November 22. 2015

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 3.3 percent over the week to close at 17,823.95. The S&P 500 jumped 3.3 percent for the week to finish at 2,089.16. The weekly gain was the best since December 2014. The Nasdaq rocketed 3.6 percent over the past five days to end at 5,104.92. All key S&P sectors ended in positive territory for the week, led by consumer discretionary. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 16.

Short-Term Technical Condition

In last week’s comment we highlighted the fact that the chance for a stronger pull back remained outright high. Therefore, we remained outright cautious as the current consolidation period could easily turn out to be corrective in its nature. As a matter of fact, we advised our conservative members to place a stop-loss limit around 2,000, as we wanted to see some negative price action first before we would issue a strategic sell signal. Apart from Monday, the market was strongly trading above that important threshold and, therefore, no-stop loss limits have been triggered so far. As a matter of fact, our strategic long position remains unchanged so far.

More importantly, from a pure price point of view, the short-term oriented trend of the market has regained some strength recently as the S&P 500 managed to close slightly above the bullish envelope line of the Trend Trader Index. So from a pure price point of view, the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not close below 2,067 (lower envelope line from the Trend Trader Index). Nevertheless, the overall trend momentum of the market still looks quite damaged at the moment. Despite the fact that the Modified MACD showed a decreasing bearish gap, this signal is a way too weak to take it too seriously as the moment. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. The gauge from that reliable indicator is still trading at quite low levels, indicating that the market is still consolidating. 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 rebound 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. This is mainly due to the fact that the Modified McClellan Volume Oscillator Daily flashed a stronger bullish crossover signal last week, plus the percentage of stockss which are trading above their short-term oriented moving averages (20/50) also managed to close slightly above their 50 percent bullish threshold. Although this indicates some form of positive tape momentum, overall short-term market breadth still looks quite damaged at the moment. If we focus on the NYSE New HighsNew Lows Indicator we can see that the recent bounce was mainly driven by short-covering so far. This is due to the fact that we only saw a small reduction in the number of stockss which are hitting a fresh yearly low, instead of a substantial increase in the total amount of new highs. 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 are pulling most indices higher. Thus, it was not a big surprise at all that the Modified McClellan Oscillator Daily has not flashed a bullish crossover signal so far, as the overall tape momentum remains weak (in this large-cap driven market environment).

The situation on a contrarian side is still supportive as most negative readings from last week have been sorted out (All CBOE Options Call-/Put Ratio Oscillator, Global Futures Put-/Volume Ratio Oscillator and the WSC Index Oscillator Weekly), whereas the WSC Capitulation Index is still indicating an all-clear environment for now. Moreover, we can see that Smart Money is still heavily betting on a year-end rally, whereas the Odd-Lot Purchases dropped to the lowest level for months. So from a pure contrarian point of view, further strength into Thanksgiving (which traditionally also has a quite positive seasonal background) looks likely.

Mid-Term Technical Condition

Nevertheless, the mid-term oriented trend-condition of the market still looks quite damaged at the moment and, therefore, we remain quite cautious at this time. Especially, if we consider the fact that the gauge from the Global Futures Trend Index dropped deeper into its bearish trading range area last week. As matter of fact, the indicator is far away from confirming the current levels from the S&P 500. In such a scenario, stronger gains/bounces tend to be a corrective rather than sustainable, especially in combination with weak mid-term market breadth! On the other hand, we would be quite surprised to see sustainable gains ahead, as long as the gauge of this reliable indicator remains depressed or does not show any signs of upside momentum. Only, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator has not turned bearish so far. This can be also seen if we focus on our Sector Heat Map, as most sectors within the S&P 500 have still a higher momentum score than riskless money market. Nevertheless, the overall momentum score of money market remains quite high which can be seen as another piece of evidence that the market is limited on the up- as well as on the down-side (at least for the time being).

Another piece of evidence for such a view is the fact that mid-term oriented market breadth remains somehow supportive but weak. This is mainly due to the fact that Modified McClellan Oscillator Weekly managed to get back on track last week, indicating some form of positive mid-term oriented tape momentum. This can be also seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume. Consequently, the readings from the Upside-/Downside Volume Index Weekly as well as the Advance-/Decline Index Weekly are indicating some form of down-side protection, as their readings are a bit too strong for a major drop below the late August low at 1,867. On the other hand, we can see that their readings still remain a way too low to support the view of a new sustainable break-out. This can be also observed if we focus on the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators (100/150) are telling us that the upside participation is extremely weak-kneed. Therefore, we would be quite surprised to see further strong rallying ahead.

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. Above all, we can see that 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 improvements last week as the Modified McClellan Volume Oscillator Weekly flashed a small bullish crossover signal in the previous week. Moreover we can see that the amount of long-term new lows slightly decreased for the week. Nevertheless, we can see the High-/Low Index Weekly is still far away from being bullish, plus the majority of all NYSE listed stocks keeps trading well below their long-term oriented moving averages (200).

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). On the other hand, it also appears that the down-side potential of the market looks quite capped as well (levels above 1,867)! As a matter of fact our strategic bullish outlook remains unchanged for the time being. However, if we consider the fact that the S&P 500 keeps already trading at the upper range of its trading range, renewed down-testing is increasingly likely. So in this context we would advise our aggressive traders to watch out for the first meaningful bearish reversal candle if they want to play the trading range. Despite the fact that we do not believe to see a pullback below the recent August low at 1,867, a move towards 1,985/1,950 and 1,913 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. Right now, the next closest support level is around 2,060. Stay tuned!