September 29. 2013

Market Review

Last week, all three major U.S. averages finished the week with a mixed performance. For the week, the Dow Jones Industrial Average slumped 1.3 percent to close at 15,258.24. The S&P 500 decreased 1.1 percent to close at 1,691.75. Both the S&P 500 index and Dow industrials recorded their first weekly drop in four. The Nasdaq eked out a small gain of 0.2 percent for the week to end at 3,781.59. All 10 S&P sectors ended in the red for the week, dragged by consumer staples and financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped above 15.

Short-Term Technical Condition

If we have a closer look at our indicator framework, we can see that the recent consolidation period caused a small deterioration in the readings of our short-term oriented trend indicators, as the Modified MACD is about to roll over into bearish territory, if we not see a strong week of gains ahead. On the other hand side, we can see that the S&P 500 is still trading 14 points above the bearish threshold from the Trend Trader Index and in addition, both envelope lines of this reliable indicator are still rising, indicating that the short-term up-trend of the market remains strong. Moreover, the Advance-/Decline 20 Day Momentum Indicator kept trading at outright bullish levels, although its gauge has started to trade sideways, indicating that the consolidation period is not over yet! However, a consolidation period is considered to be healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening, even if we see deterioration within our short-term oriented trend-indicators.

Last week, the Russell 2000 Index has hit a new all-time high, which indicates that the broad market still looks quite healthy at the moment. Having a closer look at our short-term oriented market breadth indicators, we can see that the percentage of stocks which are trading above their short-term moving averages (20/50) slightly decreased for the week, but their gauges are far away from being bearish, plus the Modified McClellan Oscillator Daily has not flashed a bearish crossover signal yet, indicating that it is too early to get bearish from a trading point of view. The same is true if we have a look at the High-/Low Index Daily. As we have not seen any increase in the number of stockss hitting a fresh 52 week?s low (Nyse New Highs/New Lows and the High-/Low Index Daily), the current consolidation period is manly driven by profit taking, which can be seen as quite constructive. Nonetheless, the short-term oriented gauge of the Modified McClellan Oscillator Daily has started to stall and the number of stockss which are hitting a new highs have been contracting and over the last two weeks, indicating that the consolidation period is not over yet.

In last week?s comment we had highlighted that we would not be surprised to see a healthy consolidation period/pullback that should relieve overbought conditions and dampen short-term optimism. In fact, the market has entered a consolidation period last week and after we have seen the expected increased volatility, in combination with some stronger losses, the consolidation period has started to have its designated impact on short-term optimism. The option market has slightly started to become more cautious, as the gauge of our reliable Daily Put-/Call Ratio All CBOE Options Indicator has gradually moved out of its extremely bearish territory, while the small-fry (Odd-Lot Differential Index and the Odd-Lots Purchases/NYSE Volume) has also started to get quite nervous about the current condition of the market. Nevertheless, we would like to see much more pessimism around, before further gains can be expected. In the worst case, the consolidation period could last until early November, to work off this strong predominant optimism within the option market.

Mid-Term Technical Condition

As per last week’s report, the mid-term trend of the market remains well intact, as the gauge of our reliable Global Futures Trend Index increased 200 basis points to 83 percent, indicating a healthy uptrend. The same is true, if we focus on the WSC Sector Momentum Indicator. The gauge of this reliable indicator is far away from being bearish, indicating that the mid-term trend structure of most underlying sectors within the S&P 500 remains outright positive. Nonetheless, mid-term market breadth is a key area of focus right now, since most of our tape indicators are strongly lagging behind at the moment and this is the main reason why the market is not taking off at the moment.

Apart from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), our entire mid-term oriented breadth indicators are bearish from a pure signal point of view (Modified McClellan Oscillator Weekly, Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly). The Modified McClellan Oscillator Weekly has stabilized on low levels and, therefore, more consolidation is highly likely. Furthermore we can see that Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly are caught in a tug-of-war and as long as we do not see further improvements/deteriorations in their readings, the market should remain capped in both directions. However, as long as the mid-term oriented uptrend of the market remains strong, we think the chances of a stronger correction are limited. Nevertheless, if we see a break within our mid-term oriented trend-indicators, together with a deteriorating mid-term oriented tape structure, we will advise our conservative members to cut their equity exposure immediately.

Long-Term Technical Condition

Our long-term bullish view has not been changed so far, since the our Global Futures Long Term Trend Index is still indicating a technical bull market while the readings of our reliable WSC Global Momentum Indicator has increased by 500 basis points, to 57 percent last week, indicating that the most global ETFs which are covered by the Global Tactical ETF Model Portfolio are back in a long-term oriented uptrend and, therefore, the global bull market has started to regain momentum. This can be also seen, if we focus on the WSC Relative Strengths Indicator. According to this indicator, the momentum score of most risky assets managed to pass the bullish zero percent thresholds, telling us that the risk appetite of global investors is getting back on track. Especially Global Emerging Markets are gearing up momentum, a fact which we have been highlighting already over the last couple of weeks. Since last months, the iShares MSCI Emerging Market ETF (EEM) has outperformed the S&P 500 by more than 6 percent. Anyhow, long-term market breadth is still confirming the long-term uptrend of the market as the percentage of stocks which are trading above their 200 day simple moving average are far away from being bearish, while the High-/Low Index Weekly still remains bullish from a pure signal point of view. Only the Modified McClellan Oscillator Weekly has not changed its bearish status yet, although we have seen some kind of stabilization within its readings.

Bottom Line

The bottom line: right now it is a bit too early to say, if the current consolidation period will soon lead to renewed strengths or if it is the beginning of a limited set-back (5-7 percent) into early November, before cyclical tendencies should bring some relief. However, as long as we do not see further bearish crossover signals within our short- to mid-term oriented trend- as well as breadth indicators or a significant rise within the WSC Capitulation Index, we think the current consolidation period could still turn out to be a constructive one and, therefore, we stick into the bullish camp for now, but we will monitor their developments quite carefully over the next couple of days/weeks. Stay tuned!