April 17. 2016

Market Review

U.S. stocks finished the week with solid gains. The Dow Jones Industrial Average rose 1.8 percent from the week-ago close to 17,897.46. The blue-chip index saw its strongest weekly gain in a month. The S&P 500 climbed 1.6 percent for the week to 2,080.73. The Nasdaq gained 1.8 percent over the week to 4,938.22. Among the key S&P sectors, financials were the best weekly performer and consumer staples the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, edged lower to near 13.7.

Strategy Review

In our last week’s comment we highlighted the fact that we remained quite bullish as we had received a growing number of evidences that the consolidation period should be limited in price and time. As a consequence, we advised our members that it was a way too early for any counter trend activities (profit taking or even short-selling) as the recent consolidation period looked quite healthy in its nature (even though we saw a deteriorating short-term oriented uptrend). In fact, after the S&P 500 dropped towards 2,039 until Tuesday morning the broad benchmark regained its footing as it closed at its highest level this year on Thursday before losing some steam on the last trading day of the week.

Short-Term Technical Condition

If we have a closer look at our short-term oriented trend indicators, we can see that the bullish trend condition of the market slightly strengthened last week. This is mainly due to the fact that the S&P 500 closed 34 points above the bearish threshold from the Trend Trader Index. This indicates that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 2,046. Furthermore, we can see that both envelope lines of this reliable indicator continued to drift higher, which can be seen as another constructive trend signal. This bullish short-term uptrend is also supported by the readings of the Modified MACD, which flashed a small bullish crossover signal last week, whereas the Advance-/Decline 20 Day Momentum Indicator has not dropped into bearish territory so far. Despite the fact that our entire short-term trend indicators are back on track, we can still see some bearish divergences in their readings, since the Advance-/Decline 20 Day Momentum Indicator has not clearly confirmed the recent breakout by the S&P 500, whereas the bullish signal from the Modified MACD is still a way too weak to be taken too seriously at the moment. So from a pure short-term oriented trend perspective, there the recent consolidation period is not completely over yet. As a matter of fact, it could be possible to see a couple of rocky sessions ahead. Nevertheless, even if we see a short-term oriented trend-break, we do not think to see a major trend reversal ahead.

This is mainly due to the fact that our entire short-term oriented breadth indicators remain outright bullish or at least quite supportive for the time being. As a matter of fact, the underlying bullish trend structure of the market remains too strong at the moment to trigger a major trend reversal at the moment. This becomes quite obvious if we focus on the on the percentage of stockss which are trading above their short-term oriented moving averages (20/50) as they have closed at quite encouraging bullish levels last week. To be more precise, about 70/60 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average, the highest numbers we have seen for months. Additionally, we saw stable readings in the total amount of all NYSE-listed stocks which reached a fresh yearly high, in combination with very depressed readings of new lows! As a matter of fact, the bullish signal from the High-/Low-Index Daily remained quite stable, although its gauge could be a bit higher in our point of view. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed also a bullish crossovers signal last week, indicating that the market internals are slightly getting back on track (albeit on quite stretched levels). So all in all, the readings from our short-term oriented tape indicators are indicating that the underlying trend condition of the market remains quite solid at the moment and, therefore, we do not think that a short-term oriented trend break would lead to a major trend reversal at this point in time.

If we focus on our contrarian indicators, we can see that the Smart Money Flow Index is still indicating that the current rally could push the Dow towards new highs, whereas the WSC Capitulation Index is still indicating an outright risk-on market environment for the time being. Above all, overall market sentiment among the option market has not reached an extreme yet and, therefore, further gains look quite likely. On the other hand, we can see that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily) at the moment. Plus the gauge from the WallStreetCourier Index Oscillator still remains in bearish territory and, therefore, increased volatility/down-testing on a very short-time frame can be possible. Another interesting fact is that the quite long-term oriented NYSE Member Debt in Margin Accounts Indicator has started to form a quite bearish divergence to the market as its gauge fell to quite low levels. Given the fact that this indicator is quite long-term oriented, it could be possible that the market runs into an important market top in this summer. However, given the outright strong bullish readings within our remaining short-term oriented indicators, it is a way too early to get concerned about that fact.

Mid-Term Technical Condition

Another reason why we remain outright bullish at the moment is the fact that the mid-term oriented uptrend of the market remains outright bullish at the moment. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index keeps trading above its extremely 90 percent bullish threshold and is, therefore, still confirming the current rally from the S&P 500. Moreover, it is worth mentioning the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming consolidation period/pullback should be limited in price and time (of course only in combination with quite solid readings in mid-term market breadth). In addition, the WSC Sector Momentum Indicator gained more bullish ground last week, indicating that most sectors of the S&P 500 have not shown any signs of weaknesses yet and they remain, therefore, still in a strong mid-term oriented uptrend. 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 low levels, whereas utilities, technology and consumer staples remain the strongest sectors for the time being. Above all, we can see that energy is definitely bottoming out as its momentum score within our Sector Heat Map slightly increased last week. This could support the current rally even more.

More importantly, this mid-term oriented up-trend is also widely confirmed by our mid-term oriented market breadth indicators and, therefore, we do not think that any short-term oriented consolidation period could trigger a stronger sell-off at the moment. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150) gained more bullish ground last week, indicating an absolutely broad based participation at the moment. Moreover, both gauges (100/150) have been pushed to their highest level for months and are, therefore, supporting the current level from the S&P 500! In addition, we can see that the Modified McClellan Oscillator Weekly strengthened its bullish gap, indicating that the underlying breadth momentum of the market keeps on growing. Another encouraging mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly. Both indicators are telling us that it is a way too early to get bearish from a strategic point of view as both indicators are far away from flashing any bearish crossover signal yet. Normally, as long as both, mid-term oriented advancing issues as well as mid-term oriented up-volume are trading above their bearish counterparts, the underlying tape structure of the market remains outright bullish. For that reason, we strongly believe that the current rally could push major indexes towards new record highs before major troubles might be due!

Long-Term Technical Condition

As per last week?s report, 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 grew another 300 basis points for the week, indicating that 68 percent of 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 gained some bullish ground on low levels. Above all, we can see that long-term market breadth also continued to brighten up 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 have also grown above the 50 percent bullish threshold last week!

Bottom Line

The technical picture of the market remains quite unchanged compared to last week. Despite the fact that the market is entering a quite challenging time period from a pure seasonal point of view (Presidential Cycle), our strategic bullish outlook has not been changed so far. With quite bullish indicators all across the board, we strongly believe to see further strengths in deeper April/early May. On a very short-time frame the market is quite overbought and together with some stretched readings within our short-term oriented trend indicators, further bullish biased consolidation looks quite likely. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a significant drop within short-term market breadth. Stay tuned!