May 24. 2015

Market Review

The three major U.S. averages finished the last week with a mixed performance. For the week, the Dow Jones Industrial Average fell 0.2 percent to close at 18,232.02. The S&P 500 gained 0.2 percent over the week to close at 2,126.06. The broad index closed at records on two of the five days. The Nasdaq, in contrast, added 0.8 percent for the week to end at 5,089.36. Among the key S&P sectors, health care was the best weekly performer, while consumer staples dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12 after hitting a year-to-date low of 11.82.

Short-Term Technical Condition

Obviously, the short-term technical trend picture of the market remains almost unchanged compared to last week. On Friday, the S&P 500 closed 26 points above the bearish threshold from the Trend Trader Index, indicating that the market is per definition in a strong short-term up-trend as long as the broad equity benchmark does not drop below 2,100. Furthermore, we can see that both envelope lines of this reliable indicator are still smoothly drifting higher as well. This can be additionally seen as a quite encouraging trend signal as it indicates higher highs and higher lows within the past 20 days. The situation is slightly different if we focus on the underlying short-term oriented trend momentum of the market. This is mainly due to the fact that the gauge from the Advance-/Decline 20 Day Momentum Indicator dropped below its bullish threshold last week. This was mainly caused by the fact that the momentum of the daily advancing issues on NYSE turned negative, indicating that the overall trend force of the market has lost some steam recently. Often the Advance-/Decline 20 Day Momentum Indicator turns bearish before the market does, thereby making it a leading indicator. Although this can be seen as a red flag on the horizon, it is a bit too early to get concerned about that fact as the Modified MACD still remains quite constructive as it gained even more bullish ground last week.

More importantly, the short-term oriented market breadth showed some signs of improvements last week! This is mainly due to the fact that we saw a quite encouraging increase in the number of stockss which are hitting a fresh yearly high, together with a quite small numbers of stocks which were pushed to a new yearly low. As a matter of fact, the High-/Low Index Daily continued to gain slightly more bullish ground last week, albeit on low levels. As a matter of fact, the High-/Low Index Daily still has not sorted out is bearish divergence yet, as the amount of total highs should be much stronger if we consider the current levels from the S&P 500. However, as long as the total amount of new lows remains outright subdued, it is a bit too early to get concerned about this bearish divergence. The situation is slightly different if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact that both indicators (20/50) remain bullish from a pure signal point of view, their gauges just barely managed to stay above 50 percent. As a matter of fact, the current trend participation still looks somehow weak, albeit still supportive. Therefore, it was good to see that the Modified McClellan Oscillator Daily flashed a small bullish crossover signal last week, whereas the Modified McClellan Volume Oscillator Daily looks like it is following soon. This tells us that the underlying breadth momentum of the market remained strength last week. So all in all, the short-term oriented technical picture of the market slightly improved last week, although most of the bearish divergences have not been sorted out yet.

The situation on the contrarian side remains quite mixed at the moment. If we focus on the AII Bulls & Bears survey, we can see that the degree of uncertainty reached almost a maximum as there are almost as many bulls than bears. This is not a big surprise at all, if we consider the fact that the market was already at the brink of a correction a couple of times this year! The gauge of the OEX Options Call-/Put Ratio Oscillator almost grew back into normal territory, whereas the WSC Capitulation Index is also almost signaling an all-clear environment for the first time since early March. Above all, we can see that the readings from the NYSE Members Debt in Margin Accounts still have not shown any signs of bearish divergences yet.

Mid-Term Technical Condition

This bullish picture is now also strongly confirmed on a mid-term time frame. This is mainly due to the fact that the mid-term oriented uptrend of the market continued to strengthen, as the gauge from our reliable Global Futures Trend Index grew into the middle part of its bullish consolidation area. This is an extremely important technical signal as it is telling us that the risk of a stronger pullback/correction diminished significantly last week as the technical trend setup changed from bearish- into bullish biased. In such a situation, pullbacks tend to be limited in price and time. However, its gauge could be a bit higher, but as long as we see solid readings above 60 percent (in combination with strong mid-term oriented market breadth) it is a way too early to issue a strategic sell recommendation. In addition, the WSC Sector Momentum Indicator is far away from being bearish, indicating that most sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend. This can be also seen if we focus on our Sector Heat Map, as health care, technology and consumer discretionary remain the strongest sectors within the S&P 500, whereas the relative strength of money market remains subdued!

Although the Modified McClellan Oscillator Weekly was rolling over into bearish territory last week, mid-term oriented market breadth still looks quite supportive at the moment. This is mainly due to the fact that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly gained even more bullish ground last week. This indicates that the overall demand has started to increase significantly. This can be seen as an outright bullish signal as we have hardly seen a stronger pullback/correction in the past, when both indicators were trading at quite bullish levels (in combination with bullish readings within our mid-term oriented trend indicators). Therefore, we are not really concerned about the fact that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are showing some form of bearish divergence, although their readings still remain bullish from a pure signal point of view. So all in all, the technical picture of the market definitely improved last week. Although some bearish divergences have not been sorted out yet, it looks like that the market internals are regaining strength again. Therefore, we would not be surprised to see a rotation into small-caps soon as it looks like the market is heading into a make instead of a break set-up (at least for the time being).

Long-Term Technical Condition

Right now, the long-term uptrend of the market has not been broken yet 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 68 percent of all global markets have not broken below their long-term uptrend yet. Nevertheless, we can see that the overall long-term oriented trend-momentum still remains quite weak, if we have a closer look at the WSC Global Relative Strength Index. Right now we are not taking this signal too seriously as long-term market breadth remains quite supportive and, therefore, we think that the current long-term uptrend of the market is not in danger at all. Especially our long-term oriented High-/Low Index Weekly is still trading at 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

The bottom line: with broadening strengths within our indicator framework (especially on a mid-term time horizon), we think to see further strength into June (albeit on a very slow pace). For that reason, we would advise our aggressive to focus on the long-side, although they should keep an eye on the Modified MACD. On a mid-term time horizon the technical market condition also improved fairly and, therefore, the threatening correction/pullback risk has diminished significantly. As a matter of fact, conservative members should hold their equity position and they should additionally cancel their existing stop-loss limit around 2,070. Nevertheless, we will monitor the Global Futures Trend Index closely within the next couple of weeks! Stay tuned!