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November 17. 2013

Market Review

U.S. stocks climbed last week, lifting the S&P 500 and Dow to record closes again. The Dow Jones Industrial Average advanced 1.3 percent, to end the week at a record 15,961.70.The S&P 500 gained 1.6 percent in the past five days to finish at 1,798.18. The broad index has posted its longest winning streak since February. Both the S&P 500 and Dow achieved their sixth weekly gains in a row. The Nasdaq gained 1.7 percent for the week to end at 3,985.97, posting its first up week in three weeks. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 12.19. All key S&P sectors ended in positive territory for the week, led by health care.

Short-Term Technical Condition

In our last week’s comment we have highlighted the fact that there is a good chance for short-lived consolidation period/serve pullback, if we see further trend breaks within our short-term oriented trend indicators, which would then give way to renewed rallying into the year’s end. In spite of the lackluster trading at the beginning of the week, the market managed to regain strength on Wednesday and, therefore, the short-term uptrend of the market has not been broken yet. The S&P 500 is now trading 41 points above the bearish threshold from the Trend Trader Index, indicating that the market is per definition in strong short-term oriented up-trend as long as the broad equity benchmark does not close below 1,757. Furthermore, we can see that both envelope lines of this reliable indicator are strongly drifting higher, which can be seen as another encouraging trend-signal for market technicians. The most important short-term trend signal is coming from the Modified MACD, which has flashed a bullish crossover signal on Wednesday and, therefore, it was not a big surprise that the market rallied for the rest of the week. Despite the fact that the gauge from the Advance-/Decline 20 Day Momentum Indicator should be much higher in our point of view (if we consider the current levels from the S&P 500), the indicator itself still remains bullish. Right now it is a bit too early to get concerned about this small bearish divergence, especially if we consider the fact that short-term market breadth was recovering quite significantly last week.

This is mainly due to the fact that the short-term oriented gauge of the Modified McClellan Oscillator Daily has slightly started to bottom out, whereas the percentage of stockss which trading above their short-term oriented moving averages (20/50) have been pushed back above their 50 percent bullish threshold (20), or have regained momentum (50), indicating that the market internals are strengthening. This coincides with the fact that the percentage of stockss which are hitting a fresh yearly high have recovered, whereas the percentages of new lows have stalled on low levels, indicating that the broad market is picking up again. All in all, our entire short-term oriented market breadth indicators have started to recover, which can be seen as quite constructive. Nevertheless, most of their readings should much stronger, given the fact that the S&P 500 has reached a new all-time high last week. In such a situation, we keep ignoring those divergences as long as the market remains in strong short-term up-trend and as long as our short-term breadth indicators are continuing to show a positive trend structure!

If we focus on our contrarian indicators, we can see that Smart Money was confirming the recent break-out by the S&P 500 and the WSC Capitulation Index has not shown any further strengths so far, giving an all-clear signal for now. The only concern at the moment is the unchanged situation on the sentiment side. According to the Daily Put-/Call Ratio All CBOE Options Indicator and to AAII survey, the crow is a way too optimistic in a contrarian point of view. Normally, it would either need a strong wash-out day or a consolidation period to dampen such strong optimism. Anyhow, as long as the market remains in a strong short-term uptrend in combination with recovering short-term market breadth, we keep ignoring those red flags on the horizon. We would get worried, only if we see a deteriorating breadth structure in combination with a breaking short-term uptrend.

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading within the upper end of its bullish consolidation area. Normally, as long as the Global Futures Trend Index remains above its 60 percent threshold, any upcoming weaknesses should only be seen as a temporary consolidation period/pullback within the ongoing bull market. 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 consumer discretionary and industrials remain the strongest sectors within the S&P 500, whereas utilities have the lowest percentage score after riskless money market. More importantly, mid-term oriented market breadth continued to strengthen at quite bullish levels and, therefore, the mid-term oriented up-trend of the market should not be in danger at the moment.

Last week’s move has pushed the percentage of stockss which are trading above their mid-term oriented moving average (100/150) back to encouraging 68/71 percent, telling us that the upside participation within the whole market is extremely broad-based and, therefore, further rallying on a mid-term time horizon can be expected! Despite the fact that the Modified McClellan Oscillator Weekly still remains bearish from a pure signal point of view, we can see that it might be just a question of time until this indicator will get back on track. However, the most promising mid-term oriented signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators continued to strengthen last week and they have, therefore, confirmed the latest move by the S&P 500! All in all, the mid-term oriented technical picture of the market is telling us right now that any upcoming short-term weaknesses should be limited in price and time!

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in-force,, therefore, our long-term bullish outlook has not been changed so far. The global trend participation remains outright broad base as the moment as the WSC Global Momentum Indicator is trading at 71 percent, indicating that the vast of all global market ETFs around the world are in a strong long-term uptrend, while the Global Futures Long Term Trend Index is still indicating a technical bull market. In such a scenario, it is highly unlikely that the market will face a sharp bear leg or even might enter a new bear market! Moreover, according to our Global Relative Strengths Indicator, Europe is the leading market in terms of momentum while the U.S. is about to regain momentum versus other risky markets. If we focus on long-term market breadth, we can see that the percentage of stockss which are trading above their 200 day simple moving average remain outright bullish, as 72 percent of all NYSE listed stocks remain in a long-term uptrend at the moment. Furthermore, it was quite encouraging to see that the High-/Low Index Weekly has continued to strengthen, whereas the Modified McClellan Volume Oscillator Weekly is about to flash a bullish crossover signal soon, indicating a strengthening long-term tape structure!

Bottom Line

The bottom line: on a very short-time frame, the market is a quite overbought (Arms (Trin) Daily, Upside-/Downside Volume Index Daily and the Advance-/Decline Ratio Daily) and, therefore, the pace is likely to slow down within the next couple of trading sessions. Nevertheless, since the short-term uptrend of the market has not been broken yet, our short-term bullish outlook has not changed so far and, therefore, we would advise our aggressive traders to buy into any upcoming weaknesses. Moreover, conservative members should hold their equity position, as our long-term bullish outlook has not been changed so far. Stay tuned!