May 17. 2015

Market Review

The major benchmarks drifted lower for much of the week but ended modestly higher thanks to a strong and broad rally on Thursday. As a matter of fact, U.S. stocks finished the week with small gains. The Dow Jones Industrial Average added 0.5 percent for the week to end at 18,272.62. The S&P 500 advanced 0.3 percent from last Friday?s close to finish at 2,122.71, a fresh record. The Nasdaq climbed 0.9 percent over the week to 5,048.29. Most key S&P sectors finished higher, led by consumer staples, while energy and financials ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.

Short-Term Technical Condition

The short-term oriented uptrend of the market remains intact as the S&P 500 managed to close 28 points above the bearish threshold from the Trend Trader Index. Consequently, the price driven short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,094. In addition, the Modified MACD as well as the Advance-/Decline 20 Day Momentum Indicator have shown some strength recently, as both indicators managed to flash a bullish signal on Friday. This indicates that the short-term oriented trend momentum of the market turned slightly positive last week. Nevertheless, both signals are definitely too weak to take them too seriously at the moment as any stronger down-day could easily produce another bearish signal within those two indicators. Moreover, we can see that their readings should be much stronger, especially if we consider the current levels from the S&P 500.

Basically, the same is true if we focus on short-term market breadth. Last week, we saw a small reduction in the number of stockss which are hitting a fresh yearly low, together with a small increase of stocks which were pushed to a new yearly high. As a matter of fact, the High-/Low Index Daily flashed a small bullish crossover signal past week. Although this bullish crossover signal can be seen as a quite encouraging green shoots of recovery, the total amount of new highs should be much higher, given the fact that the S&P 500 reached a new all-time high last week. The same is true if we have closer look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact that both indicators have been pushed back into bullish territory (above 50 percent), their gauges remain quite depressed. This indicates that the broad market is still lagging behind. In such a scenario heavy weighted stocks are pulling most indices higher, while less weighted stocks (the majority in number terms) remain quite weak. Another concerning tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators have not shown any signs of strength yet, telling us that the overall breadth momentum of the market still remains quite damaged at the moment.

From a pure contrarian point of view, the situation looks quite mixed at the moment. Market participants are purchasing call options on very fast pace and, therefore, the OEX Options Call-/Put Ratio Oscillator remains bearish, whereas the All CBOE Options Call-/Put Ratio Oscillator flashed a new sell signal last week. Moreover, we can see that the WSC Capitulation Index is still indicating a quite risky market environment at the moment. On the other hand, we can see that our Program Trading Buy-/Sell Spread Indicator turned bullish, plus the NYSE Members Debt in Margin Accounts has not shown any signs of non-confirmation so far. All in all, the technical picture of the market has slightly improved compared to last week as almost our entire short-term oriented trend- as well as breadth indicators got back on track. Nevertheless, their readings remain a bit too weak to be taken too seriously at the moment.

Mid-Term Technical Condition

The situation on a mid-term time horizon looks also quite mixed at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within its bearish trading range and is, therefore, not confirming the current levels from the S&P 500! Normally, as long as the gauge does not close above its 60 percent bullish threshold (in combination with weak mid-term oriented market breadth), the risks of a stronger pullback/correction remain quite high. Therefore, it was good to see that the gauge from the Global Futures Trend Index has shown some strength recently as it is just shy trading below its bullish threshold. If this trend continues, the market will have good chances to punch its way higher. But as long as the gauge keeps trading below 60 percent, we remain cautious. However, from a pure price point of view, most underlying sectors within the S&P 500 remain in a mid-term oriented uptrend and, therefore, the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can be also seen if we focus on our Sector Heat Map, as the relative strength score of riskless money market remains below most other major industries.

More importantly, the readings from our mid-term oriented market breadth indicators remain quite mixed. Although the market is trading at record levels, the Modified McClellan Oscillator Weekly is about to roll over into bearish territory. This indicates that the overall breadth momentum of the market remains outright weak at the moment. This is not a big surprise at all, as the current rally is mainly dominated by large caps at the moment. This can be also seen if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Despite the fact that they remain bullish from a pure signal point of view, their readings should be much higher if we consider the current levels from the S&P 500. Anyhow, the most important tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators gained quite bullish ground last week, indicating that the demand has started to increase last week.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 70 percent of all global markets remain within a long-term oriented uptrend. Unchanged compared to last week, we can see that the relative strengths of most risky markets remains quite weak, which is underlining our short- to mid-term oriented view. However, right now long-term market breadth is giving no reason to worry and, therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the the number of stockss which are trading above their longer-term oriented moving averages (200)!

Bottom Line

The bottom line: despite the fact that we saw some encouraging improvements within our indicator framework, we cannot ignore the fact that the technical picture of the market still looks quite damaged at the moment. This is mainly due to the fact that the broad market is still lagging behind, whereas only large caps are pushing major indexes higher. Such a large cap rally can never be sustainable over the long run. So either we see a healthy rotation back into small caps within the next couple of days/weeks (which will lead to significant improvements within our short- to mid-term tape indicators) or those divergences are piling up, which will lead to a significant sell-off. Consequently, it is still too early to sell and too late to buy. As a matter of fact we remain cautiously bullish at the moment but we would advise our conservative members to keep their stop-loss limit around 2,070. Stay tuned.