June 15. 2014

Market Review

All three major U.S. averages finished the week with losses. For the week, the Dow Jones Industrial Average lost 0.9 percent to 16,775.58. The S&P 500 recorded a 0.7 percent loss over the past five trading days to end at 1,936.15. The Nasdaq Composite suffered a weekly decline of 0.3 percent to 4,310.65. Energy was the only gainer among the S&P?s 10 major sectors. The Chicago Board Options Exchange Volatility Index (VIX), a gauge for U.S. stock volatility, ended at 12.18.

Short-Term Technical Condition

As already mentioned last week, from a pure contrarian point of view, the threads for a short-term oriented 2-3 percent pullback have started to increase and, therefore, it was not really a big surprise that stocks ended down for the week. Nevertheless, if we have a closer look at our short-term trend indicators, we can see that the Trend Trader Index is still trading 27 points above its bearish threshold (1,909), plus both envelope lines of this reliable indicator have started to drift higher, 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. Moreover, we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator remains quite bullish from a pure signal point of view and is, therefore, far away from flashing any bearish signal at the moment. Only the bullish readings from the Modified MACD are a bit weak-kneed at the moment and, therefore, any stronger down-day could easily produce a bearish crossover signal within that indicator. This is telling us that the current short-term oriented uptrend of the market has slightly started to deteriorate and, therefore, further down testing/consolidation could be possible.

To evaluate if any upcoming further trend-deterioration or trend-breaks will have a stronger impact on the market, short-term market breadth is a key area of focus. There we can see that short-term market breadth still looks quite constructive, although our Modified McClellan Oscillator Daily was deteriorating last week. Especially the quite encouraging readings in the number of stockss which reached a fresh yearly high, in combination with quite subdued new lows is telling us that the market internals remain quite strong. Despite the fact that the S&P 500 nearly lost 0.9 percent last week, there were hardly any stocks around which reached a new yearly low. This indicates that only heavy weighed stocks have the major indexes lower! This can be also seen if we focus on the High-/Low-Index Daily. Although the bullish gauge of this proven indicator had to take a hard hit last week, the indicator itself is far away from flashing any bearish crossover signal, indicating that the recent pullback was mainly driven by profit taking so far. This coincides with the fact that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain quite bullish, although their readings came down a bit recently. This shows that the broad upside participation still remains quite constructive as more than 60 percent of all NYSE-listed stocks are still per definition in a strong short-term oriented uptrend.

If we focus on our contrarian indicators, the recent rally has pushed the Daily Put/Call Ratio All CBOE Options and most of our dumb money indicators (Global Futures Dumb Money Indicator and the ISE Call-/Put Ratio) into excessive optimism zones, leaving the markets quite vulnerable to short-term oriented disappointments. Therefore, a stronger pullback towards 1,905/1,897 or at least a short-lived consolidation period within an ongoing bull-market looks quite possible.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market continued to strengthen. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index kept trading above its extremely bullish 90 percent threshold. This indicates that any upcoming short-term oriented consolidation period/pullback should be limited in price and time! Above all, the WSC Sector Momentum Indicator is still trading on the upper end of its scale, indicating that the entire underlying sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend! This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas energy and materials remain the strongest sectors for the time being.

More importantly, the current mid-term oriented up-trend of the market is still being widely confirmed by mid-term oriented market breadth. Right now, the upside participation within the whole market looks quite broad-based, as the percentage of stockss which trading above their mid-term oriented moving averages (100/150) are trading well above their bearish thresholds. In addition, we can see that the Modified McClellan Oscillator Weekly reached a new high last week, indicating that the mid-term oriented market internals remain quite healthy. Another encouraging mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly. Both indicators are telling us that it is a way too early to get bearish from a strategic point of view as both indicators are far away from flashing any bearish crossover signal yet. Normally, as long as both, advancing issues as well as mid-term oriented up-volume are trading above their bearish counterparts, the underlying tape structure of the market remains outright bullish. For that reason, we strongly believe that there is still enough room for an overshoot towards 1,970/2,000 into mid-summer, before major troubles might be due (Cycles & Charts of Interest).

Long-Term Technical Condition

The long-term uptrend of the market has not been broken yet 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. Nevertheless, the relative strengths score from US equities have dropped below the bullish 50 percent from the WSC Global Relative Strengths Indicator, which is another indication that US equities could run into an important top within the next couple of weeks. Anyhow, right now it is too early to get concerned about those facts as the WSC Global Momentum Indicator still remains quite strong, indicating that most risky markets remain in a long-term uptrend. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average remain bullish (at least from a pure signal point of view). Moreover we can see that the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, indicating still a positive market breadth environment for the time being. Nevertheless, the High-/Low Index Weekly, the percentage of stockss which are trading above their 200 day simple moving average as well as the Modified McClellan Volume Oscillator Weekly are already forming a long-term bearish divergence to the market. Right now it is too early to get concerned about those readings. But given the fact that we are still expecting to see a cyclical bear market later this year (Cycles & Charts of Interest), we would not be surprised if those bearish divergence will continue to mounting up within the next couple of weeks!

Bottom Line

The bottom line: from a pure contrarian point of view we think that the market looks vulnerable for a 2-3 percent pullback or at least a short-lived consolidation period into mid-/late June and, therefore, we could see some rocky sessions ahead. Nevertheless, as long as our mid- to long-term oriented indicator framework remains bullish (at least from a pure signal point of view) and as long as we do not see a typical top-building process pattern, we think it is too early to call for a major market top right now. Therefore, we think that the market could easily overshoot towards 1,970/2,000 into late summer, before major troubles might be due! For that reason, we would advise our conservative members to hold their equity position, while aggressive short-term traders should buy the dips as long as our short-term indicator framework does not turn completely bearish. Stay tuned!