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August 07. 2016

Market Review

U.S. stocks closed another week with gains, lifting the S&P 500 and the Nasdaq to record closes. The Dow Jones Industrial Average climbed 0.6 percent over the week to end at 18,543.53. The S&P 500 recorded a weekly 0.4 percent gain to close at a record high of 2,182.87. The Nasdaq rallied 1.1 percent from last Friday’s close to finish at 5,221.12, its first record close in more than a year. Among the key S&P sectors, financials were the best weekly performer, while utilities dragged. The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, traded lower, near 11.3.

Short-Term Technical Condition

Apparently, the short-term oriented trend of the market remains almost unchanged compared to last week. The Trend Trader Index 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 2,156. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, 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, at least from a pure price point of view. If we focus on the overall trend momentum, we can see that the Modified MACD flashed a small bearish crossover signal last week, indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Although the indicator is still trading at quite bullish levels, it has dropped recently and has, therefore, not confirmed the latest all-time high from the S&P 500. So basically, those signals are telling us that the pace has started to slow down and, therefore, further bearish biased signals within our trend indicators are quite possible within the next couple of trading sessions.

In such a situation, short- to mid-term oriented market breadth is key area of focus as it will give us further guidance where the market is heading to. So despite the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to strengthen their bearish signals, the overall short-term market breadth still looks quite constructive at the moment. This is mainly due to the fact that the percentage of stockss which are trading above their short-term moving averages (20/50) are trading at quite bullish levels (61/70 percent), indicating that it is a bit too early to get too cautious at the moment. Additionally, we have seen absolutely no stronger spike/increase in the total number of stockss which are hitting a fresh yearly low, which would be also a typical technical pattern that a stronger trend reversal is imminent. On the other hand, we can see that there were only about four new highs on Friday, although the S&P 500 had hit a new all-time high on that day. As a consequence, the High-/Low Index Daily is trading at quite solid levels although its bullish gauge should be definitely much higher, if we consider the current level from the S&P 500. So all in all, given the quite constructive, but somehow non-confirmative short-term oriented trend and breadth signals, a period of consolidation/sideways trading looks highly likely.

The situation from a pure contrarian point of view remains almost unchanged compared to last week. The WSC Capitulation Index is still indicating a risk-on environment for equities and the Smart Money Flow Index remains outright bullish as it gauge reached also a new high last week and has, therefore, clearly confirmed the latest levels from the Dow Jones Industrial Average. Nevertheless, we can see that the gauge from the SMFI has flattened recently, which might be another sign for a consolidation/sideways trading scenario. This view is also supported by the fact that dumb money started to get quite greedy last week, plus the overall lucre still remains a bit stretched at the moment. As a matter of fact, we would not be surprised to see a washout day or at least a period of consolidation ahead.

Mid-Term Technical Condition

However, given the fact that our entire mid-term oriented indicators still remain quite supportive for the time being, any upcoming consolidation period should be definitely healthy in its nature. The gauge from our reliable Global Futures Trend Index remains on the upper end of its extremely bullish 90 percent threshold, giving absolutely no reason to worry right now. We would only get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. Right now this is not the case at all and, therefore, it is a way too early to take the chips from the table. Also from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator gained even more bullish ground last week. This indicates that all underlying sectors within the S&P 500 remain in a powerful mid-term oriented uptrend at the moment, confirming the current levels from the S&P 500. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market remains at zero percent, whereas defensive sectors such as utilities and materials remain the strongest sectors for the time being.

The mid-term oriented trend of the market is also strongly confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week, indicating that the underlying mid-term oriented market breadth momentum remains quite supportive. Additionally, all 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! 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) as they are trading on very high levels. This can be seen as an outright strong confirming tape signal as the current rally looks quite broad based. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts. As a matter of fact, we think that further gains (after any upcoming consolidation period) into deeper summer can be expected.

Long-Term Technical Condition

The long-term oriented technical picture of the market continued to show further signs of improvements last week. Especially, the gauge from the WSC Global Momentum indicates that 70 percent of the 35 local equity markets all around the world (which are covered from our WSC Global ETF Momentum Heat Map) are in a long-term oriented up-trend in the moment. Above all, we can see that the relative strength score of US Treasuries keeps losing momentum, whereas the readings from the Global Futures Long Term Trend Index continued to increase. Above all, we can see that long-term market breadth also remains strong as the bullish signals from the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly continued to strengthen. On top of that, we can see that the percentage of stockss which are trading above their (200) day moving average are also trading on their highest level for months.

Bottom Line

On a very short time frame, the market looks quite vulnerable for a sentiment driven washout day or at least for a healthy period of consolidation. Nevertheless, with quite supportive/bullish indicators (especially on a mid- to long-term time horizon) all across the board we have not seen any typical signs for a major top-building process yet. As a consequence, our bullish outlook has not been changed so far and, therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should definitely remain in the bullish camp. Stay tuned!