November 24. 2013

Market Review

U.S. stocks finished another week of gains with the both the Dow and the S&P 500 at a record high. For the week, the Dow Jones Industrial Average gained 0.7 percent to end at 16,064.77, which marks a seventh consecutive weekly rise, its longest such stretch since an eight-week advance that ended Jan. 21, 2011. On Thursday, the blue-chip index closed above 16,000 for the first time. The S&P 500 added 0.4 percent over the five days to a record 1,804.76. The broad index closed above 1,800 for the first time and extended gains into a seventh consecutive week. The Nasdaq rose 0.1 percent to 3,991.65, posting its third consecutive weekly gain. Health care and financials led gainers among the S&P?s 10 major sectors. The CBOE Volatility Index (VIX), a gauge of investor uncertainty, fell to 12.35.

Short-Term Technical Condition

Despite the fact that the market has finished the week with solid gains, the short-term uptrend of the market has slightly started to deteriorate, since the gauge from the Advance-/Decline 20 Day Momentum Indicator has been pushed below its bullish threshold last week. This is mainly due to the fact that the amount of daily advancing issues have lost momentum on a 20 days’ time frame, indicating that the underlying trend force of the market has lost some steam recently. Although, this fact can be seen as a red flag on the horizon, the short-term uptrend of the market remains intact so far, if we have a closer look at the Trend Trader Index as well as on the Modified MACD. From a pure price point of view, the trend of the S&P 500 remains bullish as long as the broad equity benchmark does not close below 1,767, which represents the bearish threshold from the Trend Trader Index. Moreover, the Modified MACD has not flashed a bearish crossover signal so far, although its signal strengths remains quite weak, as the short-term oriented trend line of this reliable indicator just barely managed to close above its longer term oriented counterpart.

Despite the fact that our Modified McClellan Oscillator Daily has continued to deteriorate for the week, short-term market breadth still looks quite constructive from a pure signal point of view and is, therefore, still confirming the current short-term oriented uptrend of the market. Although we have seen some weaknesses during the week within the percentage of stockss which trading above their short-term oriented moving averages (20/50), their readings managed to regain strengths, indicating an intensifying tape structure. According to the the High-/Low Index Daily and the Nyse New Highs minus New Lows Indicator, every pullback since April 2013 was only driven by profit taking, as there had been only a decline of stocks which are hitting a fresh yearly high, whereas the number of stockss which have been pushed to a new yearly low have remained quite depressed. Furthermore, there was a quite encouraging increase in the amount of new highs in the last couple of trading sessions, indicating that the market internals have slightly strengthened. As long as we do not see a strong increase in the amount of new lows which would lead to a bearish crossover signal within our High-/Low Index Daily, the market internals remain constructive. Nevertheless, most readings of our short-term oriented trend- as well as breadth indicators, should much stronger, given the fact that the S&P 500 has reached a new all-time high last week. In such a situation, we keep ignoring those divergences as long as the market remains in short-term up-trend and as long as our short-term breadth indicators are continuing to show a positive trend structure as we never fight an existing trend which is being confirmed by market breadth!

The situation from a contrarian point of view is unchanged. Smart Money is still confirming the recent rally and the WSC Capitulation Index has not shown any signs of strengths yet, giving no reason to worry right now. Only the option market as well as dumb money is a way too optimistic in our point of view. What we can see right now is that short-term optimism is quite stretched at the moment, plus the short-term oriented up-trend of the market is showing some signs exhaustion, which is not a big surprise if we consider the fact that the market has been rallying for seven weeks in a row. To evaluate if any upcoming further trend-deterioration or trend-breaks will have a stronger impact on the market, short-term market breadth is a key area of focus.

Mid-Term Technical Condition

After having a look at our mid-term oriented trend indicators, apparently the technical picture of the market remains quite much the same as last week. The WSC Sector Momentum Indicator is far away from being bearish, plus the Global Futures Trend Index is still trading above the bullish 60 percent threshold, indicating 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 strengths score of riskless Money Market is trading at 0 percent, telling us that all sectors within the S&P 500 are trending higher in absolute terms, and, therefore, the current up-trend of the market looks outright healthy at the moment.

Moreover, if we focus on our mid-term oriented tape indicators, we can see that the percentage of stockss which trading above their mid-term oriented moving averages (100/150) have not shown any signs of weaknesses yet. This fact is telling us that the upside participation within the whole market is quite broad-based and, therefore, further gains on a mid-term time horizon can be expected! Only the Modified McClellan Oscillator Weekly still remains bearish from a pure signal point of view, although it might be just a question of time until this indicator will get back on track. More importantly, the amount of advancing issues as well as mid-term oriented up-volume are giving no reason to worry right now, since their gauges are trading at quite encouraging levels at the moment. Normally, as long as both, advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, the underlying tape structure of the market remains strong and any upcoming short-term weaknesses should be limited in price and time. We would start to get cautious, if we see some stronger non-confirmation in their readings as it would be the first indication that a stronger correction might be at hand. All in all, the mid-term oriented technical picture of the market remains positive and, therefore, our mid-term oriented bullish outlook has not been changed so far.

Long-Term Technical Condition

If we have a look at our long-term oriented WSC Global Momentum Indicator, we can see that the current rally remains in force globally, as roughly 70 percent of all global markets (all denominated in USD) are still in a long-term oriented uptrend. The same is true, if we have a look at our Global Relative Strengths Indicator. The relative strength of U.S. Treasuries remains below nearly all risky markets, which is a strong sign when the market is in a risk-on mode, plus the Global Futures Long Term Trend Index is still indicating a technical bull market. Moreover, we have seen further improvements in long-term market breadth, as our Modified McClellan Volume Oscillator Weekly has flashed a bullish crossover signal last week, the percentage of stockss which trading above their 200 day simple moving average remain stable at 75 percent, plus the number of stockss which are hitting a fresh 52 weeks’ high are recovering.

Bottom Line

The bottom line: on a very short-time frame, the market is slightly overbought and, therefore, the pace is likely to slow down a bit in the next couple of trading sessions. However, since the short-term uptrend of the market has not been broken yet, our short-term bullish outlook has not been changed so far. Moreover, with quite solid readings within our mid- to long-term trend-indicators, our bullish long-term outlook has not been changed so far. Stay tuned!