November 16. 2014

Market Review

All three major indexes advanced for a fourth week. In the five trading days the Dow Jones Industrial Average climbed 60.81 points, or 0.4 percent, to 17,634.74. The S&P 500 rose 0.4 percent to 2,039.82 for the five days, ending the week at an all-time high. The broad index is up just over 10 percent for the year. The Nasdaq Composite Index jumped to 4,688.54, up 1.2 percent from last Friday’s finish. Among the key S&P sectors, materials were the best weekly performer, while energy dragged. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, gained 1.5 percent to 13.31 for the five days.

Short-Term Technical Condition

Not surprisingly, the short-term oriented uptrend of the market remains well intact as the most major U.S. averages finished the week on a higher note. As a matter of fact, the S&P 500 closed 55 points above the bearish threshold from the Trend Trader Index. This indicates that the market is per definition in a strong short-term up-trend as long as the broad equity benchmark does not drop below 1,984. Furthermore, we can see that both envelope lines of this reliable indicator are strongly increasing as well, which can be seen as another encouraging trend-confirmation signal.

The same is true if we focus on the Modified MACD, which continued to show a widening bullish gap, whereas the gauge from Advance-/Decline 20 Day Momentum Indicator is far away from being bearish. Nevertheless, we should not forget the fact that the Advance-/Decline 20 Day Momentum has lost some momentum on high levels recently, indicating some signs of short-term exhaustion. Moreover, we can see that the gap between the current level from the S&P 500 and the signal lines from the Trend Trader Index are narrowing on a fast pace and, therefore, the overall risk of a bullish trend break is increasing as well, if not see strong periods of gains ahead.

Right now, it is a bit too early to get concerned about those facts as our entire short-term market breadth indicators are still confirming the current short-term oriented uptrend of the market. The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bullish ground last week, indicating that the underlying breadth momentum of the broad market remains quite constructive at the moment. Moreover, the current trend participation of all NYSE listed stocks remains quite bullish, as the percentage of stocks which are trading above their short-term oriented moving averages (20/50) remain well above their bearish 50 percent threshold. The same is true, if we focus on the High-/Low Index Daily as its bullish gauge is still trading well above its bearish counterpart. Nevertheless, the bearish divergences we mentioned last week have not been sorted out so far, although the S&P 500 is still trading at record levels! Especially, the bullish gauge from the High-/Low Index Daily continued to lose momentum, as the number of stockss which reached a fresh yearly high have come down recently. Above all, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) should be much stronger, if we consider the current levels from the S&P 500. Therefore, the recent drop within the 20 days’ time frame is another concern that the current rally is slightly running out of fuel.

From a pure contrarian point of view, this picture looks quite likely as most of our sentiment indicators have reached extreme levels. Especially, the amount of bulls on Wall Street soared to a multi-year high and, therefore, the AII Bull-/Bear Spread Indicator keeps trading at outright bearish levels. Furthermore, we can see that the small fry is chasing the market aggressively higher, whereas most program traders are outright long at the moment. This caused that the NYSE Short Interest dropped to its lowest level since early January, which is another piece of evidence that there might be not enough purchasing power around to drive equity prices higher. Above all, the WSC Index Oscillator flashed a sell signal last week, plus our reliable Smart Money Flow Index did not confirm the latest levels from the Dow Jones Industrial Average. So all in all, the clouds are gathering, which is in line with our multi-week rebound scenario we mentioned last week. However, for the very short-time frame, the WSC Capitulation Index is still signaling an all clear environment, but we would not be surprised if this situation will change within the next 2-3 weeks, if we consider the current complacent among investors .

Mid-Term Technical Condition

The technical picture for the mid-term remains more or less unchanged compared to last week. The gauge of the WSC Sector Momentum Indicator is still trading at quite comfortable levels, indicating that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we focus on our Sector Heat Map, as all industries, apart from Energy, have a higher relative strength score than riskless money market. Nevertheless, the recent rally can be still categorized as quite weak-kneed or as a bounce. The main reason behind that fact is that the gauge from our reliable Global Futures Trend Index has not managed to pass its extremely bullish 90 percent threshold yet, although the market is trading at a multi-year high! Normally, such a bearish divergence can be ignored as long as the readings from our mid-term oriented market breadth indicators are trading at bull market levels. Unfortunately, this is not the case right now and, therefore, we remain quite cautious about the sustainability of the recent rally! Particularly, the readings from the Upside-/Downside Volume Index Weekly did not improve at all, whereas the Advance-/Decline Index Weekly remains slightly bearish, although the market is trading at record levels.

This broad non-confirmation can also be observed within our entire advance decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as they are still trading well below their latest August top. This indicates that only heavy weighted stocks are pushing major averages higher, which can be observed within the S&P 500 versus Russell 2000 Ratio. The same is true if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Despite the fact that both gauges remain bullish from a pure signal point of view, their readings are showing a huge non-confirmation at the moment. Above all, the Modified McClellan Oscillator Weekly is telling us that the overall market breadth momentum remains outright weak at the moment. If we consider all those bearish divergences, we think the current rally is taking place on outright weak demand. Such a situation can never be sustainable over the long run and, therefore, we stick to our overall outlook, where we are expecting that the current rally is just part of a complex and corrective multi-week rebound pattern. This scenario looks quite likely as the long-term technical condition of the market has not shown any signs of major improvements yet. Apart from the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, most global market indexes are trading well below their long-term oriented trend-lines. This can be seen if we focus on the WSC Global Momentum Indicator, which states that only 30 percent of all global equity markets are still in a long-term oriented up-trend. This picture is widely confirmed by the Global Relative Strength Index, as the long-term relative strength score of most risky markets remain well below their 0 percent bullish threshold, which is another indication that the global bull market reached a mature stadium.

Long-Term Technical Condition

This scenario looks quite likely as the long-term technical condition of the market has not shown any signs of major improvements yet. Apart from the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, most global market indexes are trading well below their long-term oriented trend-lines. This can be seen if we focus on the WSC Global Momentum Indicator, which states that only 30 percent of all global equity markets are still in a long-term oriented up-trend. This picture is widely confirmed by the Global Relative Strength Index, as the long-term relative strength score of most risky markets remain well below their 0 percent bullish threshold, which is another indication that the global bull market reached a mature stadium. This view is broadly confirmed by long-term oriented market breadth as we have not seen any signs of recovery in the current tape structure of the market. Although, the Modified McClellan Volume Oscillator Weekly showed some signs of bottoming out, its readings are far away from crossing any bullish crossover signal, indicating that the momentum of the market internals remain negative. Above all, the bearish readings from High-/Low Index Weekly remain almost unchanged compared to last week and, therefore, we can see a tremendous bearish divergence between the market and that indicator! Another serious bearish divergence can be seen if we focus on the percentage of stockss which are trading above their 200 day simple moving average, although the indicator itself still remains slightly bullish. So all in all, we would be quite surprised if this rally turns out to be sustainable.

Bottom Line

The overall technical market outlook remains unchanged compared to last week. The technical condition of the market looks quite damaged and, therefore, we stick to our call that the recent rally is just part of a complex and corrective multi-week rebound pattern. With such weak readings within our mid-term oriented tape indicators, the market is heading into major resistance and we would not be surprised to see another strong down-leg, once we see some bearish crossover signals within our short-term oriented indicator framework. Such a down-leg would give way to renewed rallying towards the year end before we could see further negative surprises in Q1 2015. However, as long as we do not see a break within our short-term oriented trend- as well as breadth indicators, we remain bullish as we never fight an existing trend. Nevertheless, we would not advise our short-term traders to chase the market aggressively higher! From a pure trading point of view, we think the market is likely to head into major resistance at 2,050/2,050. On other hand we think a break below 2,019 would be the first sign for a major trend reversal as it would give way towards 2,000/1,990. After a break of those levels a final overshoot towards 1,950/1,925 could be likely. More conservative members should remain long as long as the Global Futures Trend Index keeps trading above 60 percent. Nevertheless, it would make sense to adjust their stop-loss limit to around 2,000. Stay tuned!