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November 27. 2016

Market Review

U.S. stocks finished another week of strong gains, with all three major averages hitting new records. The Dow Jones Industrial Average gained 1.5 percent for the week to close at 19,152.14. The S&P 500 booked a weekly gain of 1.4 percent and closed at 2,213.33. The Nasdaq advanced 1.5 percent in the holiday-shortened week to end at 5,398.92. Most key S&P sectors finished higher, led by materials and industrials, while health care ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower, near 12.3.

Short-Term Technical Condition

The short-term oriented trend of the market remains in force, as the readings from our entire short-term oriented trend indicators strengthened last week. This is mainly due to the fact that the S&P 500 closed 69 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 2,144. Furthermore, we can see that both envelope lines of this reliable indicator continued to drift higher, which can be seen as another constructive trend signal. This bullish short-term uptrend is also supported by the readings of the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator. Both indicators are now clearly confirming the recent breakout by the S&P 500. As a matter of fact the whole underlying short-term oriented trend picture looks like it has enough power for further rallying into deeper December.

This view is also widely confirmed by short-term market breadth as all of our short-term tape indicators strengthened last week. The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are indicating that the underlying breadth momentum of the broad market recovered significantly and remains, therefore, quite supportive 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), which finished the week at the highest levels for month. As a matter of fact both gauges are, therefore, definitely confirming the latest break-out by the S&P 500, as the current participation of all NYSE listed stocks within the recent rally/break-out looks extremely broad based. This can be also seen if we focus on the S&P 500 versus Russell 2000 Ratio. Additionally, there was a significant spike in the total number of stockss which are hitting a fresh yearly high, in combination with outright depressed readings of stocks which dropped to a new yearly low. Consequently, the bullish gauge from the High-/Low Index Daily strengthened its signal as it has reached the highest level for months. So given the outright supportive/bullish readings within our short-term oriented indicator framework, further rallying towards the year-end looks extremely likely.

On the contrarian side, the market is slightly overbought (Advance-/Decline Ratio Daily and Upside-/Downside Volume Ratio Daily) and, therefore, the pace is likely to slow down a bit during the next couple of trading sessions. Nevertheless, we can see that the WSC Capitulation Index dropped significantly last week and is, therefore, clearly confirming the current risk-on market environment. On the other hand, we can see that the total amount of bulls on Wall Street spiked to extreme levels last week. Right now, this fact is definitely fueling the rally even further, but such strong optimism could get definitely a burden on a mid-term time horizon, as a lot of good news is priced in already. Maybe, that is the reason, why Smart Money is still showing a bearish divergence to the Dow Jones. Anyhow, right now the current tape situation is a way too strong to get concerned about that fact on a very short time frame and, therefore, we think there is still a good chance to see the typical Christmas Rally.

Mid-Term Technical Condition

Considering the mid-term oriented technical condition of the market, we get the same picture as we have on a short-term time frame. The mid-term uptrend of the market continued to strengthen last week and is, therefore, giving no reason to worry right now. To be more precise, our reliable Global Futures Trend Index increased strongly last week to the upper end of its bullish consolidation area. For that reason, the current reading of this reliable indicator is confirming the recent break-out from the S&P 500. Worth mentioning is the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses should be limited in price and time (in combination with strong readings in mid-term oriented market-breadth). This view is also confirmed by the WSC Sector Momentum Indicator, which measures how many key sectors remain in a mid-term oriented up-trend. So from a pure price point of view, most key sectors keep drifting higher and, therefore, the underlying trend-condition of the S&P 500 looks quite healthy at the moment. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score from riskless money market dropped significantly last week.

On top of that, mid-term oriented market breadth is also confirming the current mid-term oriented uptrend of the market. All of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions and have, therefore, not shown any signs of bearish divergences yet! Also the Modified McClellan Oscillator Weekly continued to narrow its bearish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon. Basically, the same is true if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both gauges reached the highest level for months, which is another signs that the underlying tape structure of the market remains quite broad-based at the moment. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts (Upside-/Downside Volume Index Weekly) or increased significantly (Advance-/Decline Index Weekly). Consequent, we received the final confirmation that the latest corrective top building process has clearly transformed back into a new sustainable uptrend.

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 42 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. If we focus on the Global Relative Strength Indicator, we can see that the relative strengths of most risky markets strongly increased compared to the last weeks. Also, long-term market breadth is giving no reason to worry and, therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). In this context, it is quite encouraging to see that long-term new highs are very strong currently whereas long-term new lows continued to decrease, which can be seen as another positive long-term tape signal. Therefore, our long-term oriented High-/Low Index Weekly improved in the past weeks, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stockss which are trading above their longer-term oriented moving averages (200)!

Bottom Line

So in the end, the technical picture of the market has clearly improved compared to last week and, therefore, our strategic bullish outlook remains unchanged. To be more precise, with broadening strengths all across the board, we think that the current rally is not in danger of fading out at the moment. As a matter of fact, we strongly believe to see further gains into deeper December, where further rallying towards new highs looks quite likely. On a very short-time frame it could be possible that the pace is likely to slow down a bit, before further gains can be expected. However, given the fact that the current risk/reward looks outright attractive at the moment, we would advise our conservative members to hold their equity position, while aggressive short-term traders should keep buying the dips. Stay tuned!