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November 20. 2016

Market Review

All three major U.S. averages finished the week with modest gains. The Dow Jones Industrial Average eked out a small weekly gain of 0.2 percent to close at 18,867.93. The S&P 500 finished at 2,181.9 and booked a 0.8 percent gain for the week. The Nasdaq Composite closed at 5,321.51 and recorded a weekly gain of 1.6 percent. Most key S&P sectors ended in positive territory for the week, led by energy. The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, traded 3.5 percent lower, near 12.9.

Short-Term Technical Condition

The short-term technical trend picture of the market remains almost unchanged compared to last week. The S&P 500 managed to stay far above the bearish threshold from the Trend Trader Index. So from a pure price point of view, the market is per definition in a short-term up-trend as long as the broad equity benchmark does not drop below 2,133. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher as well. This can be additionally seen as a quite encouraging trend signal as it indicates higher highs and higher lows within the past 20 days. The situation is also the same if we focus on the underlying short-term oriented trend momentum of the market. This is mainly due to the fact that the Modified MACD gained even more bullish ground last week and, thus, remains very constructive. Only the Advance-/Decline 20 Day Momentum Indicator did not manage to pass the bullish threshold last week and is, therefore, not confirming the current levels from the S&P 500.

However, this bearish divergence can be definitely ignored at the moment, our entire short-term oriented tape indicators improved significantly last week. As a result, the overall trend participation within the ongoing short-term oriented uptrend rose towards solid levels within the past two weeks. Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) continued to grow further into deep bullish territory, indicating an outright supportive trend-structure at the moment. To be more precise, about 88/76 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average, the highest numbers we have seen for months. On top of that, we can see that the Modified McClellan Oscillator Daily managed to flash a bullish crossover signal last week, whereas the Modified McClellan Volume Oscillator Daily continued to show a widening bullish gap. This indicates that the underlying breadth momentum of the market is regaining strength on a very fast pace. Another encouraging fact is that the High-/Low Index Daily strengthened its bullish signal for the week. This is due to the fact that the total amount of all NYSE-listed stocks which reached a new yearly high kept trading at outright bullish levels, whereas the total amount of new lows literally collapsed after the initial spike during the presidential elections. This is telling us that the selectivity within the broad market has fallen sharply which is another positive technical signal at the moment. So all in all, as market tape has shown strong signs of recovery recently, we think that the correction risk has diminished significantly.

The situation on the contrarian side looks a bit mixed but in total it has definitely a bullish tilt right now. More specifically, the Smart Money Flow Index has not confirmed the recent break-out from the Dow as its gauge only grew towards the lower boundary of the pre-election consolidation period. Above all, the fisher transformation from the WSC Capitulation Index has not dropped into bullish territory yet, plus the Hindenburg Omen will still be a red flag on the horizon for the next 3 weeks. On the other hand we can see that the gauge from the WSC Capitulation Index dropped by half of its rise, which can be definitely interpreted as quite positive development. Another long-term bullish signal is coming from the NYSE Member Debt in Margin Accounts, as it has clearly confirmed the latest high from the S&P 500, whereas the WallStreetCourier Index as well as the ISEE Call-/Put Ratio remain or just grew into bullish territory.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market strengthened last week. This is mainly due to the fact that our reliable Global Futures Trend Index recovered strongly and was, therefore, pushed back into its bullish consolidation range last week. This can be seen as a quite constructive signal, as it indicates that the recent correction risk has clearly diminished (as its gauge closed above 60 percent together with a stronger recovery in market breadth). Basically, the same is true if we analyze the current momentum score of all major key sectors within the S&P 500. There we can see that most industries showed an outright positive momentum versus riskless money market last week. As a result, the gauge from the WSC Sector Momentum increased significantly last week and reached the highest level for months. This can be also seen if we focus on our Sector Heat Map, as the momentum score from riskless money market dropped significantly last week! In our view, this is another indication that the risk appetite among investors has returned and, therefore, we think that the recent correction risk has diminished last week.

This broader based recovery can be also seen if we focus on mid-term oriented market breadth. Especially, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) kept trading at quite solid levels. The Upside-/Downside Volume Index Weekly, the Advance-/Decline Index Weekly as well as our entire our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have shown stronger signs of strengths recently. Only the Modified McClellan Oscillator Weekly showed a widening bearish gap last week, indicating that the momentum of advancing stocks is still somehow lagging behind on a mid-term time horizon. All in all, we think that the mid-term oriented technical picture has improved fairly compared to last week, since the trend- as well as the breadth-structure of the market has given some encouraging signals. Despite the fact that the correction risk has diminished under the prevailing circumstances, we should not forget that readings within our mid-term oriented tape indicators still remain a bit weak-kneed (Upside-/Downside Volume Index Weekly) or have not turned bullish yet (Advance-/Decline Index Weekly). For that reason, we keep a close eye on the development within those two indicators within the next 2-3 weeks.

Long-Term Technical Condition

The long-term technical condition of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. But the readings from the WSC Global Momentum dropped into the bearish area, as only 42 percent of all local risky markets around the world (all quoted in USD) remain in a long-term oriented up-trend at the moment. This is sign of a growing selectivity within global markets as North America tends to be the leading market whereas Europe is still lagging behind. This picture is also confirmed by the Global Relative Strength Index. If we focus on long-term market breadth, we can see that the Modified McClellan Volume Oscillator Weekly remains bearish, indicating that the overall long-term momentum remains quite weak-kneed at the moment. On the other hand, we can see that the long-term new highs have started to strengthen recently and, therefore, the bullish gauge from the High-/Low Index Weekly stopped its downwards drift. Moreover, we can see that the percentage of stockss which are trading above their long-term oriented moving average (200) remain outright bullish as 77 percent of all NYSE listed stocks remain in a long-term uptrend at the moment.

Bottom Line

Despite the fact that the latest gains were in-line with our short-term outlook, the improvements within our indicator framework have been quite surprising. Given the strong improvements all across the board, it looks like that the recent corrective top building process transformed back into a healthier market environment. Consequently, the risk of a stronger correction clearly diminished last week and, therefore, our strategic outlook now turned slightly bullish again. For that reason, we would advise our conservative members to raise exposure again (by buying into weaknesses rather to chase the market too aggressively on the upside) as the current risk-/reward ratio looks attractive again (at least for the time being). However, given the quite fast changing market environment, we would not be afraid of issuing 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!