March 27. 2016

Market Review

U.S. stocks finished the holiday-shortened week nearly unchanged. For the week, the Dow Jones Industrial Average lost 0.5 percent to close at 17,515.73. The S&P 500 declined 0.7 percent to end at 2,035.94. The Nasdaq shed 0.5 percent for the week to end at 4,773.50. Among the key S&P sectors, health care was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 14.7.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market remains quite unchanged compared to last week. The S&P 500 is still trading 41 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 1,994. Furthermore, we can see that both envelope lines of this reliable indicator are strongly 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. This bullish short-term uptrend is also supported by the readings of the Modified MACD, which have not shown any signs of a bearish crossover signal so far. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator is still trading at quite encouraging bullish levels. Nevertheless, if we focus on the overall momentum of that reliable indicator, we can see that it has formed some bearish divergences recently. As this indicator tends to be a leading one, a period of consolidation looks quite likely.

This view is also widely confirmed by short-term market breadth. Despite the fact that the readings from our entire short-term oriented market breadth indicators remain quite supportive/bullish, we can see that some of them have lost some steam recently. This becomes quite obvious if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact that the readings from both indicators (20/50) kept trading at quite solid bullish levels, we can see that on a 20 days? time frame the gauge dropped significantly for the week. This indicates that the underlying short-term oriented trend structure of the market has started to level down. On top of that, we also can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have also shown some small signs of fatigue. Basically, the same is true if we focus on the NYSE New Highs ? New Lows Indicator, as the total amount of new highs remain supportive but it should be definitely a bit stronger if we consider the speed of the current rally. As matter of fact, the High-/Low Index Daily is forming somehow a bearish divergence, although the indicator itself remains quite bullish from a pure signal point of view. So all in all, it looks like that the market is entering a period of consolidation. However, right now it is a bit too early to get concerned about this fact as we have not seen any bearish crossover signals within our short-term indicators so far and, therefore, we stick within the bullish camp for the time being.

The situation on the contrarian side remains almost unchanged compared to last week. The Smart Money Flow Index continued to strengthen its outright bullish divergence to the Dow, indicating that big institutional investors have not switched to the bearish side yet. This can be also seen if we have a closer look at the WSC Capitulation Index as it is still indicating a risk-on environment for risky assets. Only the greed among the option market remains persistent (All CBOE Options Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, Global Futures Put-/Volume Ratio and the WSC Index Oscillator Weekly). As already mentioned last week, in such a situation, it is not unusual to a see a washout day or at least a period of consolidation ahead. Consequently, it was not a big surprise at all that the market finished nearly unchanged compared to last week.

Mid-Term Technical Condition

Despite the fact that further back and fill environment is likely on a very short-time frame, equities do not appear at risk for a stronger correction at the moment! This is mainly due to the fact that the Global Futures Trend Index is still trading far above its bearish 60 percent threshold. To be more precise, its gauge finished the week within the upper range of its bullish consolidation area and is, therefore, still confirming the current levels from the S&P 500. As already mentioned a couple of times, we would get quite cautious if its gauge would drop below 60 percent (in combination with weakening market breadth), as such a situation was always a clear indication for a major trend reversal in the past. As a matter of fact, it is a bit too early to get concerned about any potential short-term oriented consolidation period right now. In addition, the WSC Sector Momentum Indicator also grew almost into the bullish area last week, indicating that most sectors of the S&P 500 continued to strengthen their underlying mid-term oriented up-trend last week. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of most sectors remains above the one from riskless money market. Nevertheless, there we can also see that the selectivity within those sectors remains also quite high.

More importantly, the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. This is mainly due to the fact that the Modified McClellan Oscillator Weekly continued to show a widening bullish gap, 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. This is mainly due to the fact that both indicators are trading at outright bullish levels at the moment. Normally, as long as both, mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, any upcoming short-term oriented weaknesses should be limited in price and time. We would start to get cautious, if we see some stronger non-confirmation in their readings ª(together with a weakening mid-term oriented trend-structure) 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 quite bullish 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 unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Nevertheless, we can see a strong recovery in the relative strength score of almost all risky markets, indicating that the long-term oriented risk-on trade is also slightly getting back on track. This view is also confirmed by the readings from the WSC Global Momentum, which also gained quite bullish ground last week (although the indicator itself still remains quite bearish for the time being). As a matter of fact it was also good to see that long-term market breadth in the U.S. also continued to strengthen last week. Especially, the Modified McClellan Volume Oscillator Weekly as well as the percentage of stockss which are trading above their long-term oriented moving averages have shown further signs of recovery, whereas the total amount of long-term new lows also continued to decrease for the week.

Bottom Line

Basically, the technical picture of the market remains quite unchanged compared to last week and, therefore, our strategic bullish outlook has not been changed so far. Nevertheless, on a very short-time frame the current consolidation period of the market is likely to continue for a while. However, given the quite solid readings on a mid-term time horizon, we think any upcoming consolidation period should be limited in price and time. 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!