March 06. 2016

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 2.2 percent over the week to close at 17,006.77. The S&P 500 jumped 2.7 percent for the week to finish at 1,999.99. Both the Dow and the S&P 500 closed at two-month highs Friday, while posting their third consecutive weekly rise. The Nasdaq advanced 2.8 percent over the past five days to end at 4,717.02. All key S&P sectors ended in positive territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed around 16.8.

Strategy Review

After we had successfully predicted/side-stepped the January correction, it was one of our key calls that 1,810 represented an important low, as our indicator framework was telling us that the market had definitely hit rock bottom. As a consequence, we advised our members to get back into the market quite quickly afterwards. Moreover, we said that from a pure seasonal point of view (Presidential Cycle), it could be possible that such a low/bottom could also only act as basis for another stronger rally (even towards new highs) into April, before we might could see another significant correction leg into summer, which could then represent a major bottom in risky assets. As those historical patterns should only be seen as a rough guideline instead of a precise trading plan, our indicator framework remains key area of focus. So if our cyclical roadmap (Presidential Cycle) is correct, the current rally should produce a growing number of bearish divergences within our indicator framework over the next couple of weeks. If this is not the case, any upcoming weaknesses should just be seen as common 3-5 percent pullback within an ongoing bull-market.

Short-Term Technical Condition

Right in line with our recent call, 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 almost 100 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 1,901. Furthermore, we can see that both envelope lines of this reliable indicator have also 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!

Basically, the same is true if we focus on short-term market breadth. Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain even more bullish ground last week, indicating that the underlying breadth momentum of the broad market remains outright strong at the moment. This important fact is also confirmed by the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50). Both indicators finished the week at quite encouraging levels, indicating a healthy rotation back into small caps! As a matter of fact both gauges are, therefore, confirming the break-out by the S&P 500, as the participation of all NYSE listed stocks within the recent rally looks quite board based. Above all, we can see that the High-/Low Index Daily also managed to flash a small bullish crossover signal last week. Despite the fact that this can be seen a quite encouraging tape signal, we should not forget that the total amount of new highs should be a bit higher, if we consider the magnitude of the recent rally. However, as long as the total amount of new lows remains depressed, in combination with outright strong bullish readings within our remaining short-term oriented breadth indicators, it is a way too early to get concerned about that fact.

The situation on the contrarian side remains almost unchanged compared to last week. The magnitude of the recent rebound surprised a lot of money managers/non-WSC members and, therefore, they are still getting forced to increase their equity exposure, which fuels the current rally even more. Above all, we can see that our reliable Smart Money Flow Index still remains outright bullish, another quite encouraging sign that the current rally will continue for a while. However, given the fact that the market is extremely overbought (Upside-/Downside Ratio Daily, Advance-/Decline Ratio Daily) at the moment, in combination with quite bearish readings within the WSC Index Oscillator, there is a good chance to see a very short period of consolidation ahead before further gains can be expected.

Mid-Term Technical Condition

Another reason why we are quite sure about that is the fact that the mid-term oriented uptrend of the market also continued to strengthen last week. As already mentioned last week, from a formal point of view, the current correction cycle will not be completely over as long as the gauge from the Global Futures Trend Index keeps trading below its bullish 60 percent threshold! Therefore, it was good to see that its gauge managed to pass that important hurdle on Tuesday, indicating that the recent rally is definitely part of a larger rebound rather than being just a small corrective bounce. Not surprisingly, this signal is widely in line with our cyclical roadmap, where we are expecting to see further gains into March/April before further troubles might be due. Anyhow, from a pure price point of view, the market still remains in a mid-term oriented down-trend at the moment as the WSC Sector Momentum Indicator has not turned bullish yet. To be more precise, this indicator measures the spread between the momentum score of riskless money market and the S&P 500 within our Sector Heat Map. There we can see that both scores have lost some momentum recently, and, therefore, the gauge remains almost unchanged compared to last week. Nevertheless, we can see that other sectors have geared up momentum versus money market recently, which can be interpreted as quite supportive for the time being.

More importantly, mid-term oriented market breadth also continued to regain strength last week and, therefore, our bullish recovery scenario has not been changed so far. The Modified McClellan Oscillator Weekly turned almost bullish, whereas the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) continued to crawl towards their bullish 50 percent threshold last week. Moreover, it was quite encouraging to see that the Advance-/Decline Index Weekly flashed a small bullish crossover signal last week, indicating that the total amount of mid-term oriented advancing issued outpaced mid-term oriented declining issues. Above all, we can see that mid-term oriented down-volume still remains quite depressed for the time being. So all in all, it looks like that the market remains on its recovery path (at least for the time being). Nevertheless, we should not forget that the absolute levels of those important tape indicators still remain a bit depressed. So if our cyclical roadmap is correct, it could be possible that those bearish divergences will continue to grow into late March/April, which could then trigger another significant down-leg. However, right now it is a bit too early to get concerned about that fact (given the quite supportive readings all across the board) and, therefore, our bullish outlook remains unchanged (at least for the time being).

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. Nevertheless, we can see that the recovery in the relative strength score of almost all risky markets continued last week, whereas the gauge from the WSC Global Momentum remains quite unchanged compared to last week. So all in all, this is another piece of evidence that equities are slightly getting back on track. 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 in the past last weeks.

Bottom Line

The technical picture of the market remains quite unchanged compared to last week. With broadening strengths all across the board, we think to see further gains into Q1. On a very short-time frame the market is quite overbought and, therefore, it could be possible to see a period of consolidation ahead, before further gains can be expected. However, our bullish outlook remains unchanged and, therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!