June 08. 2014

Market Review

As highlighted in our latest call, U.S. stocks finished another week of gains with the Dow and the S&P 500 index at record highs. The Dow Jones Industrial Average gained 1.2 percent from the week ago close to finish at 16.924.28. The blue-chip index recorded its second straight record close and has notched eight closing records so far this year. The Dow?s weekly rise was also its strongest since April 17. The S&P 500 jumped 1.3 percent for the week to close at an all-time high of 1,949.44, notching its 18th record close of the year and its third straight record finish. The broad index also had its strongest weekly percentage rise since April 17. Both the S&P 500 and the Dow have each seen three straight weekly gains. The Nasdaq rocketed 1.9 percent for the week to end at 4,321.40 and posted its fourth straight weekly advance. Industrials and financials led gainers among the S&P?s 10 major sectors. The CBOE Volatility Index fell to 10.73. The gauge of U.S. equity volatility known as the VIX closed at the lowest level since February 2007.

Short-Term Technical Condition

The short-term oriented uptrend of the market continued to strengthen last week, as the S&P 500 is now trading 54 points above the bearish threshold from the Trend Trader Index. This indicates that as long as the S&P 500 does not close below 1,895 the market remains bullish (biased) from a pure price point of view. Furthermore, it was encouraging to see that the Modified MACD showed an increasing bullish gap last week, indicating that the market is now trading in a powerful uptrend at the moment. Another positive sign was the fact that the short-term gauge from this reliable indicator rose to its highest level since March 2014 and has, therefore, started to reduce its bearish divergence to the current level from the S&P 500. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which still remains quite bullish from a pure signal point of view. Nevertheless, its gauge has not confirmed the recent breakout from the S&P 500, although we saw a stronger reduction of this bearish divergence on Friday.

More importantly, short-term oriented market breadth continued to show strong signs of improvements and is, therefore, strongly confirming the current short-term oriented uptrend of the market. The Modified McClellan Oscillator Daily gained more bullish ground last week, indicating that the underlying momentum of the broad market remains positive. Above all, we saw a strong surge in the total amount of all NYSE-listed stocks which reached a fresh 52 week’s high (especially on Friday), in combination with one of the lowest readings of new 52 week’s low! On Friday, there were only 7 stocks on NYSE which were pulled to a new yearly low, whereas 370 stocks climbed to new highs. This indicates an extremely intensifying tape structure, as this was the biggest number of new highs within a year. This can be also seen, if we have a look at the High-/Low-Index Daily. The gauge of this indicator has been pushed to the highest level since December 2013, and is, therefore, strongly confirming the new high we have seen by S&P 500. More importantly, the indicator was able to wipe out its bearish divergence we have been worried about in our recent Market Comments as its gauge climbed to almost 10 percent. Another encouraging fact is that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have confirmed (20) or have started to confirm (50) the recent level from the S&P 500 as their gauges strongly grew above 50 percent. This indicates that a healthy rotation back into small caps has started and, therefore, the broad market is now participating within the recent rally. This is a very positive sign as purely a large cap driven rally/breakout (please read our former Market Comments) can never be sustainable in the long run.

From a pure contrarian point of view, the threads for a 2-3 percent pullback are increasing as the gauge from the Daily Put/Call Ratio All CBOE Options Indicator is about to drop into extremely bearish territory. Furthermore, we can see that the market is getting increasingly overbought (Upside-/Downside Volume Ratio Daily and the Arms (Trin) Daily). Another red flag on the horizon is the fact that dumb money is outright greedy at the moment, plus the Smart Money Flow Index has not sorted out its bearish divergence to the Dow yet! However, as long as the WSC Capitulation Index keeps trading on outright low levels, we think it is too early to get too nervous on a very short timeframe. Nevertheless, we would advise our short-term traders to keep an eye on this reliable indicator.

Mid-Term Technical Condition

The most important mid-term oriented trend signal is coming from the Global Futures Trend Index, which was pushed back above the strong bullish 90 percent threshold on Friday, indicating an outright strong mid-term uptrend at the moment. For that reason, the current reading of this reliable indicator is absolutely confirming the recent break-out from the S&P 500. And as long as the gauge of the Global Futures Trend Index is trading above 60 percent, any upcoming pullback should be limited in price and time. Furthermore, we can see that the WSC Sector Momentum Indicator remains outright bullish at the moment, indicating that most sectors within the S&P 500 remain in a strong mid-term oriented uptrend. If we have a closer look at our Sector Heat Map, we can see that energy and materials are still the strongest sectors within the S&P 500, whereas consumer discretionary and financials remain the weakest ones. Moreover, the relative strength score of riskless Money Market is still trading at 0 percent, telling us that all sectors within the S&P 500 are trending higher, and, therefore, the current up-trend of the market looks quite healthy at the moment.

If we focus on mid-term oriented market breadth, we can see that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) gained more bullish ground last week, indicating that the broad market is recovering (as small caps have started to recover). Despite the fact that the readings from those important breadth indicators were able to diminish their bearish divergence to the S&P 500, their gauges are still a bit too low, if we consider the current levels from the S&P 500. Right now, we are taking this bearish divergence not too serious as the remaining tape indicators have not shown any signs of threatening bearish crossover signals yet. Especially, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap in the last couple of trading sessions, indicating that the underlying momentum of the broad market kept growing strongly. Anyhow, the most important tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from those reliable indicators have continued to grow strongly for the week and are, therefore, confirming the recent breakout by the S&P 500. As long as mid-term oriented advancing issues as well as mid-term oriented up-volume are trading far above their bearish counterparts, further strength can be expected on a mid-term time horizon.

Long-Term Technical Condition

The long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating that the current bull market still remains in force from a technical point of view. The WSC Global Momentum Indicator grew to 95 percent, indicating that the majority of all global market indexes have been pushed back into a long-term uptrend. This is a quite encouraging number as it tells us that the current bull market has started to broaden out globally (at least for the time being). This is mainly due to the fact that Emerging Markets have started to recover significantly. Nevertheless, from a pure asset allocation point of view, Europe remains the preferred market as its strong advance has been accompanied with quite low volatility. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average have grown to 63 percent and are, therefore, far away from being bearish. Moreover, the Modified McClellan Volume Oscillator Weekly still remains constructive, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, indicating still a positive market breadth environment for the time being. Nevertheless, the High-/Low Index Weekly, the percentage of stockss which are trading above their 200 day simple moving average as well as the Modified McClellan Volume Oscillator Weekly have not sorted out their long-term bearish divergence to the market yet. Right now it is too early to get concerned about those readings as the market still remains in a strong up-trend within all time frames and, therefore, further gains into summer can be expected.

Bottom Line

The bottom line: according to our cyclical roadmap (cycles and Technical Market Outlook 2014), we are still expecting to see a cyclical bear (decline between 10 and 20 percent) market this year. Moreover, according to the presidential cycle, there is a 72 percent chance that the market will face a stronger correction this year, whereas the strong Juglar Cycle is topping out in late August. Nevertheless, the anticipated overshoot towards 1,950 in combination with broadening market breadth is telling us that it is still too early to call for an important market top at the moment. Moreover, there is no top without a distributive top-building process. A classical top building process can take a couple of weeks, whereas the first stronger pullback (4-6 percent) after a major high is just part of a larger distribution top. After such a pullback, the market usually strongly bounces back (above or slightly below) to its former high, although most of our mid-term and even sometimes our long-term oriented trend- as well as breadth indicators are already faltering! Right now, we have not received any indicators for such a scenario yet and, therefore, our bullish outlook has not changed so far. Nevertheless, we keep watching our indicators closely into summer, as the strong Juglar Cycle is anticipating a top in late August. Stay tuned!