April 06. 2014

Market Review

Last week U.S. stocks finished the week with a mixed performance. The Dow Jones Industrial Average added 0.5 percent in five trading days to end at 16,412.71. The S&P 500 eked out a 0.4 percent gain over the week to finish at 1,865.09. The Nasdaq Composite fell 0.7 percent to 4,127.73 for the five days. Among the key S&P sectors, industrials were the best weekly performer, while technology dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped near 14.

Short-Term Technical Condition

As already mentioned above, stocks recorded modest gains, bringing some of the major indexes to new highs on Wednesday before the strong pullback on Friday wiped out nearly all the gains of the week. Therefore, the S&P 500 has been pulled back in the middle part of its strong trading range (1,841/1,890) which has established over the last couple of weeks. Anyhow, this move was not a big surprise as we already mentioned the fact in our previous market comment: that the S&P 500 will remain in a consolidation process as we do not see significant improvements within our short- to mid-term market breadth indicators and, therefore, any upcoming gains should not be sustainable!

Apparently, the short-term oriented trend of the market remains quite unchanged compared to last week as the S&P 500 finished nearly flat for the week. To be more precise, the Trend Trader Index flashed a neutral trend scenario on Friday after the S&P 500 managed to close slightly above the bullish threshold until Wednesday. Moreover, the gauge from our Advance-/Decline 20 Day Momentum Indicator is trading sideways on low bullish levels, indicating that the consolidation period is not over yet! Only the Modified MACD managed to flash a very weak bullish crossover signal on Tuesday, indicating some form of small improvements within the overall trend structure of the market. However, this signal is a way too weak to take it too seriously, as any stronger down-day could easily lead to a bearish crossover within that indicator. So all in all, from a short-term oriented trend perspective we are more or less back where we started one week ago. 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 a given consolidation period should be considered as healthy or if it will turn out to be more corrective in its nature.

During the last couple of trading sessions, short-term market breadth has slightly improved compared to last week. Especially the fact that we saw an encouraging surge in the number of stockss which reached a fresh yearly high, in combination with one of the lowest readings of stocks which are dropping to a fresh 52 weeks low is telling us that the market internals are strengthening. Even on Friday, where the S&P 500 lost nearly 1.3 percent, there were hardly any stocks around which have reached a new yearly low. This indicates that only heavy weighed stocks have pushed the major indexes lower! This can be also seen, if we have a look at the High-/Low-Index Daily, as its bullish gauge has been pushed to the highest level since early March, indicating that the recent pullback was mainly driven by profit taking so far. In addition, the Modified McClellan Oscillator Daily managed to flash a bullish crossover signal so far, telling us that amount of daily advancing issues on NYSE have started to gain momentum. Nevertheless, we should not forget that this crossover signal is still a bit weak-kneed. This coincides with the fact that the percentage of stockss which are trading above their 20 day moving averages have slightly been pushed back below the bullish 50 percent threshold, whereas on a 50 day basis we saw a small improvement compared to last week.
During the last couple of trading sessions, short-term market breadth has slightly improved compared to last week. Especially the fact that we saw an encouraging surge in the number of stockss which reached a fresh yearly high, in combination with one of the lowest readings of stocks which are dropping to a fresh 52 weeks low is telling us that the market internals are strengthening. Even on Friday, where the S&P 500 lost nearly 1.3 percent, there were hardly any stocks around which have reached a new yearly low. This indicates that only heavy weighed stocks have pushed the major indexes lower! This can be also seen, if we have a look at the High-/Low-Index Daily, as its bullish gauge has been pushed to the highest level since early March, indicating that the recent pullback was mainly driven by profit taking so far. In addition, the Modified McClellan Oscillator Daily managed to flash a bullish crossover signal so far, telling us that amount of daily advancing issues on NYSE have started to gain momentum. Nevertheless, we should not forget that this crossover signal is still a bit weak-kneed. This coincides with the fact that the percentage of stockss which are trading above their 20 day moving averages have slightly been pushed back below the bullish 50 percent threshold, whereas on a 50 day basis we saw a small improvement compared to last week.

From a pure contrarian point of view, we even have received some contradicting signals as our reliable Smart Money Flow Index is showing a huge bearish divergence to the Dow. Dumb Money is chasing the market aggressively higher and our reliable WSC Capitulation Index has not dropped by half of its rise, indicating that further down-testing might be possible. On the other hand we can see that the option market is already showing some form of capitulation as the gauge of the Daily Put-/Call Ratio All CBOE Options Indicator is gradually moving into contrarian territory, although there is still some room for improvement. So all in all, we think the consolidation period is not completely over yet and, therefore, there is still a small chance to see another but final washout towards 1,839 (and a break of this level would pave the way to 1,815), before further gains into deeper Q2 can be expected.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market continued to strengthen, as the gauge from our reliable Global Futures Trend Index grew to the upper end of its bullish consolidation area, indicating that that any upcoming short-term oriented pullback should be limited in price and time. Above all, the WSC Sector Momentum Indicator is still trading on the upper end of its scale, indicating that the entire underlying sectors within the S&P 500 are per definition 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 health care remains the strongest sectors for the time being.

More importantly, the current mid-term oriented up-trend of the market is still being confirmed by mid-term oriented market breadth. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are trading well above their bearish threshold, indicating the current upside participation within the whole market still remains quite broad-based! Moreover, the Modified McClellan Oscillator Weekly showed an increasing bullish gap last week, plus we saw a quite encouraging spike in mid-term oriented up-volume as well as within mid-term oriented advancing issues. This is telling us that any upcoming weaknesses should be limited in price and time!

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains quite positive 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. Nevertheless, we can see that all risky markets are losing momentum, which is another long-term indication that we could face a cyclical bear later this year (Charts of Interest). Moreover, the WSC Global Momentum Indicator still remains bullish on low levels, indicating that most risky markets remain in a long-term uptrend. 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 are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover, we can see that the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Plus the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, indicating a quite healthy tape structure at the moment.

Bottom Line

The bottom line: despite the fact that we saw some improvements within our short-term breadth indicators, there is still a small chance to see a final washout (towards 1,839) next week as the market always tends to overshoot. Nevertheless, we think that any upcoming pullback should be limited in price and time and, therefore, aggressive traders should slightly start to buy into any upcoming pullback. Conservative members should hold their equity position as we still think that the S&P 500 could rally towards 1,920/1,950 into mid/late Q2 before a cyclical bear market might be due (Charts of Interest). Stay tuned!