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December 07. 2014

Market Review

Last week, all three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average added 0.7 percent, to close the week at a record of 17958.79. The blue-chip benchmark advanced for a seventh consecutive week. The S&P 500 increased 0.5 percent over the five days to a record of 2075.37, extending the benchmark index?s rally also to a seventh straight week. The Nasdaq declined 0.2 percent to 4780.76, it first weekly drop in seven. Of the 10 major sectors, consumer stocks led decliners, while financials led advancers. The CBOE Volatility Index, a measure of investor uncertainty, fell to 11.84.

Short-Term Technical Condition

From a pure signal point of view, the technical picture of the market remains almost unchanged compared to last week. On Friday, the S&P 500 closed 27 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 2,048. Furthermore, we can see that both envelope lines of this reliable indicator are still smoothly drifting higher as well. This can be seen as another typical pattern for a quite solid price-driven short-term oriented up-trend. Despite the fact that the short-term oriented up-trend remains quite intact from a pure price point of view, the underlying trend-momentum is telling a different story. Although, the Advance-/Decline 20 Day Momentum Indicator remains slightly, we can see that the gauge decreased significantly last week and has, therefore, not confirmed the recent levels from the S&P 500. Often the Advance-/Decline 20 Day Momentum Indicator begins to turn before price thereby making it a leading indicator. The same is true if we focus on the Modified MACD, which is about to flash a bearish crossover signal soon, indicating short-term exhaustion. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the market is entering a consolidation period or if the market is taking a healthy breather. In such a situation, short- to mid-term market breadth will give guidance if any upcoming short-term bullish trend break will lead to stronger losses or if renewed strengths can be expected.

Right now, short-term market breadth still looks quite supportive although last week’s price action has definitely left its mark on our tape indicators. Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily turned bearish last week, indicating an overall weak demand. Moreover, it looks like that the window-dressing process of large money managers is not over yet, as the amount of yearly new highs and new lows continued to increase simultaneously. Although this is a typical year-end phenomenon, we should not forget that this effect increases the selectivity within the market. As a matter of fact, short-term single-equity trades should mostly focus on high performing momentum stocks, rather than chasing cheap value stocks. Anyhow, right now this window dressing effect has not led to a bearish crossover signal within our High-/Low Index Daily yet, although its bearish gauge has shown some strong momentum recently. Nevertheless, as long as the amount of new highs is trading well above new yearly lows, the market internals remain supportive. Basically, the same is true if we have a look at the percentage of stockss which are trading above their short-term oriented moving average (20/50). Although we saw some weaknesses during the week within the percentage of stockss which are trading above their short-term oriented moving averages (20/50), their readings managed to regain strengths on low levels, indicating a constructive tape structure (at least for the time being).

The situation on the contrarian side remains almost unchanged compared to last week. On a very short time frame, the WSC Capitulation Index is still signaling an all-clear environment, although its gauge has shown some momentum on low levels recently. Moreover, we can see that the All CBOE Options Call-/Put Ratio Oscillator and overall market sentiment is heading back to normal levels. Nevertheless, we think that the overall bullish sentiment will definitely become a burden in Q1 2015. On the other hand, we still can see that the WSC Index, the WSC Index Oscillator Weekly, the Equity Options Call-/Put Ratio Oscillator Weekly and the Global Futures Put/Volume Ratio Oscillator remain within bearish territory. This is mainly due to the fact that the overall momentum of weekly total call volume remains on quite high levels. If we consider the overall bullish seasonal tendencies in December, this might be not a big surprise at all. Nevertheless, if we focus on the monthly cycles, we can see that the market is often running into a minor top in early December, which is then followed by a pullback towards Christmas, before we see the typical year-end rally. So all in all a period of consolidation and/or a minor pullback within the next 1-2 weeks looks quite likely, if we consider the weak seasonal tendencies until Christmas, together with a threatening bearish crossover signal within our short-term trend indicators, plus some non-confirmations/bearish signals within our short-term oriented tape indicators.

Mid-Term Technical Condition

Despite the fact that some down-testing until Christmas is possible, any upcoming pullback should be limited in price and time as most of our mid-term oriented trend- as well as breadth indicators remain quite supportive. Although, the gauge of our reliable Global Futures Trend Index came down a bit recently, it is still trading within the middle part of its bullish consolidation period and, therefore, the current mid-term oriented uptrend remains well intact. In addition, the WSC Sector Momentum Indicator is far away from being bearish, indicating that most sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend. This can be also seen if we focus on our Sector Heat Map, as health care and technology remain the strongest sectors within the S&P 500, whereas the relative strength of money market remains subdued. Anyhow, if we focus on the long-term development of our trend indicators, we can see some signs of exhaustion as their readings are trading well below their recent highs. As already mentioned a couple of times, as long as mid-term market breadth remains constructive, we keep ignoring those bearish divergences for now.

Therefore, it is good to see that mid-term market breadth showed some signs of improvements. This is mainly due to the fact that the Modified McClellan Oscillator Weekly continued to show some signs of bottoming out last week, whereas the readings from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain constructive, at least from a pure signal point of view. However, the most important mid-term oriented breadth signals are coming from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly. Especially, the strong spike in the amount of mid-term oriented advancing issues together with steadily increasing mid-term oriented up-volume are telling us that the market internals are getting back on track! Normally, as long as both, advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, the underlying tape structure of the market remains strong and any upcoming short-term weaknesses should be limited in price and time. We would start to get cautious, if we see some stronger non-confirmation in their readings as it would be the first indication that a stronger correction might be at hand. Anyhow, right now the mid-term oriented technical picture of the market remains outright positive and, therefore, our mid-term oriented bullish outlook has not been changed so far.

Long-Term Technical Condition

The long-term technical condition 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 equity indexes around the world have not managed to reach a new high yet. If we focus on our global momentum heat-map, we can see that especially Europe and commodity related emerging markets have a lower momentum score than risk-less money market and, therefore, the WSC Global Momentum Indicator remains well below its bullish threshold. Nevertheless, U.S. equities remain the most attractive region from a pure asset allocation point of view, as their relative strength score is far away from being bearish and is additionally leading all other risky markets! Above all, we have seen further improvements in long-term oriented market breadth, as our Modified McClellan Volume Oscillator Weekly as well as the High-/Low Index Weekly flashed a small bullish crossover signal last week. This indicates that the market internals are slightly getting back on track, which is definitely an important fact if we consider the current levels form the S&P 500. Last but not least, the percentage of stockss which are trading above their long-term oriented moving average (200) remain weak but at least constructive from a pure signal point of view. So all in all, we have seen further improvements within our long-term oriented indicator framework and, therefore, we stick to our long-term bullish outlook. Nevertheless, we would like to see further improvements within their readings over the next couple of weeks, since the bearish divergences within our long-term tape indicators have not been sorted out so far.

Bottom Line

Given the overall seasonal tendencies, together with some weak/bearish signals within our short-term trend- as well as tape indicators, we would not be surprised to see a period of consolidation and/or a minor pullback towards Christmas. Nevertheless, if we consider the quite bullish readings within our mid- to long-term indicator framework, we think that any upcoming weaknesses should be limited in price and time. As a matter of fact, aggressive traders should not chase the market too aggressively on the upside, rather than buying into weaknesses. More conservative members should hold their equity position as our mid- to long-term outlook has not been changed so far. Stay tuned!