October 20. 2013

Market Review

U.S. stocks closed out the week in positive territory with all three major averages logging strong gains. The Dow Jones Industrial Average advanced 162.54 points, or 1.1 percent, to 15,399.65. The 30-stock gauge is still 1.8 percent below its record reached Sept. 18. The S&P 500 rocketed 2.4 percent to 1,744.50 over the five days and hit a new intraday record of 1,745.32. The Nasdaq Composite Index jumped 3.2 percent to 3,914.28, the highest level since September 2000. Both the S&P 500 and the Nasdaq posted also their best weekly rally in three months. All key S&P sectors closed in positive territory for the week, led by telecoms and financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 13.

Short-Term Technical Condition

The market finished the week with hefty gains and is, therefore, in line with our recent call, where we have expected to see a new all time high after a short-lived consolidation period. Not surprisingly, the short-term up-trend of the market remains well intact and it has even gained more bullish ground last week. The S&P 500 is trading 59 points above the bearish threshold from the Trend Trader Index, the Advance-/Decline 20 Day Momentum Indicator slightly increased for the week, plus we have seen a quite strong spike in the short-term oriented gauge from the Modified MACD, which has finally led to an encouraging bullish crossover signal on Monday.

More importantly, our entire short-term oriented tape indicators are now strongly confirming the current short-term oriented uptrend of the market as the McClellan Oscillator Daily has flashed a bullish crossover signal on Wednesday and short-term up-volume is trading well above short-term down-volume. In addition, we can see that the current rally is extremely broad based as the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have grown to almost 80 percent, their highest level since July 2013. Another encouraging breadth signal is coming from the High-/Low Index Daily. The percentage of stocks which have been pushed to a fresh yearly high have soared to 10 percent and are, therefore, strongly confirming the new all time high from the S&P 500.

For the time being, there are hardly any red flags on the horizon if we focus on our contrarian indicators. Smart Money was and still is buying into any upcoming weaknesses, the option market still remains cautious, plus our reliable WSC Capitulation Index is giving no reason to worry right now. Nevertheless, the market is quite overbought (Upside-/Downside Volume Index Daily and the Advance-/Decline Ratio Daily) and in combination with the upcoming 9 week crash cycle and a bearish signal from the WallStreetCourier Trading Index and the Large Block Index Oscillator, we would not be surprised if the market will take a healthy breather, before further gains can be expected.

Mid-Term Technical Condition

As per last week?s report, the mid-term oriented uptrend of the market remains intact as the gauge from the Global Future Trend Index has slightly increased for the week and is now trading well above its bearish trading range area. Moreover, the WSC Sector Momentum Indicator is trading at outright high levels, indicating that nearly all sectors within the S&P 500 are in a strong mid-term oriented up-trend. Nevertheless, the gauge from our Global Future Trend Index should be much higher, if we consider the current level from the S&P 500. Right now it is a bit too early to get nervous about this fact, as the gauge of this indicator is still increasing and, therefore, it could be possible that this bearish divergence will be sorted out within the next couple of weeks.

Anyhow, mid-term oriented market breadth has shown some strength recently although their readings still remain a bit unevenly. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150), have grown to their highest level since July and are, therefore, strongly confirming the current mid-term oriented uptrend of the market, whereas the Modified McClellan Oscillator Weekly still remains bearish from a pure signal point of view, although it has slightly started to bottom out. Despite the fact that we have seen some encouraging bullish crossover signals within the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly last week, their readings still remain too low if we consider the current level from the S&P 500. Anyhow, as long as the mid-term oriented up-trend remains intact, we keep ignoring those bearish divergences for now but we will monitor their developments closely within the next couple of weeks!

Long-Term Technical Condition

Our long-term bullish outlook has not been changed so far, since our entire long-term trend-indicators (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths Indicator) remain strong. If we have a look at our long-term oriented WSC Global Momentum Indicator, we can see that the current stock market advance has continued to broaden out globally, as roughly 65 percent of all global market ETFs (all denominated in USD) continued to show strong momentum versus riskless money market. The same is true, if we have a look at our Global Relative Strengths Indicator. As per last week’s report, Europe remains the most attractive region, while the U.S. is losing momentum versus other risky markets. More importantly, the long-term uptrend of the market is quite confirmed by long-term oriented market breadth as the High-/Low Index Weekly remains bullish from a pure signal point of view and the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish. Nevertheless, the amount of long-term new highs should be much higher in our point of view and the Modified McClellan Volume Oscillator Weekly has not managed to turn bullish by now, which can be interpreted as long-term bearish divergence. If we have a closer look at the current bull market key statistic (Charts of Interest), we can see that the current bull-run is the sixth longest since 1900. From a cyclical point of view, the current bull market can be compared with those from 1921-1929 and from 1982-1987 as the key statistics are quite similar. All three bull market had a strong start and then they consolidated after 400 (trading) days before they showed renewed strengths after 700 days. The bull market from 1982 ended after 1300 (trading days), whereas the bull market from 1921 headed into a major correction after 1350 trading days. So all in all, if the bearish divergences within our mid- to long-term tape indicators will not be sorted out or will even get stronger, any possible mid-term oriented trend break could lead to a significant correction, which is also being supported by a cyclical point of view. For now it is ok, but we will monitor their developments closely within the next couple of weeks.

Bottom Line

The bottom line: on a very short time frame, we would not be surprised if the market is taking a healthy breather, before further gains can be expected. However, with broadening strengths within our short- to mid-term oriented trend- as well as breadth indicators, we would advise our aggressive and conservative members to hold their equity position. Stay tuned!