November 23. 2014

Market Review

U.S. stocks gained for a fifth week, with benchmark indexes reaching all-time highs. For the week, the Dow Jones Industrial Average gained 175.32 points, or 1 percent, to 17,810.06. The blue-chip index closed at a record for the 28th time this year. The S&P 500 rose 1.2 percent to 2,063.50 for the five days. Its biggest weekly advance this month and its 45th record close for the year. The Nasdaq advanced 0.5 percent from last Friday’s close to 4,712.97. All key S&P sectors ended in positive territory, led by materials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded just above 13.

Short-Term Technical Condition

The short-term uptrend of the market continued to gain more bullish ground last week. This is mainly due to the fact that the S&P 500 managed to break above its strong resistance level at 2,050. Therefore, the broad benchmark is trading 45 points above the bearish threshold from the Trend Trader Index. This indicates that the underlying bullish trend of the market remains intact as long as the S&P 500 does not drop below 2,015. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher on a fast pace. This is telling us that within the past 20 days we saw higher highs and higher lows, which is another typical pattern for a strong short-term oriented uptrend. The same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of a threatening bearish crossover signal yet. 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 absolute level from the gauge of the Advance-/Decline 20 Day Momentum Indicator, we can see that it should be much higher, given the fact that the S&P 500 reached a new all-time high last week. In addition, the Modified MACD showed also a narrowing bullish gap, indicating some small signs of short-term exhaustion.

Right now, it is a bit too early to get concerned about those facts as our entire short-term market breadth indicators are still confirming the current short-term oriented uptrend of the market. The current trend participation of all NYSE listed stocks remains quite bullish, as the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain well above their bearish 50 percent threshold. In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are smoothly trending higher, indicating that the underlying breadth momentum of the broad market remains outright constructive at the moment. The same is true, if we focus on the High-/Low Index Daily as its bullish gauge is trading well above its bearish counterpart. This is mainly due to the fact that the total amount of all NYSE-listed stocks, which reached a fresh 52 weeks high, have recovered significantly during the last couple of weeks. Nevertheless, the bearish short-term tape divergences we mentioned last week have not been sorted out so far, although the S&P 500 is trading at record levels. Especially, the bullish gauge from the High-/Low Index Daily is trading well below its former high in mid-July, whereas the percentage of stockss which are trading above their short-term oriented moving averages (20/50) should be much stronger, if we consider the current levels from the S&P 500. As a matter of fact, short- to mid-term market breadth will remain key area of focus within the next couple of weeks, as it will give us guidance if any upcoming short-term bullish trend break will lead to stronger losses or if renewed strengths can be expected. Right now, it is a bit too early to get concerned about those facts 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 now.

The situation on the contrarian side also showed some signs of improvements last week. Apart from the fact that the gauges from the WSC Index and the WSC Index Oscillator Weekly still remain quite bearish, we can see that the Smart Money Flow Index has shown some signs of bullish confirmation recently. This indicates that big institutional investors have started to increase their exposure, as they probably are betting on the year-end rally. Moreover, the readings from the AII Bull-/Bear Spread Indicator and the ISE Call-/Put Ratio got back to quite normal levels, although we think that the increased amount of bulls on Wall Street will definitely become a burden within the next couple of weeks/months. On a very short-time frame it is a bit too early to get concerned, as the gauge from the WSC Capitulation Index is still signaling an all clear environment for now. Above all, if we focus on the Presidential Cycle, the time from late November until mid-December tends to be quite supportive, before major troubles might be due.

Mid-Term Technical Condition

The bullish mid-term oriented trend condition of the market remains almost unchanged compared to last week. The gauge from the WSC Sector Momentum Indicator is still trading far above its bearish threshold, indicating that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we focus on our Sector Heat Map, as all industries, apart from Energy, have a higher relative strength score than riskless money market. Moreover, we can see that health care remains the strongest sector for the time being and is, therefore, highly likely to continue to outperform the overall market. Anyhow, from a pure technical point of view, the current rally can be still categorized as a bullish consolidation period as the Global Futures Trend Index is still trading below its extremely bullish 90 percent threshold. As a matter of fact, the indicator is still showing a quite bearish divergence to the current levels from the S&P 500. As already mentioned last week, such a bearish divergence can be ignored as long as the gauge keeps trading above 60 percent and as long as the readings within our mid-term oriented tape indicators remain constructive.

Therefore, it was good to see that the readings within our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strengthened significantly last week. As a matter of fact, they are about to sort out their bearish divergences we worried about last week. Moreover, we saw a small bullish crossover signal within the Upside-/Downside Volume Index Weekly together with a strong bullish spike in the amount of mid-term advancing issues. As both indicators of our most important mid-term breadth indicators turned bullish, the risk of a strong blow-off top has been reduced significantly! In addition, the Modified McClellan Oscillator Weekly continued to show strong signs of bottoming out last week, indicating that the underlying market breadth momentum is regaining strength at least on low levels. Moreover, all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150) remain above their bearish 50 percent threshold and, therefore, the underlying trend structure of the market remains constructive. So all in all, most of our mid-term breadth indicators showed some improvements last week and, therefore, the risk of a sharp blow-off top/another strong correction has been reduced significantly (at least for now). Nevertheless, on a relative basis, our entire mid-term oriented breadth indicators are still showing a huge bearish divergence to the current level of the S&P 500, indicating that the current rally is not really supported by a broad basis. Anyhow, those bearish divergences can be ignored as long as the readings of our mid-term oriented trend indicators (especially the Global Futures Trend Index) remain intact and as long as we do not see that the majority of our mid-term oriented breadth indicators turn bearish. Nevertheless, it is still likely that the recent rally is just part of a complex multi-week rebound (top-building) pattern. Therefore, the most advisable approach is to watch the quality of the current-/upcoming year-end rally, as it will give us more guidance. Weather, those bearish divergences will be sorted out by the end of the year or they will mounting up and lead to a significant correction leg in late 2014/early 2015.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, whereas major local market indexes are still trading well below their recent all-time high. As a matter of fact, the gauge of the WSC Global Momentum Indicator remains well below its bullish threshold, although it showed some signs of recovery last week. This recovery can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky markets is recovering. Not a big surprise at all, is the fact that US equities are strongly outperforming all other risky markets as it has a leading strengths score. Although it looks like that the risk appetite for all risky markets is slightly getting back on track, we should not forget that the relative strength score of most risky markets is still trading below their bullish 0 percent threshold. This is another indication that global bull market is quite selective at the moment, which can be seen as another major long-term divergence. More importantly, long-term market breadth still remains quite bearish biased at the moment although we saw some signs of recovery last week. Especially, the Modified McClellan Volume Oscillator Weekly continued to show some signs of bottoming out, indicating that the long-term market internals are strengthening (at least on low levels). Moreover, we can see that the amount of long-term new highs is slowly increasing, although the High-/Low Index Weekly still remains bearish from a pure signal point of view. In addition, the percentage of stockss which are trading above their 200 day simple moving average remain above their bullish threshold, indicating that most NYSE listed stocks are still in a long-term oriented uptrend. Although we saw some encouraging signs of improvements within our long-term oriented tape indicators, their bearish divergences remain evident, which is another indication for our multi-week rebound/top building process.

Bottom Line

The overall technical market outlook remains almost unchanged compared to last week. Despite the fact that we can see major bearish divergences within our market breadth indicators, we remain bullish as we never fight an existing trend. Therefore, the most advisable approach is to watch the quality of the current-/upcoming year-end rally, as it will give us more guidance. Weather, those bearish divergences will be sorted out by the end of the year or they will mounting up and lead to a significant correction leg (very late 2014/early 2015), once we see a break within our short to mid-term oriented trend indicators. Aggressive traders should remain bullish, as long as our short-term oriented indicators remain supportive. On other hand we think a break below 2,019 would be the first sign for a major trend reversal as it would give way towards 2,000/1,990. More conservative members should remain long as long as the Global Futures Trend Index keeps trading above 60 percent. Nevertheless, it would make sense to keep their stop-loss limit to around 2,000. Stay tuned!