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February 22. 2015

Market Review

Right in line with our recent call, U.S. stocks rose for the week, sending the S&P 500 and Dow Jones Industrial Average to record levels. For the week, the Dow Jones Industrial Average advanced 121.09 points, or 0.7 percent, to 18,140.44 to top its closing high from Dec. 26. The S&P 500 climbed 0.6 percent to a record 2,110.3 in the holiday-shortened week, its third record close for the year. The Nasdaq advanced 1.3 percent from last Friday’s close to 4,955.97. Most key S&P sectors ended in positive territory for the week, led by health care. Energy was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell to 14.30.

Short-Term Technical Condition

The short-term uptrend of the market continued to gain more bullish ground last week. This is mainly due to the fact that the S&P 500 closed 66 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 2,044. Furthermore, we can see that both envelope lines of this reliable indicator are still strongly drifting higher. This is telling us that within the last couple of weeks, we saw higher highs and higher lows, which is another typical pattern for a strong short-term oriented uptrend. This bullish short-term uptrend is also supported by the readings of the Modified MACD, which showed an increasing bullish gap last week. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite encouraging levels, although it should be much higher given the fact that the S&P 500 reached a new all-time high last week.

This bearish divergence can be absolutely ignored right now, as short-term market breadth continued to improve and is, therefore, confirming the current short-term oriented uptrend of the market! The Modified McClellan Oscillator Daily continued to gain even more bullish ground last week, indicating that the underlying breadth momentum of the broad market remains outright positive. Additionally, we saw stable readings in the total amount of all NYSE-listed stocks which reached a fresh 52 weeks high, in combination with one of the lowest readings of new 52 weeks low! During the whole week, there were less than 20 stocks a day that were pushed to a new yearly low, one of the lowest readings within a year! This is telling us that the current break-out from the S&P 500 looks quite sustainable and, therefore, further gains can be expected. This can be also seen, if we have a look at the High-/Low-Index Daily. The gauge of this indicator is still trading at quite encouraging levels, although its bullish gauge could be a bit higher in our point of view. Anyhow, as long as we do not see any bearish crossover signal within that indicator, it is too early to get concerned about this fact. Another encouraging fact is that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) confirmed (20) or have started to confirm (50) the recent level from the S&P 500 as their gauges strongly grew above 50 percent. This indicates that a healthy rotation back into small caps has started and, therefore, the broad market is now participating within the recent rally. This is a very positive sign as a purely large cap driven rally/breakout is hardly sustainable in the long run.

If we focus on our contrarian indicators, we can see that the Smart Money Flow Index is diminishing its long term bearish divergence to the Dow, indicating that big institutional investors are gearing up their equity exposure. This can be also observed if we focus on the WSC Capitulation Index, which is still indicating an extremely risk-on environment! Only the z-score from OEX Call-/Put Ratio Oscillator Weekly dropped into bearish territory. This indicates that its current gauge is two standard deviations away from its historical mean, which is a quite rare event. As a matter of fact a washout-day could be possible. Nevertheless, with such strong readings within our short-term trend- as well as breadth indicators, any trend-breaking divergences can be ignored at the moment! Therefore, any upcoming weaknesses should be limited in price and time and should, therefore, be used by aggressive traders to add exposure.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market continued to strengthen and is, therefore, giving no reason to worry right now. This is mainly due to the fact that our reliable Global Futures Trend Index grew almost above its strong bullish 90 percent threshold on Friday. For that reason, the current reading of this reliable indicator is absolutely 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 energy is the only sector which has a lower momentum score than riskless money market. Therefore, it is still too early to bet on a sustainable bottom in that specific sector.

More importantly, mid-term oriented market breadth showed also strong signs of improvements last week. Especially, the Modified McClellan Oscillator Weekly continued to show signs of recovery and was, therefore, able to flash a bullish crossover signal last week. This indicates that the underlying market breadth momentum is regaining strength, albeit on quite low levels. More importantly, most 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 last week, and have, therefore, confirmed the recent high or are about to do so. This can be seen as an outright strong confirming tape signal as the current rally looks quite broad based. Such a broader tape confirmation can also be seen if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both indicators continued to gain more bullish ground last week and, as a matter of fact, they have started to reduce their bearish divergence we mentioned last week! If we focus on the underlying demand, we can see that both, mid-term oriented advancing issues as well as mid-term oriented up-volume have been pushed back to quite encouraging bull market levels and, therefore, the current break-out looks outright healthy! So all in all, we think further gains into late Q1 can be expected.

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. From a regional point of view, 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. Nevertheless, the gauge strongly increased over the last couple of weeks, indicating that the global bull market (especially within the emerging market region) is getting back on track. More importantly, long-term oriented market breadth also continued to strengthen and is, therefore, clearly confirming the current long-term oriented up-trend of the market. To be more precise: (1) the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish, (2) the Modified McClellan Volume Oscillator Weekly managed to flash a bullish crossover signal last week, (3) plus the number of stockss which are hitting a fresh 52 weeks high are trading well above their bearish counterparts!

Bottom Line

The bottom line: with broadening strengths within our indicator framework, we believe to see further strength into late Q1. For that reason, we would advise conservative members to hold/increase their equity position, while aggressive short-term traders should buy into any upcoming weaknesses. Stay tuned!