May 08. 2016

Market Review

U.S. stocks finished the week in negative territory with all three major indexes logging their second straight week of losses. The Dow Jones Industrial Average declined 0.2 percent during the week to end at 17,740.63. The Standard & Poor?s 500 Index lost 0.4 percent from the prior Friday’s close to finish at 2,057.14. The Nasdaq tumbled 0.8 percent during the week to 4,736.16. Among the key S&P sectors, consumer staples were the top gainer and energy the worst performer on the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell below 15.

Strategy Review

After we had successfully predicted/side-stepped the January correction, it was one of our key calls that 1,810 represented an important low, as our indicator framework was telling us that the market had definitely hit rock bottom. As a consequence, we advised our members to get back into the market quite quickly afterwards and given the fact that the S&P 500 rallied almost 15 percent afterwards, our indicator framework showed once more its ability to identify every major market move. Anyhow, since then our strategic bullish outlook has not been changed so far. Nevertheless, we also mentioned a couple of times that from a pure seasonal point of view (Presidential Cycle), it could be also possible that such a low could only act as basis for another stronger rally (even towards new highs) into early Q2, before we could expect to see further major troubles into deeper summer. As those historical patterns should only be seen as a rough guideline instead of a precise trading plan, we mentioned the fact that the quality of the current rally would give us further guidance where the market is heading.

So if our cyclical roadmap (Presidential Cycle) is correct, the market should enter a distributive top building process into summer, which should then cause a growing number of bearish divergences within our indicator framework. Typically, a classical top building process can take a couple of weeks, whereas the first stronger pullback (3-5 percent) after an important high is just part of a larger distribution top. After such a pullback, the market usually strongly bounces back (above or slightly below) to its former high or it enters a consolidation period, although most of our mid-term and even sometimes our long-term oriented trend- as well as breadth indicators are already faltering/turning bearish. Otherwise, if the quality of the underlying market breadth structure remains quite solid, any upcoming (seasonal) weaknesses/consolidation should just be seen as common/healthy 3-5 percent pullback within an ongoing bull-market. So let?s have a closer look at our indicator framework, to evaluate the current condition of the market.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the market looked vulnerable for further consolidation and, therefore, it was not a big surprise at all that stocks ended down for the week. Obviously, the predicted consolidation period caused a deterioration of the short-term uptrend of the market. From a pure price point of view, this short-term trend clearly turned bearish last week as the S&P 500 closed 10 points below the bullish threshold from the Trend Trader Index. Moreover, our reliable Modified MACD continued to gain more bearish ground last week, indicating that further down-testing is likely. Nevertheless, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish as both envelope lines of the Trend Trader Index are still holding up quite well and, therefore, they appear to be quite flattish at the moment. The same is true if we focus on the Advance-/Decline 20 Days Momentum Indicator as its gauge remains bullish on quite moderate levels. As already mentioned in our previous comments, during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is no specific trend within a broad based trading range. Therefore, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period is just part of a healthy breather or the beginning of a more significant correction.

In normal circumstances, a consolidation period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, it is highly likely that such a consolidation period is just a harbinger of a more significant pullback/correction. Right now, short-term market breadth still looks quite constructive, although the impact of the recent consolidation has definitely left its mark on the readings of our tape indicators. This becomes quite obvious if we focus on the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily. Both indicators flashed a bearish crossover signal last week, showing that the underlying market breadth momentum has lost some steam (on extremely high levels) recently. Additionally most NYSE listed stocks closed below their 20 day simple moving average, indicating a weakening upside participation on a very short time frame. On the other hand, we still can see that the remaining market internals remain quite robust. This is mostly due to the fact that the number of stockss which are hitting a fresh yearly high remains at a very high level, whereas the number of stockss which have been pushed to a new yearly low remains outright depressed. Especially, the fact that we even saw an increase in the total amount of new highs during last week is telling us that the recent pullback was mainly driven by large caps so far, whereas the broad market was still holding up quite well. Consequently, it was not a big surprise at all that the High-/Low Index Daily even strengthened its bullish signal last week! So all in all, as long as we do not see further trend breaks on a 50 day basis, in combination with a strong increase in the amount of new lows or a bearish crossover signal within our High-/Low Index Daily, it might be a bit too early for any counter trend activities (profit taking or even short-selling) as the current consolidation period still looks constructive by its nature.

From a pure contrarian point of view, the overall technical picture of the market is also getting increasingly bullish on a very short-time frame. This is mainly due to the fact that the Smart Money Flow Index refused to confirm the recent pullback from the Dow. Furthermore, we can see that the increased volatility from last week caused a lot of fear among market participants as the amount of puts being bought soared. As a matter of fact, we received a buy signal within the Global Futures Put-/Volume Ratio whereas the gauge from the Daily Put/Call Ratio All CBOE Options Indicator also grew almost into bullish territory last week. Above all, we can see that market sentiment also remains supportive on a very short time frame.

Mid-Term Technical Condition

Despite the fact that the clouds are slightly gathering for the short-term, the mid-term uptrend of the market remains well intact for the time being and, therefore, it is still a bit too early to issue a strategic sell signal at the moment. This is mainly due to the fact that the reading from the Global Futures Trend Index remains extremely bullish, although it slightly lost some momentum for the week. Right now the indicator keeps trading within the top part of its bullish consolidation area. As long as this is the case, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. Right now this is not the case, but we will monitor the development of this indictor quite closely within the couple of trading sessions! However, from a pure price point of view, the mid-term oriented up-trend of the market remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far and is even trading on the highest level for months. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market keeps trading at outright low levels.

More importantly, mid-term oriented market breadth is still confirming the current mid-term oriented uptrend of the market, although we can already see some small signs of exhaustion. This is mainly due to the fact that apart from the Modified McClellan Oscillator Weekly, most of our mid-term oriented tape indicators slightly deteriorated last week. Especially, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) have come down recently, although they remain quite bullish from a pure signal point of view. Basically, the same is true if we have a look at the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly. Right now it is a bit too early to get concerned about this fact, as their small deterioration is just the impact of the recent consolidation period. Consequently, as long as the readings from most of our mid-term oriented tape indicators remain quite strong, it might be a bit too early to issue a strategic sell signal.

Long-Term Technical Condition

On a long-term time horizon, the technical picture of the market continued to show further signs of improvements last week. Especially, the gauge from the WSC Global Momentum shows that about 78 percent of all local equity markets around the world (which are covered from our WSC Global ETF Momentum Heat Map) managed to close above their long-term oriented trend lines and, therefore, the global bull market remains well in force (at least for the time being). Above all, we can see that the relative strength score from most risky assets remains supportive, whereas the Global Futures Long Term Trend Index continued to gain more bullish ground last week, although the indicator still remains bearish from a pure signal point of view. More importantly, this long-term bullish up-trend is still widely confirmed by long-term market breadth. Last week, the improvements within the bullish readings of the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly continued to increase, which is another piece of evidence for our bullish strategic outlook. Only the percentage of stockss which are trading above their (200) day moving average slightly decreased for the week, but their readings still remain quite supportive for the moment.

Bottom Line

The situation compared to last week remains almost unchanged. On a short time frame, the market looks vulnerable for further consolidation into May. However, with quite solid readings all across the board, the recent consolidation period still looks quite constructive in its nature. Consequently, another move towards new record highs after the consolidation period still looks quite possible. If such a move is accompanied with deteriorating breadth signals (especially on a mid-term time horizon), we have the ultimate piece of evidence that the market is following our cyclical roadmap (Presidential Cycle). Otherwise, further rallying after the consolidation period into deeper summer can be expected. As a consequence, our strategic bullish outlook has not been changed yet. Stay tuned!