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August 24. 2014

Market Review

U.S. stocks finished another week of gains, with the S&P 500 reaching an all-time high. For the week, the Dow Jones Industrial Average added 338.31 points, or 2 percent, to 17,001.22. The S&P 500 advanced 1.7 percent to 1,988.40 for the five days. The benchmark index closed at a record high of 1,992.37 on Aug. 21. The Nasdaq added 1.7 percent from the week earlier and finished at 4,538.55. Among the key S&P sectors, financials were the best weekly performer, while energy dragged. The CBOE Volatility Index, a measure of investor uncertainty, dropped to 11.47.

Short-Term Technical Condition

Right in line with our recent call, U.S. stocks continued to gain more bullish ground last week. After the S&P 500 managed to close above 1,960, the predicted retest took place on Thursday before the market lost some steam on Friday. Obviously, the short-term uptrend of the market gained more bullish ground last week, after the Trend Trader Index had switched from neutral into bullish territory on Monday. Furthermore we can see that the S&P 500 is now trading 45 points above the bearish threshold of the Trend Trader Index, indicating that the S&P 500 remains in a bullish uptrend (from a pure price point of view) as long as the market is not breaking below 1,943. The current positive uptrend is now also confirmed by the Modified MACD, which flashed a quite bullish crossover signal on Monday. This indicates that the underlying trend structure of the market has 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 finished the week at quite encouraging levels compared to last week. Nevertheless, its gauge did not confirm the latest break-out attempt by the S&P 500. Additionally, we can see that both envelope lines of the Trend Trader Index have not bottomed out yet, indicating that the overall trend structure of the market remains damaged. It is not unusual that our entire short-term trend indicator turn bullish after a stronger counter-trend rally.

In such a situation short- to mid-term market breadth is key area of focus as it will tell us if the current rally is just a stronger bounce or if renewed rallying can be expected. Last week, our entire short-term oriented market breadth indicators continued to strengthen, although we can still see a lot of bearish divergences in their readings. Especially the number of stockss which reached a new high on NYSE last week 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. 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 very small bullish signal last week. This is telling us that only heavy weighted stocks within the S&P 500 are pushing higher, whereas the broad market still struggles to get back into a strong short-term oriented up-trend. Only the Modified McClellan Oscillator Daily showed an increasing bullish gap last week, indicating that the market internals are strengthening (at least on low basis). So right down the line, we can see that short-term market breadth remains quite supportive at the moment. Nevertheless as long as we do not see further improvements within our short-term tape indicators, we think the upside potential of the market should be capped as well. Therefore, the market is highly likely to enter a volatile trading range, after the bulls will take out the 2,000 within the S&P 500.

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 Global Futures Put/Volume Ratio Oscillator Weekly), 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 latest rally we saw, whereas the small fry is chasing the market aggressively higher (ISE Call-/Put Ratio Daily), indicating further troubles ahead. This is telling us that the latest move of the market still smells like bouncing/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. Nevertheless, the indicator itself should be much giver, given the fact that the S&P 500 reached a new all-time high last week. Therefore, 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 the S&P 500 are still outperforming riskless money market. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas health care and technology remain the strongest sectors for the time being.

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 confirming the current level from the S&P 500, indicating a large-cap rally. Such a situation cannot be sustainable over the long-run as a healthy up-trend should be supported by a broad basis. 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 2,040/2,050 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 2-3 weeks will give guidance, if the market is likely to follow our cyclical roadmap, where we are expecting to see a correction leg into September, or if further gains into December can be expected (although this is not our preferred scenario)!

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains quite positive 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, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Nevertheless, we can see that the overall relative strength score of all risky markets remain quite depressed, which is another indication that global bull market is taking a breather at the moment. This can be also seen if we focus on the WSC Global Momentum Indicator which continued to decline for the week, although the indicator itself still remains quite bullish. More importantly, the situation within long-term oriented market breadth is almost unchanged compared to last week. Apart from the fact that the percentage of stockss which are trading above their 200 day simple moving average slightly rose above the bullish threshold last week, we have not seen any improvements within our long-term oriented tape indicators. Especially, the readings from the High-/Low Index Weekly continued to deteriorate, although the indicator itself still remains quite bullish. Moreover, we can see that the Modified McClellan Volume Oscillator Weekly still remains quite bearish, which is another indication that the global bull market is at a mature stage.

Bottom Line

The bottom line: after the early August low, we expected to see a stronger counter-trend rally as most of our contrarian indicators flashed a buy signal back then. Nevertheless, we cannot ignore the fact that the latest move is not really well supported by market breadth, although we saw quite encouraging signals within our trend indicators. Right now, it looks like that the market will be stuck in the middle. In such a situation, short- to mid-term market breadth is key area of focus as the next 1 – 2 weeks will give more guidance. Whether the market will be able to sort out all those bearish divergences and then renewed rallying can be expected or market breadth will deteriorate which will be definitely the ultimate evidence that stronger losses into September can be expected (our preferred scenario). From a trading point of view, we would advise our aggressive traders to keep their long position, although they should monitor our short-term trend indicators closely within the next couple of days. Moreover, 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 September is still given. In such a situation, we would scarify 2-3 percent upside to get more confirmation within the next 1 – 2 weeks where the market will be heading. Stay tuned!