December 06. 2015

Market Review

U.S. stocks finished the week with small gains. The Dow Jones Industrial Average gained 0.3 percent over the week to close at 17,847.63. The S&P 500 added 0.1 percent for the week and finished at 2,091.69. The Nasdaq added 0.3 percent from the week-ago close to 5,142.27. Among the key S&P sectors, technology was the top gainer and energy the worst performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held below 15.

Short-Term Technical Condition

From a pure price point of view, the short-term trend of the market remains intact as the S&P 500 managed to close 27 points above the bearish threshold from the Trend Trader Index. Nevertheless, we can see that the overall trend-momentum remains outright weak at the moment. This is mainly due to the fact that both envelope lines of the Trend Trader Index have started to become flattish. Plus the Advance-/Decline 20 Days Momentum Indicator also dropped below its bullish threshold last week. Another concerning fact is that the Modified MACD continued to gain more bearish ground within the last couple of trading sessions and, therefore, most of our trend indicators are definitely not confirming the current levels from the S&P 500! As already mentioned a couple of times, during a consolidation period it is not quite unusual to see a lot of changing signals within short-term oriented trend indicators as there is no specific trend within a broad based trading range. Therefore, short- to mid-term market breadth is a key area of focus to evaluate if the current consolidation should be considered as healthy or if it will turn out to be more corrective in its nature.

Unfortunately, short-term market breadth did not improve at all and, therefore, the chances for a strong year-end rally are still not visible at the moment. To be more precise, there was no spike in short-term oriented up-volume on Friday, although the market rebounded more than 2 percent on that day. So if we focus on the NYSE New HighsNew Lows Indicator we can see that the recent rebound was mainly driven by short-covering so far as there was no substantial increase in the total amount of new highs on that day. Even worse, the total number of stockss which are hitting a fresh yearly low reached a score of 196, a value we have not seen since the latest pullback in early November. As a matter of fact, the High-/Low Index Daily still remains quite bearish and is, therefore, definitely not confirming the current levels from the S&P 500. This non-confirmation can be also seen if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50), as their gauges should be much higher if we consider the current levels from the S&P 500. This indicates that the broad market did not participate so far and, therefore, only heavy weighted stocks have participated in the recent recovery. As a matter of fact it was not a big surprise at all that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily also turned bearish again last week.

From a pure contrarian point of view, the overall technical picture of the market remains weak but somehow supportive at the moment. After the increased volatility from last week, we can see that the gauge from the All CBOE Options Put-/Call Ratio Daily grew slightly into bullish territory, as the amount of put purchases soared last week. Moreover we can see that the current readings from the Smart Money Flow Index are more or less indicting a continuation of the recent trading range as the indicator did not confirm the latest bounce on Friday. On the other hand we think that from a pure contrarian point of view, overall volatility will remain high as the gauge from the WSC Capitulation Index grew towards cautious levels.

Mid-Term Technical Condition

On a mid-term time horizon, the technical trend-condition of the market still looks quite weak/vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within its bearish trading range and is, therefore, not confirming the current levels from the S&P 500. As already mentioned a couple of times, from a formal point of view, the market remains at risk for stronger pullbacks as long as its gauge keeps trading below that important threshold! Therefore, it was good to see that the gauge from the Global Futures Trend Index continued to gain some bullish ground as it is just trading 14 percent below its bullish threshold. If this trend continues, the market will have good chances to punch its way higher. But as long as the gauge keeps trading below 60 percent, we remain cautious as the chances for a couple of rocky sessions/or further back and filling remain quite high. Unchanged compared to last week, from a pure price point of view, the mid-term oriented uptrend of the market has not been broken yet. This is due to the fact that the gauge from the WSC Sector Momentum Indicator closed at quite comfortable bullish levels. This indicates that most sectors within the S&P 500 remain in a mid-term oriented up-trend and are, therefore, outperforming riskless money market. This can be also seen if we have a closer look at our Sector Heat Map, as the majority of sectors still have a higher relative strength score than riskless money market. In such a scenario, most sectors tend to perform positive on an absolute basis. As a matter of fact, we think the downside potential of the market remains quite capped, although the Global Futures Trend Index is indicating a quite vulnerable market environment.

Another main reason why we believe that the downside potential of the market remains quite capped is due to the fact that mid-term oriented market breadth still remains quite supportive for the time being. To be more precise, we can see that the overall tape momentum remains quite positive as the Modified McClellan Oscillator Weekly continued to show a small increasing bullish gap last week. Moreover, it was good to see that mid-term oriented advancing issues as well as mid-term oriented up-volume also added more bullish ground last week. Normally, as long as both indicators (Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly) remain supportive the risk of a stronger correction is quite limited. Consequently it is a bit too early to get too concerned about the current technical trend-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). Despite the fact that we saw a stronger pullback on Thursday, 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 market is gearing up on a mid-term time horizon, which is absolutely necessary if the market wants to achieve sustainable gains. 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. As matter of fact, further supportive consolidation work on a very short-time frame looks quite likely.

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 vulnerable technical environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Above all, we can see that still only 10 percent of all local market indexes around the world remain within a long-term oriented up-trend at the moment! This is telling us that the overall market environment remains highly selective in which broader diversified investors are strongly underperforming. Anyhow, long-term market breadth showed some signs of improvements last week as the Modified McClellan Volume Oscillator Weekly slightly strengthened its bullish signal. Plus the amount of long-term new lows slightly decreased for the week. Nevertheless, the overall long-term trend participation still remains quite weak as the percentage of stockss which are trading above their long-term oriented moving averages (200) have not turned bullish yet.

Bottom Line

The bottom line: our outlook remains almost unchanged compared to last week. Given the quite weak but somehow supportive readings within our indicator framework, we do not think the market has enough power to rally towards new record highs (levels above 2,120/2,130) immediately. On the other hand, it also appears that the down-side potential of the market looks quite capped as well. As a matter of fact our strategic bullish outlook remains unchanged for the time being. Nevertheless, we can see that the mid-term oriented market internals have started to show some signs of improvements recently and, therefore, the chances for a year-end rally are increasing. However, on a very short-time frame we still think to see a bit of consolidation at work. Despite the fact that we do not believe to see a pullback below the recent August low at 1,867, a move towards 1,985 and 1,950 cannot be ruled out if the S&P 500 closes below 2,000. As a matter of fact, we would advise our conservative members to keep their stop loss around that limit. Stay tuned!