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May 11. 2014

Market Review

All three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average eked out a 0.4 percent gain over the week to close at 16,583.34. The S&P 500 lost 0.1 percent from the week ago close and finished at 1,878.48. The Nasdaq dropped 1.3 percent to 4,071.87; its worst week in a month. Among the key S&P sectors, consumer staples were the best weekly performer, while utilities dragged. The CBOE Volatility Index or the VIX, Wall Street’s fear gauge, finished at 12.92.

Short-Term Technical Condition

The current consolidation period, which has started almost eight weeks ago, has pushed the S&P 500 down nearly 1 percent from its former multi-year high in early January. Last week, we highlighted the fact that as long as we see some bullish readings within our breadth indicators, we believe that the current consolidation period remains constructive in its nature. Apparently, having a look at our indicators, the market internals have started to weaken all across the board which is a typical late cycle phenomenon! For that reason, we received more confirmation that the market is about to follow our cyclical roadmap (Charts of Interest), where we are expecting to see a bear market in mid-/late summer.

The recent sideways trading of the S&P 500 caused a small deterioration in the readings of our short-term oriented trend indicators, as the Modified MACD flashed a small bearish crossover signal last week. As already mentioned in our previous Market Comments, we are not taking a bearish Modified MACD too seriously, as long as we do not see further bearish crossover signals within our other short-term oriented trend indicators. From a pure price point of view, the short-term oriented uptrend has not been broken yet as the S&P 500 is still trading 20 points above the bearish threshold from the Trend Trader Index (1,858). In addition, it was quite encouraging to see that the Advance-/Decline 20 Day Momentum Indicator has reached its highest level since late April and is, therefore, forming a quite bullish divergence to the market if we consider the current levels from the S&P 500. All in all, the short-term uptrend of the market still remains quite bullish biased and, therefore, we think it is still too early to get concerned about the recent weaknesses we saw last week. It is not quite unusual, that some of our short-term trend indicators turn bearish during times, when the market has entered a consolidation period. Anyhow, to evaluate if any upcoming consolidation period will turn out to be more corrective in its nature, short-term market breadth is key area of focus

Unfortunately, short-term oriented market breadth had to take a hard hit during the last couple of trading sessions as most of our tape indicators have started to weaken, wiping out most of the bullish divergences we saw last week. Especially the number of stockss hitting a fresh yearly high decreased fairly, while the number of stockss dropping to a fresh yearly low has started to increase. This is telling us that the current sideways trading is not really constructive in its nature anymore as the market internals have started to weaken. Therefore, the High-/Low Index Daily started to weaken, although the indicator itself still remains bullish from a pure signal point of view. Moreover, the Modified McClellan Oscillator Daily flashed a small bullish crossover signal last week, indicating a weakening tape structure. This can be also seen if we have a closer look at the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) which remain bearish from a pure signal point of view and continued to deteriorate for the week.

From a pure contrarian point of view, the S&P 500 does not look ready for a larger correction above 5 percent at the moment as the option market is still trading in quite contrarian territory, whereas the small fry is quite scared at the moment (Odd Lot Differential Index). Moreover, we saw some smart buying last week, although the Smart Money Flow Index is already forming a long-term bearish divergence to the market, which is another indication for our cyclical roadmap. Above all, the WSC Capitulation Index is still trading at outright low levels, still giving an all-clear signal for now. Another indication that it is too early to call for an important market top is the fact that market sentiment remains outright depressed at the moment. From a trading point of view we think the S&P 500 remains in a neutral/bullish biased position as long it is trading above 1,814/1,810. Therefore, those levels should be used as stop-loss limits for any tactical long position, whereas a break above would imply a rally towards 1920/1950, which remains our favorite price projection for the current bulls-run.

Mid-Term Technical Condition

The main reason, why we believe to see further strengths towards 1920/1950 is the fact that the mid-term up-trend of the market still remains intact from a pure technical point of view. This is mainly due to the fact that the gauge from the Global Futures Trend Index is still trading above its bearish trading range bracket. As long as this is the case, we remain bullish for the mid-term. Furthermore, we can see that the WSC Sector Momentum Indicator remains outright bullish at the moment, indicating that most sectors within the S&P 500 remain 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.

Nevertheless, we can see that the current mid-term oriented up-trend is slightly running out of fuels, as the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain (100) or turned bearish (150). Moreover, we can see that the mid-term oriented advancing issues as well as mid-term oriented up-volume are receding from quite high bullish levels. In our opinion, this trend will continue over the next couple of weeks. If we get a bearish crossover signal in those indicators, we will definitely know that it is time to pull the trigger as this would be a typical pattern for a mature bull-market. Right now it is still a bit too early as they still remain quite bullish, plus the Modified McClellan Oscillator Weekly is giving no reason to worry right now.

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. Moreover, the WSC Global Momentum Indicator is telling us that most risky markets remain in a long-term uptrend and, therefore, it is still too early to get bearish from a strategic point of view. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average remains bullish, although the gauge from this reliable indicator came down a bit recently. Moreover we can see that the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. This is indicating still a positive market breadth environment for the time being. Nevertheless, the High-/Low Index Weekly as well as the Modified McClellan Volume Oscillator Weekly are already forming a long-term bearish divergence to the market. Right now it is too early to get concerned about those readings. But given the fact that we are still expecting to see a cyclical bear market later this year (Charts of Interest), we would not be surprised if those bearish divergence will start to mounting up within the next couple of weeks.

Bottom Line

The bottom line: on a short-term time frame we think the S&P 500 looks quite vulnerable for a short-term pull-back or at least capped on the upside. Nevertheless, as long as not our entire short-term trend- as well as breadth indicators turn completely bearish, it is too early for aggressive traders to short the market. Moreover, conservative members should hold their equity position as we still think the market could rally towards 1,920/1,950 before a cyclical bear market might be due in mid-summer. Stay tuned!