March 22. 2015

Market Review

U.S. stocks closed out the week with strong gains. For the week, the Dow Jones Industrial Average soared 2.1 percent to end at 18,127.65. The S&P 500 rocketed 2.7 percent from last Friday’s close to finish at 2,108.06. The Nasdaq gained 3.2 percent during the week to end at 5,026.42. The tech-index had its best weekly gain since the week ending October 31 as the index approached its 15-year record closing high of 5,048.62. Most key S&P sectors finished higher, led by health care and utilities, while materials ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.

Short-Term Technical Condition

Last week, we highlighted the fact that we remained outright cautious as we had received a growing number of evidences within our short- to mid-term technical indicators that the risk of a fast paced correction was outright high. Moreover, we mentioned that from a pure contrarian point of view an oversold bounce looked likely before further troubles might be due. Therefore, we advised our conservative members to wait for a significant negative down-move (towards 2,035/2,030) first, before taking any actions. Anyhow, after we saw the predicted oversold bounce last week, the big question now is, if this strong up-move is just representing the last stages of a top-building process or if renewed strength into summer can be expected (as the bounce was also strongly bolstered by the FED).

Not surprisingly, the short-term uptrend of the market slightly strengthened last week. This is mainly due to the fact that the Trend Trader Index flashed a bullish signal on Friday, after being more or less neutral/bearish biased during the whole week. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2,078 (bearish threshold from the Trend Trader Index). Moreover, the Modified MACD also managed to flash a bullish but very weak crossover signal on Friday, indicating that the overall trend structure of the market turned slightly positive. Nevertheless, both signals are a way too weak at the moment to take them too seriously, since any stronger down-day could easily produce a sell signal again. This view is also supported by the Advance-/Decline 20 Day Momentum Indicator which did not confirm the latest break-out attempt by the S&P 500, as its gauge remains bullish on extremely low levels. Such a bearish divergence can never be sustainable over the long run. So either the indicator will get back on track or the market will face stronger losses soon!

In such a situation market breadth is key area of focus as it will give us guidance if the recent bounce will turn out to be significant or just shallow in its nature. Despite the fact that the market finished the week with solid gains, the readings within our short-term breadth indicators have been developing moderately so far. As a matter of fact, some of them are showing a huge bearish divergence if we consider the current levels from the S&P 500! Especially, the Modified McClellan Oscillator Daily remains bearish, whereas the Modified McClellan Volume Oscillator Daily just managed to flash a very small bullish crossover signal last week. This is signaling that the overall breadth momentum of the market remains quite weak-kneed. Another concerning fact is that overall NYSE volume spiked on Friday. Normally, such a breadth-event suggests a buying-panic, which often marks an intermediate top. The situation looks a bit different if we analyze the current market participation. Last week, the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) closed at quite encouraging levels, although their levels could have been slightly higher if we consider the current levels from the S&P 500. The same is true if we focus on the total number of stockss which reached a new yearly high/low. Especially on Friday, there were about 300 stocks on NYSE which dropped to a new yearly high. The last time we saw such readings was at the beginning of the year, when stocks started a new rally towards new record highs. Therefore, the readings of the High-/Low Index Daily strengthened, although its bullish gauge should be much higher if we consider the current levels from the S&P 500.

The situation on the contrarian side is getting increasingly bullish on a very short-time frame, whereas on a mid-term horizon the clouds are gathering. Apart from the fact that the market is quite overbought (Upside-/Downside Ratio Daily and the Advance-/Decline Ratio Daily), we can see that market sentiment is becoming increasingly a burden for the market. This is mainly due to the fact that the amount of bears on Wall Street is taking over the majority. On a very short-time frame, this might be a good contrarian indicator but on a mid-term time horizon a lot of purchasing power is pulled out of the market. Above all, the market triggered a Hindenburg Omen on Monday, which is a quite rare bearish technical signal. Basically, when it occurs, the market should be at risk for a correction within the next 30 days. According to our research, this pattern occurred 64 times since 1966. Since then in more than 25 percent of all cases, the market faced a maximum loss, exceeding the 5 percent range within the following 30 days! On the other hand, we can see that the strong bullish 64-week cycle is due next week, plus the option market as well as the program traders remain supportive on a very short-time frame. This view is also confirmed by the WSC Capitulation Index which dropped back from its bearish into cautious territory, whereas the Smart Money Flow Index is definitely showing increased risk appetite among institutional investors.

Mid-Term Technical Condition

Right now, the mid-term oriented trend of the market still looks quite damaged at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within its bearish trading range area and is, therefore, not confirming the current levels from the S&P 500! As already mentioned last week, as long as the gauge does not close above its 60 percent bullish threshold, the risks of nasty pullbacks remain quite high. In such a situation, stronger gains tend to have a corrective character rather than being the start of a new sustainable breakout. Nevertheless, we should not ignore the fact that the gauge from the Global Futures Trend Index has shown some strength recently and is, therefore, just trading 400 basis points below its bullish threshold. Therefore, it looks like the market is heading into a make or break set-up. However, from a pure price point of view, most underlying sectors within the S&P 500 remain in a mid-term oriented up-trend and, therefore, the WSC Sector Momentum Indicator still remains quite bullish at the moment. 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 below most other major industries.

More importantly, mid-term oriented market breadth showed some signs of recovery. So from a pure market breadth point of view, the recent bounce could have enough power to push the markets to new highs or at least withstand stronger corrective tendencies. This is mainly due to the fact that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) reached quite encouraging levels. Consequently, their gauges have started to diminish their bearish divergence, which is another positive tape signal. Basically, the same is true if we focus on the Modified McClellan Oscillator Weekly, which slightly turned bullish last week. However, the most important tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators flashed a strong bullish crossover signal last week, signaling a broad-based tape recovery. With such readings, shallow pullbacks or further consolidation is more likely than nasty waterfall declines. If we consider all those contradicting signals around, we think the market has reached a fork in the road. Either, those divergences are mounting up, and, therefore, we see a stronger pullback within the next couple of weeks, or the market will be able to wipe out all those trend-breaking divergences and we will see further strengths into early May.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost 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 most local market indexes around the world continued to regain their footing. This is mainly due to the fact that the gauge of the WSC Global Momentum Indicator increased to 48 percent and, therefore, the global bull market is getting broader based at the moment. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky markets continued to strengthen last week. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average continued to strengthen last week, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Plus the Modified McClellan Volume Oscillator Weekly continued to gain more bullish ground last week.

Bottom Line

Given the quite contradicting readings (especially mid-term oriented trend vs. mid-term oriented breadth), plus the current bearish divergences within our indicator framework, we think the up- as well as the down-side potential of the market looks capped for the time being. Therefore, it could be possible that the market will drop back into its trading range, after it slightly reached a new high (if we do not see any further strength in our indicator framework). In general, such a distribution phase/trading range is always a fork in the road. Therefore, we will monitor the development of our indicator framework closely within the next couple of weeks to get more confirmation if the market is heading into a make- or break set-up. All in all, we would advise our conservative members to keep their stop-loss limit around 2,035/2,030 just to make sure. Stay tuned!