October 13. 2013

Market Review

U.S. stocks wrapped a volatile week that left the major averages mostly higher for the week. The Dow Jones Industrial Average soared 1.1 percent to close at 15,237.11. On Thursday, the blue-chip index skyrocketed more than 300 points, posting its second-best day this year. The S&P 500 gained 0.8 percent to close at 1,703.20, its first finish above 1,700 in nearly three weeks. The Nasdaq declined 0.4 percent to end at 3,791.87. The technology-laden index fell for its first week in six. Most key S&P sectors closed higher for the week, led by utilities, while consumer discretionary slipped. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 16.

Short-Term Technical Condition

In last week?s comment we had highlighted the fact that the recent consolidation had started to have its designated impact on short-term optimism, which was needed to trigger a stronger counter trend rally that could bring the S&P 500 back to former highs. After we have seen some further down-testing at the beginning of the week, dumb money has finally thrown in the towel on Wednesday, as the Daily Put-/Call Ratios soared to 1.2 (the second highest value this year), plus the Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily have hit oversold condition, which additionally helped to trigger an extremely strong counter trend rally into the week?s end.

According to our short-term trend indicators (Trend Trader Index, Advance-/Decline 20 Day Momentum and the Modified MACD), the market has slightly been pushed back into a short-term uptrend, after the strong rebound we have seen last week. The S&P 500 just managed to close shyly above the bullish threshold of the Trend Trader Index, while the gauge of the Advance-/Decline 20 Day Momentum Indicator just barely flashed a bullish signal, indicating that the current uptrend is still a bit weak-kneed, but constructive. This can be also seen if we have a closer look at the Modified MACD, which still remains bearish from a pure signal point of view, although its short-term oriented gauge has shown some encouraging strengths recently. As already mentioned last week, it is not unusual that the readings from our entire short-term trend indicators are languishing, during a longer lasting consolidation period and, therefore, short-term market breadth as well as our contrarian indicators are a key area of focus.

Despite the fact that the Modified McClellan Oscillator Daily still remains bearish from a pure signal point of view, overall short-term market breadth still looks quite constructive at the moment and is, therefore, confirming the fragile up-trend of the market. This is mainly due to the fact that the short-term oriented gauge of the Modified McClellan Oscillator Daily has slightly started to bottom out, whereas the percentage of stocks which are trading above their short-term moving averages (20/50) have been pushed to their highest levels since August 2013, indicating an intensifying tape structure. This coincides with the fact that on Wednesday the number of stockss which are hitting a fresh 52 week?s low have not spiked at all, although we have seen quite strong losses on that day. This is telling us that the recent weaknesses was only driven by heavy weighting stocks within major blue chip indexes, whereas the broad market still remains kind of strong. Otherwise we would have seen a bearish crossover signal within our High-/Low Index Daily or a significant reduction in the number of stockss which are hitting a fresh 52 week?s high.

If we focus on our contrarian indicators, we can see that Smart Money was and is still buying into weaknesses and, therefore, it was not a big surprise that we have seen the first 9-to-1 up-day since months, indicating that big institutional investors have also started to get back into the market. The 9-to-1 up-day is based on the volume of all NYSE-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose on that day. Normally such an event indicates strong demand and as long we do not see a reverting 9-to-1 up-down day, the underlying up-trend should continue. The WSC Capitulation Index has topped out at quite low levels, plus the option market remains extremely cautious at the moment, as the gauge from the Daily Put-/Call Ratio All CBOE Options Indicator has reached contrarian territory, which is can be interpreted as another short-term bullish sign for contrarians.

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading within its bullish consolidation area, although its gauge decreased 13 percent for the week. However, as long as the Global Futures Trend Index remains above its 60 percent threshold, any upcoming weaknesses should only be seen as a temporary consolidation period within the ongoing bull market. In addition, the WSC Sector Momentum Indicator is far away from being bearish, indicating that most sectors within the S&P 500 are per definition in a strong mid-term oriented uptrend. This can be also seen if we focus on our Sector Heat Map, as health care and consumer discretionary remain the strongest sectors within the S&P 500, whereas only utility has a lower percentage score than riskless money market.

Nevertheless, mid-term market breadth still remains one of our biggest concerns at the moment as it is still kind of mixed/bearish biased at the moment. As per last week?s report, the gauge of the Modified McClellan Oscillator Weekly has lost some down-side momentum but the indicator itself still remains bearish from a pure signal point of view. Moreover, mid-term oriented up-volume as well as mid-term advancing issues remain quite weak, even though we have seen a quite encouraging counter-trend rally last week. Only the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) remain quite bullish as they slightly increased to 69 and 71 percent, respectively. As already mentioned last week, as long the mid-term oriented up-trend remains strong or as long as we do not see a significant deterioration within mid-term oriented market breadth, we keep ignoring those bearish signals for now. Nevertheless, if the upcoming retest of the latest high won’t bring their gauges back to bull market levels, there is a good chance to see a more significant setback, once the mid-term up-trend starts to deteriorate! From a cyclical point of view, the market is entering a quite challenging time period until November, as the current presidential cycle and the decennial cycle are indicating that the market will face some headwinds until then. For that reason, we will monitor the developments of our short- to mid-term oriented trend- as well as breadth indicators quite carefully over the next couple of weeks.

Long-Term Technical Condition

The long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in-force,, therefore, our long-term bullish outlook has not been changed so far. Especially, the WSC Global Momentum Indicator increased 400 basis points to 61 percent, telling us that the vast of global market ETFs (all denominated in USD) are back in a strong long-term oriented uptrend, indicating that the global bull-market remains intact so far. This can be also seen if we have a look at the Global Futures Long Term Trend Index, which is still indicating a technical bull market while the relative strength of most risky assets are trading well above their bullish zero percent thresholds. Nevertheless we can see that U.S. equities have started to lose momentum versus their peers and, therefore, Europe remains the most attractive market at the moment, whereas Global Emerging Markets are catching up as well. However, long-term market breadth remains ok. The percentage of stocks which are trading above their 200 day simple moving average are giving no reason to worry right now, whereas the High-/Low Index Weekly still remains bullish from a pure signal point of view. Nevertheless, we can already see some little bearish divergences within its readings, since the number of stockss hitting a new high on a longer-term time horizon have started to decrease significantly, while the Modified McClellan Volume Oscillator Weekly has not shown any signs of strengths yet. In other words, if we do not see an improvement in their readings within the next couple of weeks, any possible mid-term oriented trend break, could lead to a significant and longer-lasting correction. Right now it is a bit too early to get concerned about these divergences, but we will monitor their developments quite closely over the next couple of weeks.

Bottom Line

The bottom line: although we strongly believe that the current consolidation period has come to an end, we cannot rule out to see some further down testing ahead. However, given the fact that we have seen already some bullish crossover signals within our short-term oriented trend- as well as -breadth indicators, we would advise our aggressive members to stay long to increase their exposure if we will see more bullish divergences/confirmations within our short-term oriented indicators. More moderate members should hold their equity exposure as our mid- to long-term bullish outlook has not been changed so far. Stay tuned!