November 08. 2015

Market Review

U.S. stocks finished the week with gains. The Dow Jones Industrial Average rose 1.4 percent from the prior Friday’s close, to end at 17,910.33. The S&P 500 soared 1.0 percent for the week to end at 2,099.20. The Nasdaq climbed 1.9 percent to finish at 5,147.12. All three averages posted their longest period of weekly gains since late last year. Most key S&P sectors ended in positive territory for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell below 15.

Short-Term Technical Condition

Apparently, the short-term oriented trend of the market remains almost unchanged compared to last week. This is mainly due to the fact that S&P 500 closed 51 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,048. Furthermore, we can see that both envelope lines of this reliable indicator are strongly drifting higher on a fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the trend lines 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 is still trading in bullish territory, although it has shown some signs of non-confirmation recently.

As already mentioned last week, right now it is a bit too early to get concerned about those facts as our entire short-term market breadth indicators are still confirming the current short-term oriented uptrend of the market. The total trend participation of all NYSE listed stocks looks quite healthy, as the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain well above their bearish 50 percent threshold. In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are smoothly trending higher, indicating that the underlying breadth momentum of the broad market still remains constructive at the moment. Above all, the number of stockss which are hitting a fresh yearly low has not shown any signs of major strength yet. Therefore, the readings from the High-/Low Index Daily remain quite constructive. Nevertheless, we think that the total amount of new highs could be a bit higher, if we consider the current levels from the S&P 500. In our opinion, this small bearish divergence can be ignored, as long as the total amount of new lows remains depressed.

The situation on a contrarian side remains quite unchanged compared to last week. The Smart Money Flow Index strengthened its outright bullish divergence to the Dow, indicating that big institutional investors are still on a buying spree. This can be also observed if we focus on the WSC Capitulation Index, which is still indicating an extremely risk-on environment! Only the option driven oscillators (All CBOE Options Call-/Put Ratio Oscillator, Global Futures Put-/Volume Ratio and the WSC Index Oscillator Weekly) remain negative, indicating extreme short-term optimism. As already mentioned last week, in such a case it is not unusual to see a healthy breather on a very short-time frame. But given the quite strong short-term trend- as well as breadth indicators, any upcoming healthy consolidation should be limited in price and time.

Mid-Term Technical Condition

Another reason why we are quite sure about that is the fact that the mid-term oriented uptrend of the market also continued to strengthen last week. This is mainly due to the fact that the gauge from the WSC Sector Momentum Indicator grew significantly into bullish territory last week, indicating that more sectors within the S&P 500 managed to get back into a mid-term oriented up-trend. This can be also seen if we focus on our Sector Heat Map, as relative strength score of riskless money market dropped to the lowest level since month! Anyhow, from a pure technical point of view, the current rally can be still categorized as a bullish consolidation period as the Global Futures Trend Index is still trading below its extremely bullish 90 percent threshold. As a matter of fact, the indicator is also showing a small bearish divergence to the current levels from the S&P 500. As already mentioned last week, such a bearish divergence can be ignored as long as the gauge keeps trading above 60 percent and as long as the readings within our mid-term oriented tape indicators remain constructive!

Therefore, it was quite encouraging that the readings from our entire mid-term oriented market breadth indicators continued to improve last week. To be more precise, we can see that the overall tape momentum remains quite supportive as the Modified McClellan Oscillator Weekly showed a small increasing bullish gap last week. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume kept trading above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators strengthened for the week and have, therefore, turned bullish (100) or about to do so soon (150). This indicates that the total upside participation within the current rally is gearing up, which is absolutely necessary if the market wants to rally towards new record highs. Nevertheless, we can see that the absolute levels of most of our mid-term oriented tape indicators should be much stronger if we consider the current levels from the S&P 500. Right now, we think it is a bit too early to get concerned about that fact as we see steady improvements within their readings (but we will monitor their developments quite carefully over the next couple of weeks).

Long-Term Technical Condition

The long-term oriented technical picture of the market showed some small signs of improvements last week. This is mainly due to the fact that the WSC Global Momentum has shown some strength on low levels recently, indicating that most local markets around the world continued to regain their footing. Above all, we can see that the bearish gauge from the Global Futures Long Term Trend Index stabilized at quite low levels, which could be interpreted as first stage of a trend-reversal. The same is true if we focus on the Global Relative Strength Index, as the relative strength of most risky markets continued to strengthen last week. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average remain supportive, whereas the amounts of stocks which are hitting a fresh 52 weeks low have dropped significantly for the week. On top of that we can see that the Modified McClellan Volume Oscillator Weekly turned almost bullish last week, indicating that the long-term tape momentum of the market has also started to recover.

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!