November 02. 2014

Market Review

U.S. stocks rallied for the week, capping a monthly advance and returning benchmark indexes to records. The Dow Jones Industrial Average jumped 3.5 percent during the week to at a record level of 17,390.52. The blue-chip average had its best week since January 2013 and is up 2 percent for the month. The S&P 500 rose 2.7 percent to 2,018.05 in the week, topping its Sept. 18 record on the final day. The index added 2.3 percent in October. The Nasdaq rallied 3.2 percent for the week to 4,630.74 and closed at the highest level since March 2000. The technology-laden index is up 3.1 percent from the month-ago finish. All 10 of the main S&P 500 groups advanced in the week, led by technology. The Chicago Board Options Volatility Index (VIX) tumbled 13 percent to 14.03 for a second week of losses. The gauge known as the VIX plunged 47 percent since Oct. 15 when it closed at the highest since June 2012.

Short-Term Technical Condition

Right in line with our recent call, U.S. stocks strongly rallied last week, pushing major averages to new record highs. Last week, we highlighted the fact that such a move should only be part of a complex and corrective multi-week rebound pattern, if we did not see a significant recovery and/or further strength/confirmation within our indicator framework. Despite the fact that the recent retest of the old September top was not a big surprise at all, we have been quite astonished by the strong recovery within our short-term oriented indicator framework, whereas the mid-term technical condition of the market still shows some major signs of non-confirmation right now. This will be key area of focus within the next couple of weeks.

Not surprisingly, the short-term oriented uptrend of the market remains well intact as the readings from our entire short-term oriented trend-indicators continued to strengthen significantly last week. As the latest advance took place on a very fast pace, we can see that the S&P 500 is now trading almost 100 points above the bearish threshold from the Trend Trader Index! This indicates that from a pure price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not close below 1,918. Moreover, we can see that both envelope lines of that reliable indicator have started to drift higher as well, indicating that this threshold is highly likely to increase as well on a fast pace. This is a typical pattern for a strong short-term oriented up-trend. The same is true if we focus on the Modified MACD, which continued to show a widening bullish gap, after it had flashed a bullish crossover signal almost 3 weeks ago. Basically, we receive the same readings within our Advance-/Decline 20 Day Momentum Indicator, which finished the week at quite bullish levels. Nevertheless, we should not forget to mention that its gauge should be much higher, given the fact that the S&P 500 reached a new all-time high last week.

However, this small bearish divergence can be ignored at the moment, as short-term oriented market breadth continued to improve significantly and is, therefore, confirming the current short-term oriented uptrend of the market! The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain even more bullish ground last week, indicating that the underlying breadth momentum of the broad market remains outright strong at the moment. This important fact is also confirmed by the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50), which have been pushed back to quite encouraging levels. As a matter of fact both gauges are, therefore, confirming the break-out by the S&P 500, as the participation of all NYSE listed stocks within the recent rally looks quite board based. Additionally, we saw a strong surge 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! Especially on Friday, there were about 358 stocks which were pushed to a new yearly high, one of the highest readings this year! This is telling us that the current break-out from the S&P 500 looks absolutely healthy and, therefore, the risk of a sharp blow-off top is quite unlikely (at least from a short-term oriented point of view). This can be also seen, if we have a look at the High-/Low-Index Daily. The bullish gauge of this indicator rose to quite encouraging bull-market levels and is, therefore, confirming the new high we have seen by the S&P 500.

From a pure contrarian point of view, we can see that the market worked off that strong predominant pessimism among the option market as the z-score of the Daily Put/Call Ratio All CBOE Options dropped within its normal range. Moreover, we can see that the NYSE Short-Interest Ratio dropped to the lowest level since March 2013 and, therefore, the recent move by the market was mostly driven by a massive short-squeeze. This is telling us that apart from the fact that a lot of put holders and short-sellers were wiped out last week, it is quite unlikely that the market will continue to push higher on such a fast pace like last week. On other hand, we can see that the gauge from the Smart Money Flow Index has not confirmed the new all-time high from last week, which is another piece of evidence for our complex multi-week rebound scenario. This can be also observed if we focus on the z-score of the ISEE Call/Put Ratio, which grew into extremely bearish territory last week. This indicates that the amount of calls being bought by the small fry is now standard deviations away from its historical mean, which can be seen as a quite bearish mid-term oriented signal. However, on a very short time frame, the WSC Capitulation Index is signaling an all clear environment as its gauge dropped by half of its rise.

Mid-Term Technical Condition

The most important mid-term oriented trend signal is coming from the Global Futures Trend Index, which was pushed back into the middle part of its bullish consolidation territory on Tuesday, giving a strong buy signal for conservative investors. Last week, we highlighted the fact that we would remain quite cautious if any upcoming retest/break is not confirmed by clear readings above 60 percent from that reliable indicator as such a situation would be a clear sign for a major blow-off top. With solid readings above 60 percent, equities do not appear to be at risk of entering a high double digit drop or even a new cyclical bear market at the moment. Nevertheless, its gauge should be much higher, given the fact that the S&P 500 reached a new all-time high last week. Right now, this divergence can be ignored, but if we do not see further strengths in its readings or even a decreasing level, it would be another piece of evidence for our multi-week corrective rebound scenario. If we analyze the current trend participation of all major key sectors within the S&P 500, we can see that most industries remain or got back into a mid-term oriented trend, as the gauge from the WSC Sector Momentum strengthened its bullish signal last week. This can be also seen if we focus on our Sector Heat Map, as the relative strength from riskless money market dropped significantly last week. Nevertheless, we can observe that the gauge from the WSC Sector Momentum Indicator should be also much higher and, therefore, the current mid-term oriented uptrend of the market looks a bit mature.

This can be also seen if we analyze the mid-term market breadth, which is definitely key area of focus right now. Despite the fact that the market is trading at a new multi-year high, the developments within our mid-term oriented tape indicators have been developing moderately so far. Especially, the Advance-/Decline Line Daily did not confirm the recent high, indicting a quite serious mid-term oriented bearish divergence. More importantly, although the Advance-/Decline Index Weekly flashed a small bullish crossover signal last week, its readings are far away from confirming the current level from the S&P 500. The same is true if we focus on the Upside-/Downside Volume Index Weekly and the Modified McClellan Oscillator Weekly, which both remain quite bearish from a pure signal point of view, although they have shown some form of stabilization on low levels recently. This indicates that the tape condition of the market still remains extremely vulnerable at the moment, which is another piece of evidence for our corrective multi-week rebound scenario. Only the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) managed to pass their bullish 50 percent threshold, although we can also see a lot of non-confirmations within their readings.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains quite unchanged compared to last week. Apart from the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, most global market indexes are still trading well below their long-term oriented trend-lines, although we saw a strong global rally last week. As a matter of fact, the WSC Global Momentum Indicator still remains quite bearish and indicates that only 28 percent of all global equity markets are still within a long-term oriented up-trend. This picture is widely confirmed by the Global Relative Strength Index, which indicates that the relative strengths of U.S. Treasuries are higher than any other risky market at the moment, whereas U.S. equities are also holding up quite well. This is another indication that the global bull-market has reached a quite mature stadium. More importantly, long-term oriented market breadth remains quite bearish, which is another indication that the easy buy and hold gains might have come to an end. Despite the fact that the Modified McClellan Volume Oscillator Weekly showed some signs of bottoming out, its readings are far away from crossing any bullish crossover signal, whereas the bearish readings from High-/Low Index Weekly remain almost unchanged compared to last week. So all in all, we have received even more confirmation that the current bounce might be just the part of a complex multi-week rebound pattern which could lead to renewed weaknesses afterwards.

Bottom Line

After we have successfully side-stepped the latest correction, it was one of our key calls that 1,820 represents an important low and, therefore, we advised our members to buy into weaknesses as we expected to see at least a retest of the old September top. Moreover, we mentioned that such a move would only be part of a corrective multi-week rebound pattern and, therefore, the risk of another down-leg within that year is still given! Despite the fact that our entire short- to mid-term trend indictors got back on track, we can still see a lot of non-confirmation and even some bearish signals within our mid- to long-term oriented breadth indicators (which is in line with our rebound scenario). Such a situation can never be sustainable over the long run and either we see a strong recovery in the readings of our mid-term oriented breadth indicators (not our preferred scenario) or the market will face another strong down-leg once we see a break within our short- to mid-term oriented trend indicators. However, as the short- to mid-term oriented trend (Global Futures Trend Index above 60 percent) remains intact, we do not fight an existing trend and, therefore, we remain bullish for the time being. Nevertheless, we will monitor our indicators quite closely over the next couple of days/weeks as they will tell us when it is time to pull the trigger again. From a pure trading point of view, we would advise our aggressive traders to keep their long positions as long as the S&P 500 trades above 1,975 and as long as our short-term indicators remain constructive. Conservative members should remain long as long as the Global Futures Trend Index keeps trading above 60 percent. Nevertheless, it would make sense to adjust their stop-loss limit to around 1,940. Stay tuned!