that the market will follow its typical seasonal pattern, which should push the S&P 500 towards 1,820/1,840 by the end of the year. Moreover, we mentioned that such a move is just part of a larger top-building process into January, if we do not see significant improvements within our indicator framework, especially on a mid-term time horizon. Despite the fact that we have expected to see slightly more volatility last week, the S&P 500 has followed its typical December cycle and has exactly reached the upper end of our initial year end price target of 1,820/1,840.

Not surprisingly, the short-term oriented up-trend of the market has continued to gain bullish ground last week, as the S&P 500 is now trading 45 points above the bearish threshold from the Trend Trader Index. In other words, the market is per definition in strong short-term oriented up-trend as long as the broad equity benchmark does not close below 1,796. Furthermore, we can see that both envelope lines of this reliable indicator are slightly drifting higher, which can be seen as another positive trend-signal for market technicians. Another small bullish signal is coming from the Advance-/Decline 20 Day Momentum Indicator, which has been pushed back into bullish territory last week, indicating that the underlying price momentum of the market has slightly started to regain some strength recently. However, the most important short-term trend signal is coming from the Modified MACD, which has flashed a bullish crossover signal on Wednesday and, therefore, it was not a big surprise that the market rallied for the rest of the week. Despite the fact that our entire short-term trend indicators are back on track, we are still concerned about the fact that the gauge from the Advance-/Decline 20 Day Momentum Indicator has not confirmed the recent break-out by the S&P 500. This is telling us that the underlying momentum of the market is quite weak-kneed, which can be seen as a red flag on the horizon, as momentum tends to break before prices do!

Anyhow, we keep ignoring this bearish divergence for the time being, as short-term market breadth was recovering quite significantly last week. Right now, there are hardly any stocks around which are hitting a fresh 52 week’s low, plus the number of stockss which have reached a new high last week have confirmed the recent break-out by the S&P 500. Short-term up-volume is trading well above short-term down-volume, plus our reliable Modified McClellan Oscillator Daily has continued to show a widening bullish gap, indicating that the market internals have strengthened! If we have a closer look at the underlying short-term trend structure of the market, we can see that the current trend participation remains quite broad based as percentage of stockss which trading above their short-term oriented moving averages (20/50) are far away from being bearish and, therefore, further gains into early January can be expected, from a pure market breadth point of view.

If we focus on our contrarian indicators, we can see that the WSC Capitulation Index has dropped back to normal levels, plus we are expecting the bullish 21- and 64 week cycle next week and, therefore, another short-term oriented rally into the years end is highly likely. Nevertheless, we can see that the recent rally has pushed the Daily Put/Call Ratio All CBOE Options, Global Futures Put/Volume Ratio and the readings from our sentiment indicators into excessive optimism zones, leaving the markets extremely vulnerable for disappointments. Furthermore we can see that the small fry is aggressively chasing the market higher, as the Odd Lots Purchases/Nyse Volume has reached the highest level since years, whereas Smart Money is selling into strengths, indicating troubles ahead, once we will see a short-term oriented trend break and/or a huge decline in short-term oriented market breadth!

Mid-Term Technical Condition

The mid-term technical trend-picture of the market has slightly improved, as the gauge of our reliable Global Futures Trend Index has been pushed back within its bullish 60 percent threshold last week and, therefore, the risk of a fast paced correction has diminished (at least from a trend-point of view). Nevertheless, the gauge of this reliable indicator should be much higher, if we consider the current level from the S&P 500, which is another early indication for a intermediate market top in Q1. Anyhow, the WSC Sector Momentum Indicator is telling us that most sectors within the S&P 500 remain in a strong mid-term uptrend, since the gauge of this reliable indicator is trading on its upper end and is, therefore, far away from being bearish. As per last weeks’ report, healthcare, consumer discretionary and industrials are/remain the strongest sectors right now, whereas the utility sector is highly likely to continue to underperform the market, since its relative strength score is trading far below from the relative strengths score of the S&P 500.

If we have a look at mid-term oriented market breadth, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) have been pushed back to almost 75 percent and are, therefore, confirming the current levels from the S&P 500, plus it was quite encouraging to see that the current rally is well supported by mid-term oriented up-volume. Nevertheless, the Modified McClellan Oscillator Weekly still remains bearish from a pure signal point of view, although we have seen some improvements last week, since its short-term gauge has slightly started to increase for the week. What we worry the most at the moment is the fact that mid-term oriented advancing issues are just shy trading above mid-term oriented declining issues. This is telling us that the current rally has strongly started to lose steam, which is another indication for an important market top within Q1. All in all, we see quite encouraging readings within our mid-term oriented trend-indicators whereas mid-term oriented market breadth has started to improve as well, although we do still see huge non-confirmations in our reliable Advance-/Decline Index Weekly. In such a situation, we do not fight the trend but we will switch to the cautious/bearish side, if we see a pull-back of the Global Future Trend Index into the bearish trading range (in combination with deteriorating mid-term oriented market breadth).

Long-Term Technical Condition

As per last week’s report, 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 global trend participation remains quite broad base as the moment as the WSC Global Momentum Indicator is trading at 62 percent, indicating that the vast of all global market ETFs around the world are in a strong long-term uptrend, while the Global Futures Long Term Trend Index is still indicating a technical bull market. Moreover, according to our Global Relative Strengths Indicator, Europe is the leading market in terms of momentum while the U.S. is about to catch up fast in relative terms. If we focus on long-term market breadth, we can see that the percentage of stockss which are trading above their 200 day simple moving average remain outright bullish, as 74 percent of all NYSE listed stocks remain in a long-term uptrend at the moment. Furthermore, the High-/Low Index Weekly remains quite strong although the amount of new long-term highs have stalled recently, plus the Modified McClellan Volume Oscillator Weekly has flashed a small bullish crossover signal last week.

Bottom Line

The bottom line: on a very short-time frame, the market is heavily overbought and, therefore, the pace is likely to slow down a bit in the next couple of trading sessions. Although we have received quite concerning signals from our contrarian indicators, we remain bullish for the short-term since the short-term uptrend of the market has not been broken yet. Conservative investors should remain invested in equities as we think it is still a bit too early to take the chips from the table. Nevertheless, they should adjust their safety stop-loss limit around 1,760 just in case the market does not follow a typical path of a top-building process into Q1. Stay tuned!