December 18. 2016

Market Review

After rallying towards a new all-time high on Tuesday, U.S. stocks lost some steam and finished the week nearly unchanged. For the week, the Dow Jones Industrial Average gained 0.4 percent to close at 19,843.41. The S&P 500 lost less than 0.1 percent to end at 2,258.07. The Nasdaq decreased 0.1 percent for the week to end at 5,437.16. Among the key S&P sectors, telecom was the best weekly performer, while industrials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower near 12.2.

Short-Term Technical Condition

The market is moving right in line with our recent outlook and, therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains quite unchanged compared to last week. The S&P 500 is still trading 43 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.215. 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. Moreover, the bullish status from the Modified MACD remains quite unchanged compared to last week. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is trading at quite bullish levels, although it dropped for the week and has, therefore, formed of bearish divergence recently. Given the fact that Advance-/Decline 20 Day Momentum Indicator tends to lead price movements, such a non-confirmation could indicate the start of a potential consolidation period

Essentially, we receive the same picture if we analyze short-term market breadth. For the time being, our entire short-term oriented tape indicators remain supportive, although we can see a lot of non-confirmation within their readings. Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are indicating that the overall breadth momentum is currently slowing down a bit, as their short-term oriented gauges are showing some form of exhaustion. This can be also seen if we focus on the percentage of stockss which are trading above their short-term moving averages (20/50). Both indicators remain bullish from a pure signal point of view, but their readings should be much higher if we consider the current level from the S&P 500. This is telling us that the participation within the latest break-out remained a bit weak-kneed. Basically, the same is true if we focus on the High-/Low Index Daily and the NYSE New Highs-/New Lows Indicator. Although the amount of new highs on NYSE closed out the week at quite supportive levels, they came down significantly and have, therefore, shown some degree of fading thrust. In summary, given the quite bullish but somehow non-confirmative readings within our short-term oriented indicator framework, the market looks ready for a healthy breather/consolidation.

This view is broadly confirmed by our contrarian indicators, as some of them showed some form of extreme greed/optimism among the crowd. This becomes quite obvious if we focus on our option based oscillator, which grew into bearish territory last week (All Options Call-/Put Ratio Oscillator Weekly, Equity Options Call-/Put Ratio Oscillator Weekly, All CBOE Options Put-/Call Ratio, Global Futures Put-/Volume Ratio Oscillator and the Uptick-/Downtick Ratio). This indicates that a lot of money has flown into call options recently. As approximately 90 percent of all uncovered options are an also-ran, we think it is highly unlikely to significant gains until the next option expiring date in mid-January. This view is also confirmed by the Smart Money Flow Index, which remains quite bullish but has also shown some non-confirmation recently. Another quite concerning fact is that the market flashed another Hindenburg Omen recently and, therefore, a sentiment driven washout in early/mid-January cannot be ruled out at the moment.

Mid-Term Technical Condition

Right now, any upcoming consolidation period should not lead to a major trend reversal for the time being, as our entire mid-term oriented indicators still remain quite supportive at the moment. The gauge from our reliable Global Futures Trend Index remains at the top of the bullish consolidation range, giving absolutely no reason to worry right now. We would only get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. Right now this is not the case at all and, therefore, it is a way too early to take the chips from the table. Nevertheless, we can see that the Global Futures Trend Index should be much higher if we consider the current levels from the S&P 500. In our opinion, this is another piece of evidence that the market might be ready for a period of consolidation quite soon. From a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is trading at solid bullish levels. This indicates that the spread between the momentum score from the S&P 500 and riskless money market within our Sector Heat Map is outright positive. Nevertheless, we can see that momentum score of riskless money market is still somehow elevated, which can be seen as another red flag on the horizon. Right now it is too early to get concerned about that fact, but we will keep an eye on their developments.

Another main reason why we believe that it is a bit too early to get concerned about those bearish divergence is due to the fact that mid-term market breadth still looks quite supportive at the moment. Especially, the Modified McClellan Oscillator Weekly continued to increase last week and narrowed its bearish gap, indicating that the overall tape momentum of the market is getting back on track. Additionally, most of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) remained unchanged at very high bullish levels or have not shown any signs of bearish divergences yet! Also, mid-term oriented up-volume improved last week. Only the mid-term oriented advancing issues could definitely be a bit stronger in our point of view. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators were holding up quite well and, therefore, they are trading at quite encouraging bullish levels. This indicates that the total upside participation on a mid-term time horizon still looks broad based, which is another indication that it might be a bit too early to take the chips from the table.

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. Nevertheless, we can see that the global bull market remains quite selective as only 45 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 most risky markets keeps trading above the one from U.S. Treasuries. This is another indication for the current risk-on market environment. Moreover, we saw again improvements within our long-term oriented breadth indicators. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly continued to improve, whereas the percentage of stockss which are trading above their 200 day simple moving average 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

Our bullish outlook remains unchanged compared to last week. However, on a very short-time frame the market looks quite vulnerable for a healthy breather and/or a period of consolidation. However, given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a way bit too early to get concerned about the technical condition of the market. As a consequence, our bullish outlook has not been changed so far. Consequently, we would advise 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.