January 19. 2014

Market Review

The three major U.S. averages finished another week with mixed results. The Dow Jones Industrial Average eked out a small gain of 0.1 percent to finish at 16,458.56. The blue-chip average managed to post its first weekly gain of the year but is still down 0.7 percent for the year. The S&P 500 fell 0.2 percent for the week to finish at 1,838.70. The broad index is down 0.5 percent for 2014. The Nasdaq advanced 0.6 percent for the week to 4,197.58, up 0.5 percent for the year. Among the key S&P sectors, technology was the best weekly performer, while energy dragged. The Chicago Board Options Exchange Volatility Index (VIX) finished at 12.44.

Short-Term Technical Condition

In last week’s comment we highlighted the fact that we expect to see either a sharp wash-out day or a short-lived period of consolidation that should relieve overbought conditions and dampen short-term optimism before further gains can be expected. In fact, after Monday’s steep selloff in the major indices, the market reversed and rallied two days straight, as the 16-week cycle hit the market right on time, erasing the initial losses. Furthermore, S&P 500 has reached a new bull market high on Wednesday, before profit-taking on Thursday and Friday shaved off some of those gains.

If we have a closer look at our short-term oriented indicator framework, we can see that the current consolidation period is not completely over yet, as our reliable Modified MACD has not managed to turn bullish last week. Apart from that fact, the short-term uptrend of the market still looks quite constructive, as the the S&P 500 is still trading 10 points above the bearish threshold from the Trend Trader Index. In addition, both envelope lines of this reliable indicator are still strongly drifting higher, indicating that the underlying price driven trend of the market remains outright bullish at the moment. Furthermore, the gauge from the Advance-/Decline 20 Day Momentum Indicator has clearly confirmed the recent breakout by the S&P 500, as its gauge is trading at outright high levels at the moment. As already mentioned last week, it is not unusual that some of our short-term oriented trend indicators tend to deteriorate, when the market is entering a consolidation period or if the market is taking a healthy breather. In such a situation, short-term market breadth will give guidance if any upcoming short-term bullish trend break will lead to stronger losses or if renewed strengths can be expected. In general, a consolidation period is considered to be healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening, even if we see further deterioration within our short-term oriented trend-indicators.

As per last week’s report, our entire short-term oriented market breadth indicators remain outright strong, telling us that the current consolidation period should be limited in price and time. Especially the High-/Low Index Daily as well as the Nyse New Highs minus New Lows Indicator are indicating that the last week’s decline was mainly driven by profit taking, as we have only seen a decline in the number of stockss which are hitting a fresh yearly high whereas the number of stockss which have been pushed to a new yearly low remain quite depressed. As long as we do not see an increase in the amount of new lows or a bearish crossover signal within our High-/Low Index Daily, the market internals remain outright bullish from a pure signal point of view. The same is true if we have a look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that their readings came down a bit recently, the gauges of both indicators are trading well above their 50 percent bearish threshold, indicating that the majority of all NYSE-listed stocks are per definition in a short-term uptrend. Another encouraging breadth signal is the fact that both trend lines from the Modified McClellan Oscillator Daily keep steadily drifting higher since mid December 2013, indicating that the market internals have not shown any signs of weaknesses yet.

Despite the fact that the recent selloff had the positive effect of relieving overbought conditions (Arms (Trin) Daily), short-term optimism within the option market (Daily Put/Call Ratio All CBOE Options, the CBOE Call/Put Ratio Oscillator Weekly and the Put/Call Ratio All CBOE Options Weekly) and among dumb money (Odd Lots Purchases/Nyse Volume and the ISE Call/Put Ratio) has not decreased at all, leaving the market vulnerable for short-term disappointments. As already mentioned last week, according to our investment process, we keep ignoring those bearish signals from our contrarian indicators as the current readings of our short-term oriented indicators are telling us that it is still a way too early to get bearish yet. Furthermore, as long as we do not see a short-term oriented trend break in combination with a huge decline in short-term oriented market breadth we think to see further strengths ahead, although the advance will be most likely be accompanied with increased volatility.

Mid-Term Technical Condition

The most important mid-term oriented trend signal is coming from the Global Futures Trend Index, which has been pushed slightly above the strong bullish 90 percent threshold last week, flashing a strong bullish signal for mid-term oriented investors. Moreover, our reliable WSC Sector Momentum Indicator is trading on the upper end of its bullish range, indicating that most sectors within the S&P 500 are in a strong mid-term oriented uptrend.

More importantly, this strong mid-term oriented up-trend is widely being confirmed by mid-term oriented market breadth, since Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly remain quite bullish from a pure signal point of view, plus the Modified McClellan Oscillator Weekly has continued to gain more bullish ground. Moreover, it was good to see that the Advance-/Decline Index Weekly has slightly started to sort out its bearish divergence to the S&P 500, as the amount of mid-term oriented advancing issues on NYSE have gained further strengths last week. If we focus on our Sector Rotation Strategy Heat Map, we can see that the relative strengths score of riskless Money Market is trading at 0 percent, telling us that all sectors within the S&P 500 are trending higher and, therefore, the current up-trend of the market looks outright healthy at the moment. The same is true if we have a look at the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). More than 70 percent of all stocks which are listed on Nyse are per definition in a mid-term oriented up-trend at the moment and, therefore, the upside participation within the whole market is extremely broad-based! Given the outright healthy trend- and tape structure which we can see on a mid-term time horizon, we strongly believe that any upcoming short-term oriented consolidation period will be limited in price and time!

Long-Term Technical Condition

The picture for the long-term remains nearly unchanged compared to last week and, therefore, our long-term bullish outlook has not been changed so far. The our Global Futures Long Term Trend Index is still indicating a technical bull market while the readings of our reliable WSC Global Momentum Indicator indicates that slightly more than 50 percent of all global ETFs which are covered by the Global Tactical ETF Model Portfolio remain in a long-term oriented uptrend. Moreover, according to the WSC Relative Strengths Indicator, developed market equities remain in a strong long-term oriented uptrend and are, therefore, the most attractive asset class from a pure asset allocation point of view. Despite the fact that our entire long-term oriented trend indicators remain bullish from a pure signal point of view, we can see that most risky markets (apart from developed market equities) have started to lose momentum, indicating that the overall risk-on environment has slightly started to deteriorate. This can be also seen within our WSC Global Momentum Indicator which is about to flash a bearish signal, if we do not see significant strength ahead. Right now, it is a bit too early to take those developments too seriously, since long-term oriented market breadth is still confirming the current long-oriented uptrend of the market. Especially, the percentage of stocks which are trading above their 200 day simple moving average are far away from being bearish, the Modified McClellan Volume Oscillator Weekly has continued to strengthen for the week, plus the number of stockss which are hitting a fresh 52 weeks highs are trading well below their bearish counterparts, indicating a quite healthy tape structure. However, according to our Technical Market Outlook 2014, a cyclical bear market is highly likely to occur this year and, therefore, we would not be surprised if we see further deterioration within our indicators over the next couple of weeks, which could lead to significant losses in Q3 2014.

Bottom Line

The bottom line: on a very short-time frame, we cannot rule out further consolidation and/or increased volatility ahead, as most of our contrarian indicators have flashed a sell signal last week or remain bearish from a pure signal point of view. Nevertheless, given the fact that short- to mid-term market breadth looks quite healthy at the moment, we think that any upcoming consolidation period/healthy pullback should be limited in price and time. Therefore, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see further breaks within our short-term trend-indicators in combination with a significant drop within our short-term market breadth indicators. Stay tuned!