May 04. 2014

Market Review

All three U.S. major averages posted modest gains for the week. The Dow Jones Industrial Average added 0.9 percent to finish the week at 16,512.89. The blue-chip index closed at a record on April 30 and is down about 0.4 percent in the year-to-date. The S&P 500 increased 1.0 percent to 1,881.14 for the week. The benchmark index for American equities has climbed 1.8 percent this year. The Nasdaq gained 1.2 percent over the week to 4,123.90. Most key S&P sectors finished higher, led by technology, while utilities ended in the red. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, closed at 12.91.

Short-Term Technical Condition

On Monday, the 9-week crash cycle hit the market right on time as the S&P 500 lost nearly 1.4 percent on an intraday basis, before stocks set to rebound into the closing bell. Anyhow, the short-term up-trend of the market has continued to strengthen, as the S&P 500 is now trading 28 points above the bearish threshold from the Trend Trader Index. Plus the Modified MACD has not shown any signs of weaknesses so far. Moreover, during the whole week we saw a quite encouraging rise in the readings of the Advance-/Decline 20 Day Momentum Indicator, indicating that the trend-internals improved significantly.

Not surprisingly, short-term market breadth continued to strengthen last week and is, therefore, confirming the current short-term oriented up-trend of the market! Especially, the quite solid readings in the number of stockss which are hitting a fresh yearly high, in combination with quite depressed readings in the amount of new lows are indicating an intensifying tape structure at the moment. For that reason, the bullish gauge of our High-/Low Index Daily rose to the highest level since early April. If this trend continues, it might be just a question of time until we see new highs in major indexes. The same is true if we focus on the Modified McClellan Oscillator Daily. Both gauges of this reliable indicator continued to drift higher last week, indicating that the upside momentum of advancing issues on NYSE outpaced the declining ones. Only the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) have not passed the bullish 50 percent threshold yet, although we saw some improvements last week.

From a pure contrarian point of view, the recent sell-off on Monday has started to have its designated impact on the short-term optimism, which is needed to trigger a (sustainable) breakout by the S&P 500 from its the current trading range. The optimism among dumb money (ISEE Call-/Put Ratio and the Global Futures Dumb Money Indicator) decelerated last week, whereas the gauge of our reliable Daily Put-/Call Ratio All CBOE Options Indicator remains in contrarian/bullish territory. Moreover we can see that market sentiment remains quite depressed and, therefore, a lot of money is waiting to be invested, once the market will reach new all-time highs. Only the Smart Money Flow Index has not sorted out its bearish divergence to the Dow yet. But given the fact that the WSC Capitulation Index measures the momentum from the Smart Money Flow Index, we think that the current divergence should not be taken too seriously right now. Especially due to the fact that the gauge from the WSC Capitulation Index dropped by half of its rise already, indicating a risk-on scenario right now! Above all, we are expecting the 16-week bullish cycle next week and, therefore, we strongly believe that it is just a question of time until we see renewed rallying into mid-May.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market continued to strengthen, as the gauge from our reliable Global Futures Trend Index grew to the upper end of its bullish consolidation area. This scenario is confirming our short-term view, that it is just a question of time until the S&P 500 manages to break out of its frustrating trading range! Above all, the WSC Sector Momentum Indicator is still trading on the upper end of its scale, indicating that the entire underlying sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend! This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas industrials and materials remain the strongest sectors for the time being.

More importantly, mid-term oriented market breadth is still confirming this strong mid-term oriented uptrend; although the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) turned bearish (100) or remain weak (150). This is mainly due to the fact that the amount of advancing issues as well as mid-term oriented up-volume are giving no reason to worry right now, since their gauges are trading at quite encouraging levels at the moment. In addition, the Modified McClellan Oscillator Weekly has not turned bearish yet, indicating that the mid-term oriented market internals remain quite healthy. Normally, as long as both, advancing issues as well as mid-term oriented up-volume, are trading above their bearish counterparts, the underlying tape structure of the market remains outright bullish. We would start to get cautious, if we see some non-confirmation in their readings as we have never seen any situation in the past where the market entered a strong correction with such strong readings in those two indicators! Therefore, we stick to our cyclical roadmap (Charts of Interest and Cycles) where we are expecting to see a significant but maybe final rally towards 1,950/1,970 into summer, before a cyclical bear market might be due!

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 WSC Global Momentum Indicator slightly increased last week, indicating that 78 percent of all global market ETFs, which are covered by the WSC Global Tactical ETF Portfolio, are still in a long-term uptrend. If we have a closer look at the global relative strength scores, we can see that Emerging Markets are picking up momentum fast, which is another indication that the risk appetite among investors remains high. Furthermore, the Global Futures Long Term Trend Index is still indicating a technical bull market and, therefore, our long-term bullish outlook has not changed so far. More importantly, long-term oriented market breadth is still confirming the readings from our long-term oriented trend indicators. Especially the percentage of stockss which are trading above their 200 day simple moving average are still trading at 59 percent, plus the Modified McClellan Volume Oscillator Weekly has not turned bearish yet. Furthermore, we can see that the High-/Low Index Weekly still remains quite bullish from a pure signal point of view, although it is already forming a long-term bearish divergence to the market. As already mentioned a couple of times this year, we are still expecting to see a cyclical bear market in late Q2/early Q3 and, therefore, we would not be surprised to see increased bearish divergences within our long-term market indicator framework over the next couple of weeks.

Bottom Line

The bottom line: with broadening strengths in our short-term and especially within our mid-term oriented trend- as well as breadth indicators, we believe to see new record highs soon. Therefore, aggressive market timers should use any upcoming weakness to build up exposure, whereas conservative members should hold their equity position as we still think that the S&P 500 could rally towards 1,950/1,970 before a cyclical bear market might be due. Stay tuned!