December 04. 2016

Market Review

U.S. stocks finished the week with a mixed performance. For the week, the Dow Jones Industrial Average gained 0.1 percent to close at 19,170.42; its fourth consecutive weekly rise. The S&P 500 booked a weekly loss of 1.0 percent to end at 2,191.95. The Nasdaq dropped 2.7 percent for the week to end at 5,255.65. Both the S&P 500 and the Nasdaq snapped three-week winning streaks. Among the key S&P sectors, energy was the top performer and technology the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower, near 14.1

Short-Term Technical Condition

The short-term oriented uptrend of the market remains quite unchanged compared to last week. The S&P 500 is still trading 24 points above the bearish threshold from the Trend Trader Index. This is telling us that (from a pure price point of view) the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.167. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they have not flashed a threatening bearish crossover signal so far. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator closed at quite encouraging bullish levels (and has, therefore, formed a small bullish divergence recently). But on the other hand we can see that the readings from the Modified MACD are quite stretched 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 is slowing down/taking a breather, especially after a stronger and quite impulsive up-move. Anyhow, 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 (a healthy) exhaustion. The situation would be slightly different if we saw further stronger trend breaks within our remaining short-term oriented trend-indicators in combination with deteriorating short-term oriented market breadth all across the board!

Despite the fact that the recent momentum slow-down weakened the bullish readings from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, the overall short-term oriented tape condition still looks quite constructive at the moment. This is mainly due to the fact that the readings from the High-/Low-Index Daily and the NYSE New HighsNew Lows Indicator look outright bullish at the moment, indicating that the market internals are still looking quite healthy at the moment. This view is also confirmed if we have a look at the percentage of stockss which are trading above their short-term oriented moving average (20/50). Despite the fact that they have lost some steam recently, they are still trading at quite encouraging levels (65/70 percent).

From a pure seasonal point of view, a short-term pullback into mid-December looks quite likely before we could expect the typical Christmas rally. To be more precise, December tends to be one of the best months for equities (please have a closer look at the average monthly performance charts within our cycles section). Nevertheless, we often see a pullback in the first half of December, before the market starts its typical year-end rally. This early December pullback (about 2 percent on average) is often the result from the Thanksgiving rally, which puts the market in a quite overbought position at the beginning of the month. With the current technical setup (quite stretched short-term indicators), together with quite non-confirmative readings within our Smart Money Flow Index, the Uptick-/Downtick Ratio and the Equity Options Call-/Put Ratio Oscillator Weekly, such a scenario looks quite likely. On the other hand, we can see that our WallStreetCourier Index and the WSC Capitulation Index are still indicating a risk-on scenario (on a short-term time horizon) and, therefore, the impact of such a pullback should be limited (at least from a pure contrarian point of view).

Mid-Term Technical Condition

Despite the fact that some typical seasonal driven down-testing looks quite possible on a very short-time frame, equities do not appear at risk for a stronger correction at the moment. This is mainly due to the fact that our reliable Global Futures Trend Index is trading in the upper area of its bullish consolidation range (82 percent), which is telling us that the mid-term oriented up-trend of the market remains well in force. In addition, we can see that the WSC Sector Momentum Indicator is also trading at quite solid levels, indicating that most sectors of the S&P 500 remain in a mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of most sectors remains above the one from riskless money market. Only health care and consumer staples have a lower scoring and, therefore, it is too early to bet on a sustainable trend-change in that sector.

The mid-term oriented market breadth condition looks quite supportive at the moment, although the recent momentum slow-down has definitely left its mark on some of our tape indicators. This becomes quite obvious if we focus on our Advance-/Decline Index Weekly, which turned slightly bearish again last week, whereas the Modified McClellan Oscillator Weekly finished nearly unchanged for week. On the other hand, we can see that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) as well as the Upside-/Downside Volume Index Weekly kept trading at quite solid supportive levels, although their bullish gauges slightly decreased for the week. Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they all have lost some steam at quite bullish levels recently. So despite the fact that our entire mid-term oriented market breadth indicators decreased for the week, most of them are still trading at quite bullish/supportive levels and, therefore, our strategic bullish outlook remains unchanged.

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. However, we can see that the global bull market remains quite selective as only 40 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. In contrast, the relative strength of all risky markets improved last week if we consider the Global Relative Strength Indicator. This might be an indication that the global equity markets are getting ready for the year-end rally. Moreover, we saw some improvements within our long-term oriented breadth indicators. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly might flash a bullish crossover signal soon, whereas the percentage of stockss which are trading above their 200 day simple moving average (200) are also trading at sound bullish levels. The same is true if we focus on the High-/Low Index Weekly, as its readings also improved last week.

Bottom Line

Given the quite stretched readings within some of our short-term oriented indicators, in combination with quite negative seasonal patterns a period of consolidation and/or increased down-testing into mid-December cannot be ruled out at the moment. However, given the fact that our entire short- to long-term oriented indicators remain quite supportive, together with quite solid readings within our mid-term oriented trend-indicators, we think any upcoming early December weaknesses should be limited in price and time. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside! Stay tuned!