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January 12. 2014

Market Review

All three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.2 percent over the week, to end at 16,469.99. The blue-chip index posted its second weekly loss in a row this year. The S&P 500 advanced 0.6 percent for the week to finish at 1,842.37. The broad index had its first weekly gain this year. The Nasdaq added 1 percent for the week to 4,174.66, its first weekly gain this year as well. Among the key S&P sectors, health care was the best weekly performer, while materials dragged the most. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, ended at 12.14. The index has fallen 12 percent this month and closed at the lowest level since August.

Short-Term Technical Condition

As already mentioned last week, the market appeared ready for taking a healthy breather/entering a consolidation period as the market has/had to work of this strong predominant bullish sentiment and, therefore, it was not really a big surprise that stocks finished the week with a mixed performance. The recent consolidation period caused a small deterioration in the readings of our short-term oriented trend indicators, as the Modified MACD has flashed a small bearish crossover signal last week. As already mentioned in our previous Market Comment, we are not taking a bearish Modified MACD too seriously, as long as we do not see further bearish crossover signals within our other short-term oriented trend indicators. From a pure price point of view, the short-term oriented uptrend has not been broken yet as the S&P 500 is still trading 28 points above the bearish threshold from the Trend Trader Index (1,814). In addition, it was quite encouraging to see that the Advance-/Decline 20 Day Momentum Indicator has reached its highest level since April 2013 and is, therefore, forming a quite bullish divergence to the market if we consider the current levels from the S&P 500. All in all, the short-term uptrend of the market still remains quite bullish biased and, therefore, we think it is still too early to get concerned about the recent weaknesses we have seen last week. It is not quite unusual, that some of our short-term trend indicators turn bearish during times, when the market is taking a healthy breather or has entered a short consolidation period. Anyhow, to evaluate if any upcoming consolidation period will turn out to be more corrective in its nature, short-term market breadth is key area of focus.

It was good to see that the Russell 2000 Index has hit a new all-time high last week, indicating that the broad market still looks extremely healthy for the time being. This coincides with the fact that our entire short-term oriented tape indicators have improved during the last couple of trading sessions and are, therefore, confirming the current uptrend of the market! Last week, we have seen an encouraging surge in the number of stockss which are hitting a fresh 52 week’s high, in combination with one of the lowest readings of stocks which are dropping to a fresh 52 week’s low, indicating an intensifying tape structure. As long as we do not see an increase in the amount of new lows or a bearish crossover signal within our High-/Low Index Daily, any upcoming consolidation period/weaknesses should be limited in price and time. The same is true if we have a look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that the percentage of stocks which are trading above their 20 day simple moving average came down a bit recently, both indicators are far away from being bearish and, therefore, the majority of all NYSE-listed stocks are per definition in a short-term uptrend. Furthermore, we can see, that the gauges of the Modified McClellan Oscillator Daily are smoothly trending higher, telling us that the momentum of advancing stocks is still outpacing the declining ones and, therefore, further gains are highly likely.

The situation on the contrarian side remains nearly unchanged compared to last week. Despite the fact that the WSC Capitulation Index has started to show some strengths recently, its gauge is still trading at quite low levels, indicating a risk-on equity environment, plus we are expecting the bullish 16 week cycle next week. On the other hand, we can see that the bearish divergence between the SMFI and the Dow has increased for the week, which can be seen as a quite threatening red flag on the horizon. Although the recent consolidation period has slightly damped the optimism among the crowd, most of our option based contrarian indicators are still trading in outright bearish territory right now (Daily Put/Call Ratio All CBOE Options, All CBOE Options Call/Put Ratio Oscillator Weekly and the Global Futures Put/Volume Ratio), leaving the markets quite vulnerable to short-term oriented disappointments. Normally it takes either a sharp wash-out day or a period of consolidation to work off such a high optimism. However, according to our investment process, we keep ignoring those bearish signals from our contrarian indicators as the current readings of our short-term oriented indicators are telling us that it is still a way too early to get bearish yet. Furthermore, as long as we do not see a short-term trend break or a huge decline in short-term oriented market breadth we think to see further strengths ahead, although we would not be surprised to see a short-lived period of consolidation and/or increased volatility within the next couple of trading days.

Mid-Term Technical Condition

Despite the fact that the market remains vulnerable for a short-term consolidation period, equities do not appear to be at risk of entering a high double digit drop or even a new cyclical bear market at the moment, as the mid-term uptrend of the market continued to strengthen. This is mainly due to the fact that the gauge from the Global Futures Trend Index has gained 500 basis points to 88.6 percent last week, and it has, therefore, reached the upper end of its bullish consolidation area, which can be seen as quite bullish signal. Normally, as long as the gauge of this reliable indicator remains above its 60 percent threshold, any upcoming weaknesses should only be seen as a temporary consolidation period within the ongoing bull market. In addition, the WSC Sector Momentum Indicator is far away from being bearish, indicating that most sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend. As per last weeks’ report, healthcare, consumer discretionary and industrials are/remain the strongest sectors right now, whereas utilities are 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.

More importantly, mid-term oriented market breadth is still confirming this strong mid-term oriented trend as mid-term oriented up-volume has increased further for the week and is, therefore, trading at quite outright bullish levels at the moment. Moreover, it was quite encouraging to see that the Advance-/Decline Index Weekly has flashed a small bullish crossover signal last week and it is, therefore, diminishing its bearish divergence to the actual level from the S&P 500. In addition, the Modified McClellan Oscillator Weekly has started to bottom out, whereas the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remain stable at 71 and 73 percent, respectively, indicating that the mid-term oriented market internals are giving no reason to worry right now. All in all, as long as we do see further improvements within our mid-term oriented indicator framework, we think any upcoming short-term oriented trend-break should be limited in price and time!

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,, 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 58 percent, indicating that the majority 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 still catching 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 continued to show a widening bullish gap last week.

Bottom Line

The bottom line: as the short-term uptrend of the market has slightly started to deteriorate, in combination with quite concerning readings within our contrarian indicators, we think it is possible to see increased volatility ahead. Nevertheless, given the fact that our entire short- to mid-term trend- as well as breadth indicators remain outright strong at the moment, we think that any upcoming consolidation period/weaknesses should be limited in price and time. Therefore, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see further breaks within our short-term trend-indicators or a significant drop within short-term market breadth. Stay tuned!