February 15. 2015

Market Review

U.S. stocks ended the second straight week with solid gains. The Dow Jones Industrial Average gained 1.1 percent for the week to close at 18,019.35. The blue-chip index finished above 18,000 for the first time this year. The S&P 500 rallied 2 percent over the week to end at 2,096.99. The Nasdaq jumped 3.2 percent over the past five days to close at 4,893.84, the highest level since March 2000. Most key S&P sectors ended in positive territory for the week, led by technology. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 15 percent to 14.69.

Short-Term Technical Condition

In our last week’s comment, we highlighted the fact that we remained quite neutral as long as we did not see any significant changes within our indicator framework. Moreover, we mentioned that in such a situation we would scarify 2-3 percent upside to get more confirmation from our indicator framework where the market is heading. Therefore, it was good to see that the readings of our entire indicator framework strengthened significantly last week.

The short-term uptrend of the market continued to gain more bullish ground last week. This is mainly due to the fact that the S&P 500 closed 42 points above the bearish threshold from the Trend Trader Index, which indicates that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 2,028. Furthermore, we can see that both envelope lines of this reliable indicator have also slightly started to drift higher, which can be seen as another constructive trend signal. The Modified MACD continued to show a widening bullish gap in the last couple of trading sessions, after it had flashed a bullish crossover signal two weeks ago. For that reason, heavy losses would be necessary to trigger a bearish crossover signal within that indicator, which is another positive indication that further strength can be expected! Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite encouraging levels, although it should be much higher given the fact that the S&P 500 reached a new all-time high last week.

Anyhow, this small bearish divergence can be ignored for the time being as short-term oriented market breadth showed strong signs of improvements last week. Especially, the Modified McClellan Oscillator Daily showed an increasing bullish gap last week, indicating that the market internals are strengthening. Moreover, we saw a strong reduction in the total amount of all NYSE-listed stocks which reached a fresh yearly low, whereas the total amount of new highs remains quite unchanged compared to last week. This indicates that the broad market continued to strengthen last week, although the amount of new highs could be a bit higher if we consider the current levels from the S&P 500. This can be also seen, if we observe the High-/Low-Index Daily. If we focus on the underlying short-term trend structure of the market, we can see that the current trend participation also improved fairly last week, as the percentage of stockss which trading above their short-term oriented moving averages (20/50) continued to gain more bullish ground. Furthermore it was good to see that the bearish divergence within both indicators (20/50) started to diminish significantly last week and, therefore, the recent break-out attempt by the market looks absolutely healthy.
Anyhow, this small bearish divergence can be ignored for the time being as short-term oriented market breadth showed strong signs of improvements last week. Especially, the Modified McClellan Oscillator Daily showed an increasing bullish gap last week, indicating that the market internals are strengthening. Moreover, we saw a strong reduction in the total amount of all NYSE-listed stocks which reached a fresh yearly low, whereas the total amount of new highs remains quite unchanged compared to last week. This indicates that the broad market continued to strengthen last week, although the amount of new highs could be a bit higher if we consider the current levels from the S&P 500. This can be also seen, if we observe the High-/Low-Index Daily. If we focus on the underlying short-term trend structure of the market, we can see that the current trend participation also improved fairly last week, as the percentage of stockss which trading above their short-term oriented moving averages (20/50) continued to gain more bullish ground. Furthermore it was good to see that the bearish divergence within both indicators (20/50) started to diminish significantly last week and, therefore, the recent break-out attempt by the market looks absolutely healthy.

Most of our option based contrarian indicators got back to normal levels (Daily Put-/Call Ratio All CBOE Options Daily and the ISEE Call-/Put Ratio), whereas the WSC Capitulation Index is still indicating a short-term oriented risk-on scenario. Only the Smart Money Flow Index did not confirm the current levels from the Dow. Right now, we keep ignoring this fact as our entire short-term trend as well as -breadth indicators remain outright strong at the moment.

Mid-Term Technical Condition

On a mid-term time frame, the most important trend signal is coming from the Global Futures Trend Index, as its gauge gained 500 basis points to 85 percent last week! Therefore, the indicator reached the upper end of its bullish consolidation area and has, therefore, sorted out a lot of bearish divergences we worried about last week. Above all, the recent momentum in the gauge of this indicator is also telling us that the mid-term oriented trend structure of market strengthened enormously. With such strong readings equities do not appear to be at risk of entering a high double digit drop at the moment and, therefore, any upcoming short-term oriented pullback should be limited in price. In addition, the bullish gauge from the WSC Sector Momentum Indicator has shown also some positive momentum recently. This is mainly due to the fact that the relative strength score of riskless money continued to decline within our Sector Heat Map as most sectors regained their footing last week.

More importantly, mid-term oriented market breadth showed also some signs of improvements last week and is, therefore, clearly confirming the current mid-term oriented trend of the market. To be more precise, the Modified McClellan Oscillator Weekly showed a decreasing bearish gap, whereas the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) continued to gain more bullish ground last week, indicating an intensifying tape structure. Right now, 63 percent of all NYSE listed stocks are trading above their 100 day simple moving average and 59 percent of them are above their 150 day simple moving average. These are the highest ratios since late December 2014 and, therefore, the recent break-out from the market looked quite constructive. Above all, our entire advance-/decline line indicators (Advance-/Decline Line Daily, NYSE Advance-/Decline Line Percent and the NYSE Advance-/Decline Volume Line) have clearly confirmed the latest levels from the S&P 500. Above all, we saw a bullish crossover signal from the Upside-/Downside Volume Index Weekly, plus the Advance-/Decline Index Weekly also continued to strengthen last week. Although both indicators should be stronger, we think with the current set-up, there is a good chance that those divergences will be wiped out. Mainly due to the fact that most of our mid-term oriented trend- as well as breadth indicators continued to strengthen last week. As a matter of fact we think the market will have enough breadth to punch its way higher into Q1.

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. Nevertheless, we can see that the global bull market remains 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. If we focus on the Global Relative Strength Indicator, we can see that the relative strength score of most risky markets have started to regain momentum after they had traded more or less sideways for the past 2-3 weeks. This is another indication that the global bull market is slightly getting back on track. Moreover, we saw some improvements within our long-term oriented breadth indicators. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly is about to flash a bullish crossover signal, whereas the percentage of stockss which are trading above their 200 day simple moving average continued to strengthen last week. This indicates an intensifying tape structure, although we still see a lot of bearish divergences in their readings. The same is true if we focus on the High-/Low Index Weekly. Right now it is a bit too early to get concerned about those facts but we will monitor their developments quite closely over the next couple of weeks.

Bottom Line

The bottom line: with broadening strengths within our indicator framework, we think to see further strength into Q1. For that reason, we would advise our aggressive traders to buy into weaknesses, as long as our short-term indicator framework remains constructive. On a mid-term time horizon the technical market condition also improved significantly and, therefore, the threatening correction/pullback risk has diminished. As a matter of fact, we would advise our conservative members to build up exposure again as we do not fight an existing uptrend. Nevertheless, we would issue a strategic sell signal immediately, if the current mid-term trend-/breadth condition of the market turns negative again as capital appreciation is the most important driver for success. Stay tuned!