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March 09. 2014

Market Review

All three major U.S. averages finished the week with solid gains. For the week the Dow Jones Industrial Average eked out a gain of 0.8 percent to end at 16,414.91. The S&P 500 added 1 percent for the week to finish at 1,790.29. Both the Dow and the S&P 500 logged their second straight week of gains. The Nasdaq advanced 0.7 percent from the week-ago close to 4,336.22, its fifth straight weekly advance. Financials and industrials led gainers among the S&P?s 10 major sectors. The CBOE Volatility Index or the VIX, Wall Street’s fear gauge, finished at 13.98.

Short-Term Technical Condition

On track with our recent outlook the market continued to push higher into early March, whereas major key indices reached new record highs. As per last week’s report, the short-term uptrend of the market remains well intact, since our entire short-term trend indicators are bullish at the moment (Trend Trader Index, Modified MACD and the Advance-/Decline 20 Day Momentum). On Friday, the S&P 500 closed 46 points above the bearish threshold from the Trend Trader Index, indicating that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 1,832. Furthermore, we can see that both envelope lines of this reliable indicator are strongly drifting higher. This indicates that within the past 20 days we saw higher highs and higher lows, which is another typical pattern for a strong short-term up-trend. The same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of a threatening bearish crossover signal yet. Plus the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week also at quite encouraging levels, although its gauge showed some small non-confirmation on Friday.

More importantly, the current short-term oriented uptrend is still strongly confirmed by short-term oriented market breadth (Upside-/Downside Volume Index Daily, High-Low Index Daily, Modified McClellan Oscillator Daily, Stocks above their 20/50 SMA). The current participation of short-term up-volume in the current up-trend looks ok, the gauges of the Modified McClellan Oscillator Daily are smoothly trending higher, plus the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain quite stable at approximately 75 percent. In addition, the number of stockss which are hitting a fresh yearly high have not show any signs of weaknesses yet and, therefore, the bullish gauge of our High-/Low Index Daily has drifted slightly higher for the week, indicating a quite bullish tape structure at the moment. Nevertheless, we think that the total amount of new highs could be a bit higher, if we consider the current levels from the S&P 500. In our opinion, this small bearish divergence can be ignored, as long as the total amount of new lows remains depressed.

From a pure contrarian point of view we have received some indications that a minor pullback might be at hand, as the Smart Money Flow Index has clearly not confirmed the latest high from the Dow. Furthermore, we can see that the WSC Capitulation Index showed some small strength recently, plus according to our cyclical roadmap (Charts of Interest) a minor pullback into mid-March looks quite possible. Above all, we can see that the gauge from the Trin Daily dropped into bearish territory last week and in combination with a quite overbought market (Global Futures Advance-/Decline Indicator), we would not be surprised to see a strong washout day or a 2-4 percent pullback/consolidation into mid-March, before new highs into April can be expected.

Mid-Term Technical Condition

The mid-term oriented 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 and, therefore, any upcoming pullback should be limited in price and time! 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 health care and industrials remain the strongest sectors for the time being.

More importantly, the current mid-term oriented up-trend of the market is still being confirmed by mid-term oriented market breadth. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150) continued to strengthen for the week and are now trading at encouraging 75 percent. This indicates that the current upside participation within the whole market remains quite broad-based! Moreover, the Modified McClellan Oscillator Weekly showed an increasing bullish gap last week, plus mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, indicating a quite bullish tape structure from a pure signal point of view! Nevertheless, we can already see some bearish divergence in the Upside-/Downside Volume Index Weekly, as the total amount of up-volume should be much higher, given the current levels from the S&P 500. Right now, it is too early to get concerned about those developments. But we would not be surprised if those negative divergences within our indicator framework will start to mounting up into late mid/late Q2 as we are still expecting a cyclical bear market later this year (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 that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. As already mentioned a couple weeks ago, the relative strength of commodities continued to strengthen and, therefore, it might be possible to see further positive surprises in that asset class within the next couple of weeks. However, only the WSC Global Momentum remains quite bearish, as most global equity markets (especially emerging markets) are still underperforming riskless money market. More importantly, long-term oriented market breadth is still confirming the current long-term oriented uptrend of the market, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish. Additionally, the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts and the Modified McClellan Volume Oscillator Weekly still remains bullish from a pure signal point of view, indicating that the overall long-term demand looks quite healthy for the time being.

Bottom Line

The bottom line: from a contrarian- and cyclical point of view (Charts of Interest) we would not be surprised to see a minor pullback into mid/late March before further new highs can be expected. Therefore, aggressive traders can take some profits if we see a strong bearish reversal candle or start slightly buying into weaknesses if they want to act contrarian. Conservative members should hold/increase their equity position as we still think that the S&P 500 could rally towards 1,950 into mid/late Q2. Stay tuned!