February 08. 2015

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 3.8 percent over the week to close at 17,824.29. The blue-chip index had its best week since January 2013. The S&P 500 jumped 3.0 percent for the week to finish at 2,055.47. The weekly gain was the best since December 2014. The Nasdaq advanced 2.4 percent over the past five days to end at 4,744.40. Most key S&P sectors ended in positive territory for the week, led by energy. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 18.

Short-Term Technical Condition

The strong bounce from last week pushed the S&P 500 back to the upper band of its trading range which started almost two months ago. Obviously, the short-term oriented trend turned clearly bullish last week, as the S&P 500 closed 40 points above the bearish threshold from the Trend Trader Index. So from a pure price point of view, the S&P 500 remains in a bullish uptrend as long as it does not close below 2,015. The current positive uptrend is now also confirmed by the Modified MACD, which flashed a bullish but quite weak crossover signal on Wednesday. This indicates that the underlying trend structure of the market slightly started to gain positive momentum (at least on low levels). This can be also seen if we focus on the Advance-/Decline 20 Day Momentum Indicator, which also turned bullish last week. Nevertheless, its gauge did not confirm the latest break-out attempt by the S&P 500. Additionally, any stronger down-day could easily lead to a bearish crossover signal within the Modified MACD. Plus we can see that both envelope lines of the Trend Trader Index have started to widen which is another typical sign for a broader based trading range. As already mentioned a couple of times, during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is no specific trend within a broad based trading range. Therefore, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period should be considered as healthy or if it will turn out to be more corrective in its nature.

Despite the fact that most of our short-term oriented market breadth indicators strengthened last week, we can still see a lot of non-confirmation within their readings. Especially, the number of stockss which reached a fresh yearly high on NYSE should be also much higher, if we consider the current levels from the S&P 500. For that reason, the High-/Low Index Daily is not confirming the recent breakout attempt by the S&P 500, although the indicator itself still remains bullish from a pure signal point of view. More or less, the same is true if we focus on the Modified McClellan Oscillator Volume Daily, which flashed a weak bullish crossover signal last week. As a matter of fact, any upcoming stronger down-day could easily lead to bearish crossover signal again within that indicator. This is telling us that the underlying momentum of up-volume remains quite weak but somehow supportive. This can be also seen if we focus on the percentages of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Apart from quite encouraging readings within the 20 days time frame, the percentage of stockss which closed above their 50 day simple moving averages are a way too low, as the indicator just managed to flash a small bullish signal last week. If we compare this ratio with the current levels from the S&P 500, it becomes quite obvious that the recent bounce was mainly driven by heavy weighted stocks, whereas the broad market is still somehow lagging behind. The case is slightly different if we analyze the Modified McClellan Oscillator Daily as its bullish readings have clearly confirmed the recent levels from the S&P 500. This indicates that the short-term oriented momentum of advancing issues on NYSE was clearly positive, which can be seen as a quite encouraging signal. So right down the line, we can see that short-term market breadth remains bullish biased but not really powerful at the moment. So as a matter of fact, the upside- as well as the down-side potential of the market looks quite capped at the moment.

This view is also supported by our contrarian indicators, which flashed some patchy signals last week. If we focus on the option indicators (Daily Put-/Call Ratio All CBOE Options Daily and the ISEE Call-/Put Ratio), we can see that the market still has to work off this predominant bearish sentiment within the option market and, therefore, further gains/sideway trading is likely. This view is also supported by the WSC Capitulation Index, which dropped by half of its rise last week. On the other hand, we can see that the big guys have used the recent rally to reduce exposure, as the Smart Money Flow Index did not confirm the current levels from the Dow, indicating further troubles ahead. This is telling us that the latest move still smells like top-building!

Mid-Term Technical Condition

Basically, on a mid-term time frame we received similar signals from our indicator framework as the overall trend-structure improved but overall market breadth is still strongly lagging behind. The most important mid-term trend signal is coming from the Global Futures Trend Index, which was pushed into the upper part of its bullish consolidation area last week. This can be seen as a quite constructive signal, as the recent correction risk has diminished. This is mainly due to the fact that the gauge closed above 60 percent. However, as long as the gauge remains within its bullish consolidation area, the market is highly likely to stick within a broad-based trading range. From a pure price point of view, the mid-term oriented up-trend of the market remains intact and, therefore, the gauge from the WSC Sector Momentum Indicator still remains quite bullish at the moment. This is telling us that most sectors within our Sector Heat Map have a higher relative strength score of than riskless money market. Nevertheless, we can see that some sectors have already started to have a lower scoring than riskless money market and, therefore, the gauge from the WSC Sector Momentum Indicator dropped to the lowest level since 2011. Right now this is not a big deal at all but it is another indication for the current vulnerable market environment.

Despite the fact that the signals from mid-term market breadth indicators are looking quite constructive from a pure signal point of view, they still give some reason to worry as they are not confirming the recent level from the S&P 500. Although, the amount of mid-term advancing issues as well as mid-term oriented up-volume showed some positive signs of strength last week, their readings remain outright depressed at the moment. As long as we do not see further improvements in their readings, we still remain a bit cautious. The same is true if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Although both indicators passed their bullish 50 percent threshold last week, their readings are not really confirming the current level from the S&P 500, indicating a large-cap bounce. Above all, the Modified McClellan Oscillator Weekly did not flash a bullish crossover signal, indicating that the overall tape momentum still remains negative on a mid-term time frame. So despite the fact that the current correction risk diminished compared to last week, the upside potential of the market looks also quite limited for now! So all in all, we think that the market will not have enough breadth to break substantially above 2,096/2,115 which represents about 2 to 3 percent from the current levels, whereas the downside potential of the market looks limited as well. In our opinion, the next 1-3 weeks will give guidance, if the market is likely to follow our preferred scenario, where we are expecting to see a stronger pullback or further gains into early March can be expected!

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 38 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. Moreover, the relative strength of most risky markets kept trading sideways last week which is another indication for a bigger breather among risky markets. More importantly, long-term oriented market breadth remains quite supportive and is, therefore, confirming the current long-term oriented up-trend of the market. This is mainly due to the fact that the percentage of stockss which are trading above their long-term oriented moving average flashed a small bullish signal last week, whereas High-/Low Index Weekly continued to strengthen. Only the Modified McClellan Volume Oscillator Weekly still remains bearish. As a matter of fact our long-term bullish outlook has not been changed so far, although our entire long-term oriented breadth indicators should be much stronger, if we consider the current levels from the S&P 500.

Bottom Line

Right now, it looks like that the current trading range might continue for a while as the market looks capped in both directions. So the next 1-3 weeks will give us more guidance. Whether the market will be able to sort out all those bearish divergences and then renewed rallying is highly likely or stronger losses into early March can be expected. Especially, this would be most likely the case if the short- to mid-term market breadth in combination with the Global Futures Trend Index deteriorates significantly. Therefore, we would advise our conservative members to stay at the sideline as the upside potential of the market looks capped at the moment and moreover, the risk of steep losses into March is still given. In such a situation, we would scarify 2-3 percent upside to get more confirmation within the next 1 – 3 weeks where the market will be heading. Stay tuned!