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October 18. 2015

Market Review

U.S. stocks finished another week of gains. The Dow Jones Industrial Average advanced 0.8 percent over the week to close at 17,215.97. The S&P 500 eked out a gain of 0.9 percent for the week to finish at 2,033.11. The Nasdaq rose 1.2 percent from last Friday’s close and ended at 4,886.69. Among the key S&P sectors, utilities was the greatest gainer for the week, while materials and industrials were the only negative sectors for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 15.

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 84 points above the bearish threshold from the Trend Trader Index! This indicates that from a pure price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not close below 1,949. Moreover, we can see that both envelope lines of that reliable indicator have started to drift higher as well, indicating that this threshold is highly likely to increase as well on a fast pace. This is a typical pattern for a strong short-term oriented up-trend. The same is true if we focus on the Modified MACD, which continued to show a widening bullish gap, after it had flashed a bullish crossover signal almost 3 weeks ago. Basically, we receive the same readings within our Advance-/Decline 20 Day Momentum Indicator, which finished the week at quite bullish levels (although it showed a small non-confirmation on Friday).

Right now, this small bearish divergence can be ignored at the moment, as short-term oriented market breadth continued to improve significantly last week. As a matter of fact, our entire short-term oriented tape indicators are confirming the current short-term oriented up-trend of the market. Especially, the strong surge in the short-term gauge from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily is telling us that the underlying tape momentum continued to gain even more bullish ground last week! On top of that, we can see that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) kept trading at quite encouraging levels as both finished the week clearly above their bearish 50 percent threshold. As a matter of fact, the recent recovery looks quite sustainable (for the time being) given the quite broad based participation. Above all, we can see that the High-/Low Index Daily also managed to flash a small bullish crossover signal last week. But we should not forget that this signal was only caused by the fact that we saw a strong reduction in the amount of new yearly lows instead of a major increase in the amount of new yearly highs. As a matter of fact, the bullish indicator is somehow forming a bearish divergence. In such a situation, the market often tends to take a healthy breather. Actually, it could be, therefore, possible that the market might take a healthy breather on a very short time frame.

From a pure contrarian point of view, we can see that the market worked off that strong predominant pessimism among the option market as the z-score of the Daily Put/Call Ratio All CBOE Options dropped within its normal range. However, if we consider the recent speed of this drop, it also tells us that the crowd is slightly getting greedy again. Therefore, it is not a big surprise at all that the All CBOE Options Call-/Put Ratio Oscillator Weekly and the Global Futures Put/Volume Ratio Oscillator Weekly dropped slightly into bearish territory as they measure the overall momentum of calls being bought. Right now, this is not a big concern at all, as overall market sentiment still remains outright supportive, indicating that there is still much room for improvement until the bullish sentiment among investors will reach extreme values. For that reason we strongly believe that the market has priced in a lot of bad news already, leaving the market better positioned to rally on positive surprises! Above all, we can see that the WSC Capitulation Index is still indicating a risk-on environment, whereas the Smart Money Flow Index is still showing a huge bullish divergence to the current levels from the Dow. So if we consider all the signals around, it could be, therefore, possible to see a small period of weaknesses/consolidation ahead, before further strength can be expected.

Mid-Term Technical Condition

However, the most important mid-term oriented trend signal is coming from the Global Futures Trend Index. As already mentioned last week, from a formal point of view, the any correction cycle will not be over as long as its gauge keeps trading below its 60 percent threshold! Therefore, it was good to see that its gauge managed to pass that important hurdle on Thursday, indicating that the recent rally is definitely part of a larger recovery rather than a corrective rebound. If we analyze the current trend participation of all major key sectors within the S&P 500, we can see that most industries showed a strong form of a positive momentum recently. This is mainly due to the fact that the gauge from the WSC Sector Momentum gained almost 20 percent last week. So, if this trend continues it might be just a question of time until we receive a bullish signal within that indicator too. This can be also seen if we focus on our Sector Heat Map, as the relative strength from riskless money market dropped significantly last week. As a consequence, many industries have started to get back on track from a pure trend-point of view.

More importantly, mid-term oriented market breadth continued to regain strength last week and, therefore, our bullish recovery scenario has not been changed so far. 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) showed major signs of recovery last week (although both indicators still remain bearish from a pure signal point of view). Moreover, it was quite encouraging to see that mid-term oriented up-volume continued to strengthen 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! Nevertheless, the absolute levels of those important tape indicators still remain a bit depressed. Therefore, we think the market will not have enough power for the time being to rally to new highs immediately. Thus, it could be possible that the pace of the recent recovery is likely to slow down (period of consolidation) until those divergences will be sorted out. Nevertheless, as long as we see an improvement within these indicators, the current recovery is not in danger at all.

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. Above all, we can see that only 13 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. Nevertheless, we saw some small signs of improvements last week. This is mainly due to the fact that the relative strength scores of most risky markets continued to strengthen last week. Above all, we can see that the WSC Global Momentum Indicator showed also some small signs of recovery. This is another piece of evidence that the global rout might have come to an end. 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 last week.

Bottom Line

After we have successfully side-stepped the latest correction, it was one of our key calls that 1,871.91 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 period of a healthy consolidation ahead. 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!