February 09. 2014

Market Review

U.S. stocks finished the week with modest gains. The Dow Jones Industrial Average gained 0.6 percent for the week to finish at 15,794.08, ending a two-week losing streak. After three straight weeks of losses, the S&P 500 gained 0.8 percent for the week to close at 1,797.02. Both the Dow and the S&P 500 posted their best week of the year. The Nasdaq advanced 0.5 percent for the week to end at 4,125.86. The CBOE Volatility Index (VIX) finished at 15.29. Among the key S&P sectors, materials were the best weekly performer, while utilities dragged.

Short-Term Technical Condition

In last week’s comment we highlighted the fact that a corrective bounce might be possible and aggressive traders should sell into any upcoming strength since a strong (and maybe final) pullback towards 1,760/1,730 was expected. On Wednesday, the S&P 500 exactly reached the lower end of our preferred price target, as the bears took the broad index down to 1,738.77 on an intraday basis, before stocks strongly rebounded for the rest of the week. Despite the fact that the market showed some solid gains last week, the improvements in the readings of our short-term oriented trend indicators have been developing moderately so far. The S&P 500 managed to close within the neutral territory of the Trend Trader Index, whereas the gauge of the Advance-/Decline 20 Day Momentum Indicator just barley flashed a bullish signal last week, indicating that the current up-trend of the market remains quite fragile at the moment. Therefore, any stronger down-day could easily lead to a bullish trend-break signal within those indicators. Moreover, the Modified MACD, still remains quite bearish from a pure signal point of view. Nevertheless, it was quite encouraging to see that the Modified MACD showed some signs of recovery last week. Given the fact that we saw a strong surge in the short-term oriented gauge of this reliable indicator, we strongly believe that any upcoming weaknesses will most likely produce a bullish divergence in its readings, since quite heavy losses would be necessary to bring this short-term oriented gauge back to its former low! Another bullish divergence is coming from the Advance-/Decline 20 Day Momentum Indicator, which refused to drop to a new low on Wednesday, indicating that 1,738.77 could represents an ultimate bottom!

Moreover, it was good to see that short-term oriented market breadth showed some improvements compared to last week, although not all of our tape indicators have turned bullish yet. The most encouraging signal is coming from the High-/Low-Index Daily, which flashed a small bullish crossover signal last week. The main reason for this bullish crossover signal is the fact that we have seen a quite strong reduction in the number of stockss which are hitting a fresh 52-week’s low, in combination with a small increase of those stocks which have hit a new 52 week’s high, indicating that the market internals are strengthening. Another important fact is that there were fewer stocks which had hit a fresh low on Wednesday (where the S&P 500 dropped to 1,738.77) compared to the recent 9-to-1 down-day we saw on Monday, two weeks ago. This is telling us that it is highly likely that we should have seen the worst already as such a situation is a typical pattern for an important bottom. Nevertheless, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have not turned bullish yet, indicating that most listed stocks on NYSE are still per definition in a short-term oriented down-trend. Furthermore, we can see that the Modified McClellan Oscillator Daily still remains bearish from a pure signal point of view, although the indicator itself has shown some signs of bottoming out.

From a contrarian point of view, we have received even more confirmation that we have seen the worst already as the Daily Put/Call Ratio All CBOE Options Indicator has moved into contrarian territory, the bears among Wall Street have increased to the highest level since August 2013 and the Volatility Index has dropped significantly after the spike we saw on Wednesday. This indicates capitulation among the crowd. Moreover, from a cyclical point of view (Charts of Interest), we already have highlighted the fact that we are expecting to see an important (intermediate) bottom in mid-February, which should act as basis for another strong rally into Q2, which could lift the S&P 500 towards 1,950/1,970, before renewed weaknesses can be expected.

Mid-Term Technical Condition

Despite the fact that we have some improvements in the Global Futures Trend Index, its gauge still remains within its bearish trading range area and is, therefore, not confirming the current levels from the S&P 500! As already mentioned last week, as long as the indicator does not close above 60 percent, the risk of sharp pullbacks remains outright high. Nevertheless, from a pure price point of view, the market still remains in a mid-term oriented up-trend as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. The indicator is telling us that most sectors within the S&P 500 remain in a strong uptrend and are outperforming riskless money market. This can be also seen if we have a closer look at our Sector Heat Map, since the relative strength score of riskless money market remains at zero percent. For that reason, the mid-term oriented trend looks quite damaged but intact for the time being.

More importantly, the current mid-term oriented up-trend of the market is still being confirmed by mid-term oriented market breadth. The Modified McClellan Oscillator Weekly showed a decreasing bearish gap, plus the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) have turned bullish again (100) or continued to strengthen (150), indicating that most stocks on NYSE are per definition in a mid-term oriented up-trend. Moreover, it was quite encouraging to see that mid-term oriented up-volume has strengthen for the week, indicating that more volume was flowing in advancing stocks than in declining ones. Only the total amount of advancing issues on NYSE remains quite depressed but at least the Advance-/Decline Index Weekly still remains bullish from a pure signal point of view, although we saw a quite strong correction during the last two weeks.

Long-Term Technical Condition

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 that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Only the WSC Global Momentum remains quite bearish, as most global equity markets (especially emerging markets) have started to underperform riskless money market. More importantly, long-term oriented market breadth is still confirming the current long-term oriented uptrend of the market, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish. Additionally, the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Only the Modified McClellan Volume Oscillator Weekly still remains bearish, indicating that the overall long-term demand has started to weaken. As already mentioned last week, we would not be surprised to see further deterioration within our mid- to long-term oriented indicators over the next couple of weeks, as we are still expecting to see a cyclical bear market later this year.

Bottom Line

The bottom line: Although we strongly believe that 1,738.77 have marked an important low, the bottom building process is not completely over yet as we still want to see further improvements in short-term oriented market breadth. For that reason, we cannot rule out renewed weaknesses on a short-term time frame. However, given the fact that we have seen already some typical signs for a market bottom within our contrarian indicators, plus our cyclical roadmap is predicting seasonal tailwinds, we would advise our aggressive members to start slightly buying into weaknesses; and to increase their exposure if we will see more bullish divergences/confirmations within our short-term oriented indicators. More moderate members, should wait until the bottoming out process is completely done (stronger bullish signals within our short-term trend indicators and/or a strengthening/bullish Global Futures Trend Index). Stay tuned!