April 24. 2016

Market Review

U.S. stocks finished the week with a mixed performance. For the week, the Dow Jones Industrial Average gained 0.6 percent to close at 18,003.75. The S&P 500 rose 0.5 percent to end at 2,091.58.
The Nasdaq lost 0.7 percent for the week to end at 4,906.23. Among the key S&P sectors, energy was the top performer and utilities the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, declined to end slightly above 13.

Short-Term Technical Condition

The market is moving right in line with our recent outlook and, therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains quite unchanged compared to last week. The S&P 500 is still trading 33 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.058. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they have not shown a threatening bearish crossover signal yet. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator recovered and has, therefore, closed at quite encouraging bullish levels. Nevertheless, its gauge should a bit higher if we consider the current levels from the S&P 500. Moreover, we can see that the readings from the Modified MACD remain quite stretched and, therefore, any stronger down-day could easily produce a bearish crossover signal within that indicator. As already mentioned a couple of times, it is not quite unusual to see some bearish readings within some of our trend indicators, when the market is crawling higher on a very slow pace. In such a case, short- to mid-term market breadth will give us further guidance as it will show us if a short-term oriented trend break is caused by a healthy/ bullish biased consolidation process or if such an event can be interpreted as the harbinger of a stronger pullback.

As per last week?s report, we do not think that any short-term oriented trend-break will lead to a major trend reversal (at this point in time) as the readings of our entire short-term oriented breadth indicators remain outright bullish at the moment. This becomes quite obvious if we focus as the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both gauges continued to grow deeper into bullish territory (20) or have reached their highest level for months (50). Therefore, the current rally still looks extremely broad based at the moment. In addition, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain even more bullish ground on quite high levels, indicating that the underlying breadth momentum of the market remains quite supportive (albeit on quite stretched levels). Another encouraging fact is that there are absolutely no new lows around, whereas the total amount of all NYSE-listed stocks which reached a new yearly high remains quite stable. As a consequence, the High-/Low Index Daily remains quite bullish, although its signal could be a bit stronger in our point of view. Nevertheless, as long as we do not see a strong increase in the amount of new lows, the overall signal from the High-/Low Index Daily remains constructive. So all in all, the readings from our short-term oriented tape indicators are indicating that the underlying trend condition of the market remains quite solid at the moment. As a consequence, we do not think that a short-term oriented trend break would lead to a major trend reversal at this point in time.

The situation on the contrarian side remains almost unchanged compared to last week. This is mainly due to the fact that the Smart Money Flow Index is still telling us that major institutional investors keep buying the rally, whereas the greed among the option market has not reached any extreme levels yet. On the other hand, we can see that the gauge from the WSC Capitulation Index has grown into cautious territory recently and in combination with quite bearish readings from the WallStreetCourier Index Oscillator as well as the Program Trading Buy-/Sell Spread, increased volatility on a very short-time frame might be possible. But given the quite bullish readings within our short-term oriented market breadth indicators, we think any upcoming short-term oriented swings can be ignored for the time being.

Mid-Term Technical Condition

Despite the fact that increased volatility can be possible on a very short time frame, equities do not appear to be at risk of facing a stronger pullback at the moment. This is mainly due to the fact that our reliable Global Futures Trend Index keeps trading above its extremely bullish 90 percent threshold and is, therefore, confirming the current rally and/or the current levels from the S&P 500. Moreover, it is worth to mention 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 (if additionally mid-term market breadth remains strong). In addition, the readings from the WSC Sector Momentum Indicator continued to gain even more bullish ground last week. This indicates that the majority of sectors within the S&P 500 is gearing up and is, therefore, confirming the current break-out attempt by the broad index. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market remains at low levels, whereas utilities, technology and consumer staples remain the strongest sectors for the time being.

The mid-term oriented trend of the market is also strongly confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week, indicating that the underlying mid-term oriented market breadth momentum remains quite supportive. Additionally, 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 is, therefore, clearly confirming the current break-out attempt by the S&P 500! 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) as they have definitely reached their highest level for months. 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 mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts. As a matter of fact, we think that further gains into mid-May can be expected.

Long-Term Technical Condition

The long-term technical condition of the market also improved in the last couple of trading sessions. Although the Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, it has shown some improvements in recent time. In addition, the Global Relative Strength Index indicates that the relative strengths of all risky asset classes/markets remains attractive. Above all, we can see that the gauge from the WSC Global Momentum also increased strongly last week and reached its highest level for months. This indicates that most local equity markets around the world are also participating within the current rally, supporting our strategic bullish outlook. However, the most important fact is that long-term market breadth in the U.S. still remains constructive and is, therefore, confirming the current long-term oriented trend of the market. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly as well as the percentage of stockss which are trading above their long-term oriented moving averages (200) continued to strengthen their bullish signals and also reached their highest levels for months. Additionally, also the High-/Low Index Weekly showed also further signs of improvements in the past days.

Bottom Line

The technical picture of the market remains quite unchanged compared to last week. Despite the fact that the market is entering a quite challenging time period from a pure seasonal point of view (Presidential Cycle), our strategic bullish outlook has not been changed so far. With quite bullish/improving indicators all across the board, we strongly believe to see further strengths towards/above new record highs in deeper April/early May. On a very short-time frame the market is quite overbought and together with some stretched readings within our short-term oriented trend indicators, further bullish biased consolidation looks quite likely. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a significant drop within short-term market breadth. Stay tuned!