September 04. 2016

Market Review

Stocks were modestly higher on the week, but major U.S. indexes have traded in a noticeably tight window over the last month and half. For the week the Dow Jones Industrial Average eked out a small gain of 0.4 percent to finish at 18,491.96. The S&P 500 finished at 2,179.98 and recorded a weekly gain of 0.4 percent as well. The Nasdaq posted also a weekly gain of 0.4 percent to end at 5,249.90. Among the key S&P sectors, financials were the best weekly performer, while health care dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded more than 9.5 percent lower, near 12.2.

Short-Term Technical Condition

In line with our recent outlook, the market continued to be in a consolidation mode last week. From a pure short-term oriented price point of view, the trend status from the S&P 500 turned quite neutral after it managed to close within both envelope lines of the Trend Trader Index. Nevertheless, the underlying trend structure of the market remains quite supportive as both envelope lines of this reliable indicator are still drifting higher. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a solid uptrend, at least from a pure price point of view. The situation is different if we analyze the overall trend momentum of the market. Especially, the weak readings from the Modified MACD are still indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator, as its gauge continued to trade sideways on low bullish levels, indicating that the recent consolidation period is highly likely to continue next week.

Not surprisingly, the short-term oriented breadth momentum of the market (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily) remains extremely subdued, after the market kept trading in a tight range for more than six weeks. Apart from that fact, we can see that the overall tape structure still looks quite constructive for the time being. As a matter of fact, we do not think that the market looks ready for a stronger pullback at the moment. To be more precise, the percentage of stockss which are trading above their short-term moving averages (20/50) are trading at quite solid levels (61/66 percent), indicating that it is a bit too early to get too cautious at the moment. Additionally, we have seen absolutely no stronger spike/increase in the total number of stockss which are hitting a fresh yearly low, which would be also a typical technical pattern that a stronger trend reversal is imminent. On the other hand, we can see that there were about 208 new highs on Friday, although the S&P 500 gained only 0.42 percent on that day. This was a quite solid number, indicating that the market internals still look quite healthy at the moment. As a consequence, the High-/Low Index Daily is trading at quite supportive levels although its bullish gauge should be definitely much higher, if we consider the current level from the S&P 500. So all in all, given the quite constructive, but somehow non-confirmative short-term oriented trend and breadth signals, the consolidation period is likely to continue for a while.

On the contrarian side, the situation is almost unchanged compared to last week. From an absolute level, the Smart Money Flow Index remains outright bullish as it gauge reached also a new high last week. Nevertheless, we can see that its gauge continued to trade sideways which is another indication that the recent consolidation period might continue for a while. Moreover, we can see that the OEX Call-/Put Ratio Oscillator Weekly and the ISEE Call-/Put Ratio are giving some bullish impulses whereas the WSC Capitulation Index is still signaling a risk-off market scenario. So even from a pure contrarian point of view, further bullish biased sideways trading looks quite likely.

Mid-Term Technical Condition

Despite the fact that further consolidation 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 the reading from the Global Futures Trend Index remains outright bullish. Right now the indicator keeps trading above its extremely bullish 90 percent threshold. As long as this is the case, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. This is not the case right now. In addition, we can see that the gauge from the WSC Sector Momentum Indicator kept trading at outright bullish levels, indicating that the majority of sectors within the S&P 500 remains in a solid mid-term oriented uptrend at the moment. 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 zero percent, indicating that all sectors within the S&P 500 should continue to perform positive on an absolute basis.

Another encouraging fact is that the current 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) strengthen in the last couple of trading sessions and are, therefore, clearly confirming the current level of the S&P 500! Another positive signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators were holding up quite well and, therefore, they remain outright bullish. This indicates that the total upside participation within the market still looks quite broad based, which is another indication that it might be a bit too early to take the chips from the table. 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 can be expected on a mid-term time horizon (and, therefore, it is a way too early to take the chips from the table).

Long-Term Technical Condition

The long-term uptrend of the market remains well intact and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 85 percent of all local equity markets around the world remain in a long-term oriented uptrend at the moment. Moreover, we can see that the relative strength of most risky markets keeps trading above the one from U.S. Treasuries which is another indication for a risk-on market environment. Above all we can see that long-term market breadth is giving no reason to worry right now and, therefore, we think that the current long-term uptrend of the market is not in danger at all (at least for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at quite supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stockss which are trading above their longer-term oriented moving averages (200)!

Bottom Line

Our outlook remains unchanged compared to last week. On a very short time frame, the market looks quite vulnerable for further bullish biased consolidation or for a sentiment driven washout day. Nevertheless, with quite supportive/bullish indicators (especially on a mid- to long-term time horizon) all across the board, we have not seen any typical signs for a major top-building process yet. As a consequence, our bullish outlook has not been changed so far. Therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should definitely remain in the bullish camp. Stay tuned!