October 25. 2015

Market Review

U.S. stocks rallied for the week. The Dow Jones Industrial Average advanced 2.5 percent over the week to close at 17,646.97. The S&P 500 booked a 2.1 percent gain over the week and closed at 2,075.16. The benchmark index turned positive for the year. The Nasdaq rocketed 3.0 percent for the week to 5,031.86, its strongest weekly advance since July. Most key S&P sectors finished higher, led by technology and industrials, while energy ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

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 close 101 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 broad equity benchmark does not drop below 1,974. Furthermore, we can see that both envelope lines of this reliable indicator have slightly started to drift 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 finished the week at quite encouraging levels and has, therefore, clearly confirmed the recent levels from the S&P 500! If we consider the absolute readings of that reliable indicator, we can see that it has already reached extreme levels. As this indicator tends to be mean-reverting, it could be possible that the pace is likely to slow down in the next couple of trading sessions.

However, this fact by its own is not a big concern at all as short-term market breadth continued to improve last week. The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain even more bullish ground last week, indicating that the underlying breadth momentum of the broad market remains outright strong at the moment. This important fact is also confirmed by the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50), which finished the week at quite encouraging levels. As a matter of fact both gauges are, therefore, definitely confirming the break-out by the S&P 500, as the current participation of all NYSE listed stocks within the recent rally looks quite broad based. Consequently, we have been a bit surprised that we did not see a stronger spike in the total amount of new highs on NYSE last week (especially if we consider the current levels from the S&P 500). Therefore, the High-/Low-Index Daily is showing a quite bearish divergence to the current levels from the S&P 500, although the indicator itself remains bullish. The same is true if we focus on the Upside-/Downside Volume Index Daily, as its bullish gauge has shown some small signs of non-confirmation recently. However, this is not a big concern at all but might be another indication that the market might be ready for a healthy breather.

From a pure contrarian point of view, the situation is almost unchanged compared to last week. The z-score of the Daily Put/Call Ratio All CBOE Options remains within its normal range, indicating that the total amount of options being bought are in-line with their historical mean. Nevertheless, we can see that the momentum calls being bought increased significantly and, therefore, All CBOE Options Call-/Put Ratio Oscillator Weekly and the ISEE Call-/Put Ratio flashed a sell signal last week. The same is true if we focus on the Program Trading Buy-/Sell Spread Indicator. On the other hand we can see that the market has priced in a lot of bad news already, leaving the market better positioned to rally on positive surprises! Above all, we can see that the WSC Capitulation Index is still indicating a risk-on environment, whereas the Smart Money Flow Index is still showing a huge bullish divergence to the current levels from the Dow. So if we consider all the signals around, it could be, therefore, possible to see a small period of weaknesses/consolidation ahead, before further strength into Q4 can be expected. Above all, such a short-term pullback/consolidation scenario looks also quite if we analyze the current recovery with a typical path after a confirmed low (Charts of Interest).

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame as the mid-term uptrend of the market continued to strengthen last week. Especially, the gauge from our reliable Global Futures Trend Index grew into the middle part of its bullish consolidation area and, therefore, the current recovery looks definitely sustainable! Moreover, if we analyze the current trend participation of all major key sectors within the S&P 500, we can see that most industries continued to show a strong form of positive momentum last week. This is mainly due to the fact that the gauge from the WSC Sector Momentum almost turned bullish last week. This can be also seen if we focus on our Sector Heat Map, as the relative strength score from riskless money market dropped significantly last week! This is another indication that the recent break-out is definitely part of a larger recovery rather than a longer-lasting bull-trap.

This becomes quite obvious if we focus on our mid-term oriented tape indicators, which continued to strengthen last week. The Modified McClellan Oscillator Weekly turned almost bullish, whereas the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) continued to crawl towards their bullish 50 percent threshold last week. Moreover, it was quite encouraging to see that mid-term oriented up-volume continued to strengthen last week, indicating that more volume was flowing in advancing stocks than in declining ones. Basically, the same is true if we focus on the Advance-/Decline Index Weekly! Nevertheless, the absolute levels of those important tape indicators still remain a bit depressed. As a matter of fact, we do not think that the market will rally towards new record highs immediately as we need to see stronger readings within our mid-term oriented indicators first. Thus, it could be possible that the pace of the recent recovery is likely to slow down a bit until those divergences will be sorted out.

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Nevertheless, we can see a strong recovery in the relative strength score of almost all risky markets. Above all, we can see that the gauge from the WSC Global Momentum stabilized at quite low readings. This indicates that most local equity markets around the world have started to bottom out recently. This is another piece of evidence that equities are getting back on track. This can be also seen if we focus on long-term market breadth as the Modified McClellan Volume Oscillator Weekly showed a decreasing bearish gap last week. Additionally, we saw that the percentage of stockss which are trading above their long-term oriented moving averages and the High-/Low Index Weekly showed also some signs of improvements last week.

Bottom Line

The bottom line: the technical picture of the market remains quite unchanged compared to last week. With broadening strengths all across the board, we think to see further gains into Q4. Nevertheless, we do not think that the market will rally towards new record highs immediately as we need to see stronger readings within our mid-term oriented indicators first. Thus, it could be possible to see a period of consolidation ahead, before further gains can be expected. However, our bullish outlook remains unchanged and, therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!
The bottom line: the technical picture of the market remains quite unchanged compared to last week. With broadening strengths all across the board, we think to see further gains into Q4. Nevertheless, we do not think that the market will rally towards new record highs immediately as we need to see stronger readings within our mid-term oriented indicators first. Thus, it could be possible to see a period of consolidation ahead, before further gains can be expected. However, our bullish outlook remains unchanged and, therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!