January 25. 2015

Market Review

After being closed on Monday for the Martin Luther King, Jr. holiday, U.S. markets gathered momentum throughout most of the week, whereas positive news from the ECB bond buying program appeared to drive much of the gains. The Dow Jones Industrial Average recorded a weekly increase of 0.9 percent and finished at 17,672.60. The S&P 500 climbed 1.6 percent to 2,051.82 during a holiday-shortened week. The Nasdaq closed at 4,757.88 and rose 2.7 percent during the week, its biggest such advance since October. Technology was the top gainer among the S&P 500?s 10 major sectors. The CBOE Volatility Index (VIX), known as Wall Street?s ?fear gauge,? fell more than 20 percent for the week and ended at 16.66.

Short-Term Technical Condition

In last week’s comment we highlighted the fact that the chanced for a stronger pull back remained outright high. Therefore, we remained outright cautious as the current consolidation period could easily turn out to be corrective in its nature. As a matter of fact, we advised our conservative members to place a stop-loss limit around 1,990, as we wanted to see some negative price action first before we issue a strategic sell signal. Moreover, a decline towards such a level would have definitely triggered a short signal within the Global Futures Trend Index and within the Advance-/Decline Index Weekly, which would have given us the ultimate confirmation for an important intermediate price top. However, during the whole week, the market was strongly trading above 1,990 and, therefore, no stop-loss limits have been triggered so far.

More importantly, from a pure price point of view, the short-term oriented trend of the market has regained some strength recently as the S&P 500 managed to close within the neutral territory of the Trend Trader Index. Furthermore, we can see that the Modified MACD managed to flash a very weak bullish crossover signal on Friday, indicating some form of small improvements within the overall trend structure of the market. However, this signal is a way too weak to take it too seriously, as any stronger down-day could easily lead to a bearish crossover within that indicator. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. The gauge from that reliable indicator is still trading sideways on low bullish levels, indicating that the market is still consolidating. As already mentioned a couple of times, during a consolidation period it is not quite unusual to see a lot of 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.

During the last couple of trading sessions, short-term market breadth has slightly improved compared to last week. This is mainly due to the fact that we saw an encouraging surge in the amount of new yearly highs, in combination with quite depressed readings of stocks which are dropping to a fresh 52 weeks low. Especially on Friday, the amount of all NYSE listed stocks which reached a new yearly high surged to 326, the highest number we have seen for weeks. This is telling us that the market internals have started to strengthen as the recent gains have been quite wide spread. As a matter of fact, the bullish gauge from the High-/Low-Index Daily has been pushed to the highest level since July 2014, indicating some green shoots of recovery. In addition, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily managed to flash a small bullish crossover signal, telling us that amount of daily advancing issues on NYSE have started to regain momentum (at least on low levels). Nevertheless, we should not forget that those crossover signals are still a bit weak-kneed. This coincides with the fact that the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) remain slightly bearish, although we saw some form of recovery last week. Even though we saw some encouraging improvements within our short-term oriented tape indicators, we should not forget the fact that most of their readings remain supportive but weak. As a matter of fact every stronger down-day could easily wipe out all those bullish (crossover) signals we saw last week. In addition, all those bearish divergences within our tape indicators (Modified McClellan Oscillator Daily, Modified McClellan Volume Oscillator Daily and the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50)) have not been sorted out yet.

On the contrarian side, we received a lot of evidences that the strong pessimism within the option market remains persistent (All CBOE Options Put/Call Ratio Z-Score, Equity-/Options Call-/Put Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator Weekly). The same is true if we focus on the ISEE Call-/Put Ratio. On the other hand, we can see that the Smart Money Flow Index is still showing a huge divergence to the Dow, whereas the WSC Capitulation Index has not dropped by half of its rise yet and, therefore, increased volatility might be likely.

Mid-Term Technical Condition

However, the most important mid-term oriented signal is coming from the Global Futures Trend Index. Last week, we mentioned the fact that this indicator was clearly key area of focus as readings below 60 percent (together with bearish mid-term market breadth) are an early indication for a major correction. Therefore, it was good to see that its gauge grew into the middle part of its bullish consolidation area, indicating that the correction risk decreased for the time being. On the other hand, as long as the gauge keeps trading within its bullish consolidation area and does not simultaneously show some signs of positive momentum, the upside potential of the market should remain limited as well. As a consequence further sideways trading with increased volatility is quite possible. Anyhow, we would get quite cautious if the gauge will drop below 60 percent (in combination with weakening market breadth, especially within the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly), as it would be a clear indication that a stronger correction lies ahead! Therefore, those indicators are clearly key area of focus within the next couple of weeks! Anyhow, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is far away from being bearish. This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map. Apart from energy, the relative strength score of all major sectors is trading well above the riskless money market!

More importantly, apart from the Modified McClellan Oscillator Weekly most of our mid-term oriented tap indicators improved a bit during the last couple of trading sessions and, therefore, the recent correction risk slightly reduced last week. This is mainly due to the fact that we saw a small bullish crossover signal within the Upside-/Downside Volume Index in combination with a quite encouraging spike in mid-term oriented advancing issues! As already mentioned above, as long as both indicators remain bullish, it is a bit too early to issue a strategic sell signal. Moreover, the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) slightly turned bullish during the week, indicating the growing number of upside participation within the market. Although the correction risk has diminished under the prevailing circumstances, we remain cautiously bullish at the moment. This is mainly due to the fact that the readings within our indicators still remain a bit weak-kneed (especially within the Global Futures Trend Index, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly). For that reason, we keep a close eye those three indicators as we will issue a strategic sell signal immediately if this is the case! Right now we are not there yet, but we remain alerted!

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 28 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. From a pure asset allocation point of view, U.S. equities remain the strongest market for the time being although they have to lose momentum recently. 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 (200) as well as long-term new highs remain quite bullish. At the same time, the Modified McClellan Volume Oscillator Weekly is about to flash a bullish crossover signal soon, indicating that the underlying tape momentum of the market is about to get back on track (at least on low levels). 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

On a very short time frame further bullish biased distribution looks quite likely. Therefore, as long as our short-term oriented indicators remain supportive, a retest or a move towards the December top can be possible. Although the correction risk has diminished under the prevailing circumstances, we remain cautiously bullish at the moment. This is mainly due to the fact that the readings within our mid-term oriented indicator framework still looks a bit weak-kneed and therefore, the current distribution process still could turn out to be corrective in its nature! Right now it is too early to sell and too late to buy. Although we remain cautiously bullish, we think conservative members should keep their stop loss limit around 1,990. Stay tuned!