June 05. 2016

Market Review

All three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.4 percent over the week, to end at 17,807.06. The S&P 500 advanced 0.1 percent for the week to finish at 2,099.13. The Nasdaq added 0.2 percent for the week to 4,942.52. Among the key S&P sectors, the utilities sector was the best weekly performer, while financials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.4.

Strategy Review

In our last week’s comment we highlighted the fact that the up- as well as the down-side potential of the market looked quite capped. Consequently, we expected that the market would drop back into its trading range, as market breadth was not supporting a broad based and sustainable break-out. As a matter of fact, we said that further consolidation could be expected, whereas such a distribution would definitely turn out to be a fork in the road. To be more precise, we expected either to see a healthy rotation back into small caps within the following couple of days/weeks (which would lead to significant improvements within our short- to mid-term tape indicators) or that those divergences are piling up, which would lead to a significant sell-off. Consequently, the quality of the underlying market tape during the following couple of days would give us further guidance which scenario would to happen.

Short-Term Technical Condition

Despite the fact that the market finished nearly flat for the week, the bullish trend-status from the S&P 500 gained more bullish ground last week. To be more precise, the S&P 500 closed 39 points above the bearish threshold from the Trend Trader Index and both envelope lines of this reliable indicator have started to drift higher as well. This indicates that the underlying price driven trend of the S&P 500 is outright strong at the moment. Basically, the same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of a threatening bearish crossover signal yet. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator rocketed for the week and has, therefore, sorted out its quite bearish divergence from last week. So in the end, our entire short-term oriented trend indicators got back on track, which indicates a continuation of the current risk-on trading environment.

More importantly, the current short-term oriented up-trend of the market is also supported by short-term market breadth, as the readings from most of our tape indicators showed major signs of improvements last week. This becomes quite obvious if we focus on the on the percentage of stockss which are trading above their short-term oriented moving averages (20/50) as they closed at outright bullish levels last week. To be more precise, about 75/65 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average, the highest numbers we have seen for weeks. On top of that we saw a massive spike in the total number of stockss which are hitting a fresh yearly high on Friday, although the market finished down on that day. As a matter of fact, the High-/Low-Index Daily also strengthened its bullish signal and has, therefore, started to diminish its bearish divergence. Another positive signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators flashed a bullish crossover signal last week, indicating that the market internals are getting back! So all in all, the readings from our short-term oriented tape indicators are telling us that the underlying technical condition of the market has strengthened significantly during the last couple of trading days and, therefore, we can definitely neglect any sell-off scenario.

From a pure contrarian point of view, there are hardly any extreme signals around at the moment. Only market sentiment remains quite depressed at the moment. This indicates that the market has priced in a lot of bad news already. And given the quite solid readings within our short-term oriented tape indicators we think the market is perfect positioned to rally on positive surprises. This coincides with the fact that apart from the WallStreetCourier Index Oscillator, the readings from our entire option based indicators (WallStreetCourier Index Oscillator Weekly, Global Futures Put-/Volume Ratio Oscillator Weeky, All CBOE Options Put-/Call Ratio, All CBOE Options Put-/Call Ratio Oscillator Weekly and the Equity Options Call-/Put Ratio Oscillator Weekly) dropped back within their normal range. As a consequence, there is also still enough room left before the greed is reaching extreme values.

Mid-Term Technical Condition

Another reason, why we believe to see a sustainable break-out ahead is due to the fact that the mid-term condition of the market also strengthened significantly last week. This is mainly because the readings from the Global Futures Trend Index continued to increase strongly last week. Right now the gauge of this reliable indicator is touching the top part of its outright bullish 90 percent area. As long as this is the case (in combination with bullish mid-term oriented tape signals), any pullback should only turn out to be a temporary weakness/consolidation within an ongoing bull market! Consequently, the recent top building process has definitely transformed into a healthy breather and, therefore, the looming correction risk we have worried about over the past couple of weeks is definitely off the table. Another positive signal is coming WSC Sector Momentum Indicator as it has not shown any signs of weaknesses so far. This indicates that most sectors within the S&P 500 remain in a strong mid-term oriented uptrend at the moment. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market keeps trading at zero percent.

More importantly, mid-term oriented market breadth is also confirming the current mid-term oriented uptrend of the market. Especially, the Modified McClellan Oscillator Weekly continued to increase last week, indicating that the overall tape momentum remains quite positive for the time being. However, the most important tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators regained strength and have, therefore, stopped a threatening bearish crossover scenario, which was often the vanguard of a stronger correction. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) as both gauges managed to close at their highest level for weeks. This indicates that the total upside participation within the market is now outright broad based, which is another indication that it might be a bit too early to take the chips from the table.

Long-Term Technical Condition

Right now, the long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a positive environment for stocks, whereas the WSC Global Momentum Indicator is showing a quite similar picture as 85 percent of all global equity markets around the world remain in a long-term oriented uptrend at the moment. Nevertheless, according to the WSC Global Relative Strength Index the overall long-term oriented trend-momentum remains a bit weak at the moment. Right now we are not taking this signal too seriously as long-term market breadth remains quite supportive and, therefore, we think that the current long-term uptrend of the market is not in danger at all. Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as at the number of stockss which are trading above their longer-term oriented moving averages (200).

Bottom Line

With broadening strengths all across the board, we strongly believe to see a strong break-out towards new record highs soon, although a few attempts might be necessary. Consequently, we think that the consolidation period which started in mid-April will come to a happy end soon as the corrective top building process transformed into a healthy consolidation period. Moreover, we can see that market sentiment remains quite depressed, leaving enough room for positive surprises into summer. For that reason, we would advise conservative members to hold/increase their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!