November 03. 2013

Market Review

U.S. stocks finished the week nearly unchanged. In five trading days the Dow Jones Industrial Average gained 0.3 percent to close at 15,615.55. The S&P 500 rose 0.1 percent to end at 1,761.64. The Nasdaq declined 0.5 percent for the week to end at 3,922.04, snapping a two-week winning streak. The Dow and S&P 500 both scored their fourth straight up week in a row. Furthermore, it was the best October for all three indexes since 2011 as the S&P 500 gained 4.5 percent, the Dow advanced 2.8 percent and the Nasdaq climbed 3.9 percent. Among the key S&P sectors, consumer staples were the best weekly performer, while materials dragged. The CBOE Volatility Index (VIX), a measure of investor uncertainty, fell to 13.23.

Short-Term Technical Condition

On Friday, the S&P 500 closed 43 points above the bearish threshold from the Trend Trader Index, indicating that the market is per definition in a strong short-term up-trend as long as the broad equity benchmark does not drop below 1,718. Furthermore, we can see that both envelope lines of this reliable indicator are strongly increasing as well, which can be seen as another encouraging trend-confirmation-signal for market technicians. Moreover, the gauge of the Advance-/Decline 20 Day Momentum Indicator remains quite stable, whereas the Modified MACD has not flashed a bearish crossover signal yet, indicating that the short-term up-trend of the market remains well intact from a pure signal point of view. Nevertheless, if we focus on the absolute level from the gauge of the Advance-/Decline 20 Day Momentum Indicator, we can see that it should be much higher, given the fact that the S&P 500 has reached a new all-time high on Tuesday. In addition, the Modified MACD has also shown some signs of weaknesses last week and is, therefore, about to flash a bearish crossover signal if we do not see a week of strong gains ahead, indicating some signs of short-term exhaustion.

Basically, if we focus on our short-term market breadth indicators, the technical picture looks quite similar. After a couple of weeks of increasing short-term uptrend confirmation, most of our short-term market breadth indicators (Modified McClellan Oscillator Daily, High-Low Index Daily, Nyse New Highs minus New Lows, Stocks above their 20/50 SMA) are receding from very high levels, and, therefore, they have started to show some bearish divergences, although their readings still remain quite bullish from a pure signal point of view. Especially, the number of stockss which are hitting a yearly high have started to pull-back significantly, the Modified McClellan Oscillator Daily is about to flash a bearish crossover signal, plus the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have slid quite considerably for the week, indicating the number of stockss which are participating at the current rally is diminishing.

Another red-flag on the horizon is coming from our contrarian indicators. The crowd is a way too optimistic in our point of view, as the Daily Put-/Call Ratio All CBOE Options Indicator is moving into contrarian territory, market sentiment is quite stretched, plus dumb money has started to chase the rally aggressively. On the other hand we can see that Smart Money has slightly started to take some profits, whereas our reliable WSC Capitulation Index has shown some strength on low levels recently. All in all, we think that the market looks quite vulnerable for a short-term pullback into mid November, once we will see some bearish crossover signals within our short-term oriented trend- and/or breadth indicators.

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact, as the gauge from our reliable Global Futures Trend Index is still trading above the extremely bullish 90 percent threshold and has, therefore, clearly confirmed the latest break-out by the S&P 500. 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! According to our sector heat map, consumer discretionary is the strongest industry right now, followed by industrials and health care.

Anyhow, mid-term oriented market breadth still looks quite ok and is, therefore, still confirming the current mid-term oriented uptrend of the market. Despite the fact that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) have lost some ground recently, their gauges are far away from being bearish, indication that the upside participation within the whole market remains broad-based! Moreover, the Modified McClellan Oscillator Weekly is about to turn bullish, the Upside-/Downside Volume Index Weekly still remains bullish from a pure signal point of view, plus mid-term oriented advancing issues are trading well above their bearish counterparts, indicating that any upcoming short-term pullback should be limited in price and time!

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in-force,, therefore, our long-term bullish outlook has not been changed so far. The global trend participation remains outright broad base as the moment as the WSC Global Momentum Indicator is trading at 75 percent, indicating that the vast of all global market ETFs around the world are in a strong long-term uptrend, while the Global Futures Long Term Trend Index is still indicating a technical bull market. In such a scenario, it is highly unlikely that the market will face a sharp bear leg or even might enter a new bear market! Moreover, according to our Global Relative Strengths Indicator, Europe is the leading market in terms of momentum while the U.S. is about to lose steam, indicating that a lot of investors are searching for undervalued stocks overseas. If we focus on long-term market breadth, we can see that the percentage of stockss which are trading above their 200 day simple moving average remain outright bullish, as 73 percent of all NYSE listed stocks remain in a long-term uptrend at the moment. Furthermore, it was quite encouraging to see that the High-/Low Index Weekly has continued to strengthen, whereas the Modified McClellan Volume Oscillator Weekly is about to flash a bullish crossover signal soon, indicating a strengthening long-term tape structure!

Bottom Line

The bottom line: since the short-term uptrend of the market has not been broken yet, our short-term bullish outlook has not changed so far. Nevertheless, we would not be surprised to see a short-lived pullback/consolidation period into mid-November, if we see a short-term trend break ahead. Such a consolidation period would dampen short-term optimism and would leave the market better positioned for a yearend rally. For that reason, we would advise our short-term traders not chase the market too aggressively on the upside rather than buying into weaknesses. Moreover, conservative members should hold their equity position, as our long-term bullish outlook has not been changed so far. Stay tuned!