November 09. 2014

Market Review

U.S. stocks finished the week with modest gains and with record highs for two of the three main benchmarks. For the week, the Dow Jones Industrial Average added 1.0 percent to 17,573.93. The S&P 500 advanced 0.7 percent to 2,031.92 for the five days. Both, the Dow and S&P 500, posted their next record highs. The Nasdaq closed at 4,632.53, remaining in positive turf for the week. Nearly all key S&P sectors ended in positive territory, led by, consumer staples. The CBOE Volatility Index, a measure of investor uncertainty, dropped 6.5 percent last week to 13.12, the lowest level since Sept. 19.

Short-Term Technical Condition

The short-term uptrend of the market continued to gain more bullish ground last week. This is mainly due to the fact that the S&P 500 managed to close 92 points above the bearish threshold from the Trend Trader Index. This indicates that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 1,939. Furthermore, we can see that both envelope lines of this reliable indicator have slightly started to drift higher on a fast pace. This is telling us that within the past 20 days we saw higher highs and higher lows, which is another typical pattern for a strong short-term oriented uptrend. The same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of a threatening bearish crossover signal yet. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite encouraging levels and has, therefore, clearly confirmed the recent levels from the S&P 500. Obviously, from a pure signal point of view, our entire short-term oriented trend indicators are signaling an outright strong short-term oriented uptrend at the moment. This is not a big surprise at all, as the market rallied on a very fast pace within the last three weeks. However, if we focus on the absolute levels of these reliable indicators, we can see that the short-term oriented gauge from the Modified MACD as well as the Advance-/Decline 20 Day Momentum Indicator reached already extreme bullish levels. As those indicators tend to be mean-reverting, we get increasingly cautious for the short-term. Nevertheless, we stick to the bullish camp for now as we never fight an existing up-trend.

As a matter of fact, short- to mid-term oriented market breadth remains key area of focus. Right now, our entire short-term oriented tape indicators are confirming the current short-term oriented uptrend of the market. The current trend participation of all NYSE listed stocks remains quite bullish, as the percentage of stocks which are trading above their short-term oriented moving averages (20/50) remain well above their bearish 50 percent threshold. In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are smoothly trending higher, indicating that the underlying breadth momentum of the broad market remains outright constructive at the moment. The same is true, if we focus on the High-/Low Index Daily as its bullish gauge is trading well above its bearish counterpart. This is mainly due to the fact that the total amount of all NYSE-listed stocks, which reached a fresh 52 weeks high, have recovered significantly during the last three weeks. Nevertheless, the bearish divergences we mentioned last week have not been sorted out so far, although the S&P 500 is trading at record levels. Especially, the bullish gauge from the High-/Low Index Daily is trading well below its former high in mid-July, whereas the percentage of stocks which are trading above their 50 day moving average should be much stronger, if we consider the current levels from the S&P 500. Right now, it?s a bit too early to get concerned about those facts but we will monitor their developments quite closely within the next couple of trading sessions as it will tell us if the current short-term oriented uptrend will remain intact.
As a matter of fact, short- to mid-term oriented market breadth remains key area of focus. Right now, our entire short-term oriented tape indicators are confirming the current short-term oriented uptrend of the market. The current trend participation of all NYSE listed stocks remains quite bullish, as the percentage of stocks which are trading above their short-term oriented moving averages (20/50) remain well above their bearish 50 percent threshold. In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are smoothly trending higher, indicating that the underlying breadth momentum of the broad market remains outright constructive at the moment. The same is true, if we focus on the High-/Low Index Daily as its bullish gauge is trading well above its bearish counterpart. This is mainly due to the fact that the total amount of all NYSE-listed stocks, which reached a fresh 52 weeks high, have recovered significantly during the last three weeks. Nevertheless, the bearish divergences we mentioned last week have not been sorted out so far, although the S&P 500 is trading at record levels. Especially, the bullish gauge from the High-/Low Index Daily is trading well below its former high in mid-July, whereas the percentage of stocks which are trading above their 50 day moving average should be much stronger, if we consider the current levels from the S&P 500. Right now, it?s a bit too early to get concerned about those facts but we will monitor their developments quite closely within the next couple of trading sessions as it will tell us if the current short-term oriented uptrend will remain intact.

From a pure contrarian point of view, the market managed to work off the recent predominant pessimism among investors, as the z-score of the Daily Put/Call Ratio All CBOE Options remains within its normal range. However, we would not be surprised if this gauge will move into bearish territory soon as the amount of bears on Wall Street dropped to the lowest level since 2012. This indicates that a lot of investors are already heavily invested, leaving no purchasing power left to push prices higher on a mid-term time frame. As a matter of fact, the AII Bull-/Bear Spread Indicator flashed a sell signal last week! In addition, we can see that the Smart Money Flow Index is far away from confirming the recent high from the Dow Jones Industrial Average. In the past, such a situation often led to a stronger pullback and, therefore, this is another piece of evidence for our corrective rebound scenario, which we mentioned over the last couple of weeks. However, on a very short-time frame, the market remains in an all-clear environment as the gauge from the WSC Capitulation Index has not shown any signs of strength yet, plus the short-term oriented trend is still supported by short-term market breadth.

Mid-Term Technical Condition

More importantly, the mid-term oriented uptrend of the market continued to strengthen last week, as the gauge of our reliable Global Futures Trend Index increased by 300 basis points to 80 percent. As already mentioned a couple of times, as long as its gauge remains above 60 percent, 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. Nevertheless, the indicator remains in the middle of its bullish consolidation area and is, therefore, definitely not confirming the current levels from the S&P 500. This can be seen as a huge red flag on the horizon, as from a pure technical point of view, the market remains in a consolidation/bounce mode. Moreover, we can see that the gauge lost some steam recently and if this trend continues, we have definitely the clear confirmation for our multi-week corrective rebound scenario, we mentioned last week. If we analyze the current trend participation of all major key sectors within the S&P 500, we can see that most industries remain in a mid-term oriented uptrend, as the gauge from the WSC Sector Momentum is trading well above its bearish threshold. Nevertheless, its gauge should also be much higher, if we consider the current levels from the S&P 500. This can be also seen if we focus on our Sector Heat Map, as the relative strength from riskless money grew to 10 percent although we saw new all-time highs last week! This is another indication that the current rally could turn out to be part of a complex and corrective rebound pattern.

The most important evidence for such a scenario is the fact that our entire mid-term oriented breadth indicators remain bearish or are not confirming the current levels from the S&P 500. In particular, the bearish readings from the Upside-/Downside Volume Index Weekly continued to strengthen last week, whereas the Advance-/Decline Index Weekly flashed a small bearish crossover signal last week. This indicates an extremely fragile tape structure at the moment and, therefore, the risk of a fast paced pullback is increasing. Moreover, we would be quite surprised to see further strong sustainable gains ahead as long as both gauges remain depressed! Another concern is the fact that nearly all advance decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not confirmed the latest high from the S&P 500. This indicates that only heavy weighted stocks are pushing major averages higher, which can be observed within the S&P 500 versus Russell 2000 Ratio. The same is true if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Despite the fact that both gauges remain bullish from a pure signal point of view, their readings are showing a huge non-confirmation at the moment. This is telling us that the current trend participation within the current rally remains outright weak-kneed. Such a situation can never be sustainable in the long-run! Another important fact is that the Modified McClellan Oscillator Weekly remains quite bearish, although it has shown some signs of bottoming out recently.
The most important evidence for such a scenario is the fact that our entire mid-term oriented breadth indicators remain bearish or are not confirming the current levels from the S&P 500. In particular, the bearish readings from the Upside-/Downside Volume Index Weekly continued to strengthen last week, whereas the Advance-/Decline Index Weekly flashed a small bearish crossover signal last week. This indicates an extremely fragile tape structure at the moment and, therefore, the risk of a fast paced pullback is increasing. Moreover, we would be quite surprised to see further strong sustainable gains ahead as long as both gauges remain depressed! Another concern is the fact that nearly all advance decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not confirmed the latest high from the S&P 500. This indicates that only heavy weighted stocks are pushing major averages higher, which can be observed within the S&P 500 versus Russell 2000 Ratio. The same is true if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Despite the fact that both gauges remain bullish from a pure signal point of view, their readings are showing a huge non-confirmation at the moment. This is telling us that the current trend participation within the current rally remains outright weak-kneed. Such a situation can never be sustainable in the long-run! Another important fact is that the Modified McClellan Oscillator Weekly remains quite bearish, although it has shown some signs of bottoming out recently.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains quite unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, whereas other global market indexes are still trading well below their long-term oriented trend-lines. Therefore, the WSC Global Momentum Indicator still remains quite bearish as only 28 percent of all global equity markets are still within a long-term oriented up-trend. This picture is widely confirmed by the Global Relative Strength Index, which indicates that the relative strengths of U.S. Treasuries are higher than any other risky market at the moment, whereas U.S. equities are also holding up quite well. This is another indication that the global bull-market has reached a quite mature stadium. More importantly, long-term oriented market breadth remains quite bearish, which is another indication for a mature rally. Although, the Modified McClellan Volume Oscillator Weekly showed some signs of bottoming out, its readings are far away from crossing any bullish crossover signal, whereas the bearish readings from High-/Low Index Weekly remain almost unchanged compared to last week. So all in all, we have received even more confirmation that the current bounce might be just the part of a complex multi-week rebound pattern which could lead to renewed weaknesses afterwards.

Bottom Line

The overall outlook remains unchanged compared to last week. After we have successfully side-stepped the latest correction, it was one of our key calls that 1,820 represented an important low and, therefore, we advised our members to buy into weaknesses as we had expected to see at least a retest of the old September top. Moreover, we mentioned that such a move would only be part of a corrective multi-week rebound pattern and, therefore, the risk of another down-leg within that year was still given! Despite the fact that our entire short- to mid-term trend indictors got back on track, we can still see a lot of non-confirmation and even some bearish signals within our mid- to long-term oriented breadth indicators (which is in line with our rebound scenario). Such a situation can never be sustainable over the long run and either we see a strong recovery in the readings of our mid-term oriented breadth indicators (not our preferred scenario) or the market will face another strong down-leg once we see a break within our short- to mid-term oriented trend indicators. However, as the short- to mid-term oriented trend (Global Futures Trend Index above 60 percent) remains intact, we do not fight an existing trend and, therefore, we remain bullish for the time being. Nevertheless, we will monitor our indicators quite closely over the next couple of days/weeks as they will tell us when it is time to pull the trigger again. From a pure trading point of view, we would advise our aggressive traders to keep their long positions as long as the S&P 500 trades above 1,995 and as long as our short-term indicators remain constructive. In detail, a break of 1,995 would pave the way towards 1,945/1,920 into deeper November, whereas we think the market is becoming increasingly capped on the upside (2,040/2,050). As a matter of fact, conservative members should remain long as long as the Global Futures Trend Index keeps trading above 60 percent. Nevertheless, it would make sense to adjust their stop-loss limit to around 1,985. Stay tuned!