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December 11. 2016

Market Review

U.S. stocks rallied for the week, lifting the three major indexes to new records highs. For the week, the Dow Jones Industrial Average added 3.1 percent, to 19,756.85. The blue-chip average recorded its fifth week of consecutive gains. The S&P 500 booked also a 3.1 percent weekly gain to finish at 2,259.53. The broad index notched its best winning streak since June 2014. The Nasdaq rocketed 3.6 percent in five trading days to 5,444.50. All key S&P sectors finished in positive territory for the week, led by financials and technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 11.8.

Short-Term Technical Condition

The short-term oriented uptrend of the market remains well intact as the readings from our entire short-term oriented trend-indicators continued to strengthen significantly last week. As the latest advance took place on a very fast pace, we can see that the S&P 500 is now trading almost 67 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,192. Additionally, both envelope lines of this reliable indicator continued to increase on a fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. This bullish short-term uptrend is also widely supported by the readings of the Modified MACD, which showed an increasing bullish gap last week, indicating further gains ahead. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at the highest level for months and is, therefore, clearly confirming the recent levels from the S&P 500.

This view is also strongly confirmed by short-term market breadth as the current trend participation of all NYSE listed stocks within the current rally looks extremely healthy at the moment. Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) continued to grow further into deep bullish territory, indicating an outright supportive trend-structure at the moment. To be more precise, about 79/83 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average; for the SMA 50 the highest numbers we have seen for months. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of weaknesses yet and even increased their bullish gaps. This indicates that the underlying breadth momentum of the market remains positive. Another encouraging fact is that we have seen a strong pick-up in the total amount of all NYSE-listed stocks which reached a new yearly high, in combination with one of the lowest readings of stocks which dropped to a new yearly low! As a consequence, the High-/Low Index Daily strengthened its bullish signal for the week and reached record readings. In our opinion, with such strong signals all across the board, it is highly unlikely that the recent rally will run out of fuel. As a consequence, we think that the market is heading towards new records into mid-December, which is definitely in line with our strategic bullish outlook.

The picture on the contrarian side is getting also increasingly bullish. This is due to the fact that the Smart Money Flow Index has clearly started to diminish its bearish divergence to the Dow, whereas WSC Capitulation Index is still signaling an all-clear market environment right now. Given the quite strong and impulsive ?after election? rally, we received some contradicting signals within the option market (OEX Options Call-/Put Ratio Oscillator Weekly, All CBOE Options Call-/Put Ratio Oscillator Weekly and the Equity Options Call-/Put Ratio Oscillator Weekly). To be more precise, they are indicating a higher-than-usual level of greed and fear among the crowd. In normal circumstances, this could easily cause stronger swings in both direction. But given the strong tape structure at the moment, those signals can be ignored for the time being.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market also remained strong last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index increased to 84 percent and is, thus, trading at the top of the bullish consolidation range. Also the WSC Sector Momentum Indicator is also trading at quite solid levels, indicating that most sectors of the S&P 500 remain in a mid-term oriented uptrend. This view is also supported by our Sector Heat Map, as the momentum score of most sectors remains above the one from riskless money market. Anyhow, from a pure technical point of view, the current rally can be still categorized as a bullish consolidation period as the Global Futures Trend Index is still trading below its extremely bullish 90 percent threshold. As a matter of fact, the indicator is also showing a small bearish divergence to the current levels from the S&P 500. But, already mentioned several times, such a bearish divergence can be ignored as long as the gauge keeps trading above 60 percent and as long as the readings within our mid-term oriented tape indicators remain constructive!

On top of that, mid-term oriented market breadth is strongly confirming the current mid-term oriented uptrend of the market. Especially, the Modified McClellan Oscillator Weekly continued to narrow its bearish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon and that the underlying market breadth momentum remains quite supportive. More importantly, most of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions and have, therefore, not shown any signs of bearish divergences yet! Basically, the same is true if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both gauges kept trading at quite encouraging bullish levels, which is another signs that the underlying tape structure of the market remains quite broad-based at the moment. Such a broader tape improvements can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume (although both indicators could be definitely a bit stronger). Anyhow, all in all we think it is a way too early to call for a major market top at the moment.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. However, we can see that the global bull market still keeps quite selective as only 40 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being (same as in the previous week). Focusing on the on the Global Relative Strength Index, we can also see, that the relative strength of most risky markets nearly remained unchanged compared to the previous week. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average continued to strengthen last week and reached their highest level for months. Plus the Modified McClellan Volume Oscillator Weekly continued to gain more bullish ground last week and flashed a bullish cross over signal. In this context, also long-term new highs are very strong and rocketed last week, whereas long-term new lows continued to decrease. This can be seen as another positive long-term tape signal. Therefore, our long-term oriented High-/Low Index Weekly continued to strengthen, indicating that the long-term tape of the market remains well intact.

Bottom Line

The technical picture of the market remains quite unchanged compared to last week. With quite bullish indicators all across the board, we think to see a further gains into deeper December. On a very short-time frame, the market looks quite overbought and, therefore, it would be normal that the pace is likely to slow down for a couple of trading days. Anyhow, our strategic bullish outlook remains unchanged and, therefore, would advise our conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside! Stay tuned!