February 16. 2014

Market Review

U.S. stocks rallied for the week with all three major averages posting their biggest weekly gain of the year. The Dow Jones Industrial Average gained 2.3 percent for the week to close at 16,154.39. The S&P 500 rallied 2.3 percent over the week as well to end at 1,838.63. The Nasdaq jumped 2.9 percent over the week to close at 4,244.03, the highest level since July 2000. Utilities and health care led gainers among the S&P?s 10 major sectors. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, fell 4 percent to 13.57.

Short-Term Technical Condition

The market is moving right in line with our cyclical roadmap (Charts of Interest), where we expected an important bottom in mid-February. After the bears took the S&P 500 down towards our preferred correction price target of 1,730, we have seen typical signs for an important market bottom within our short-term oriented breadth- as well as contrarian indicators. Since then the market has strongly bounced back and, according to our cyclical roadmaps, we think that the current rally could lift the S&P 500 towards 1,950/1,970 into Q2, before a cyclical bear market might be due.

Anyhow, after the strong surge from last week, the market is strongly overbought (Upside-/Downside Volume Ratio Daily and Advance-/Decline Ratio Daily) on a very short-time frame and, therefore, pace is likely to slow down a bit in the next couple of trading sessions. More importantly, the short-term uptrend of the market strengthened last week as the S&P 500 managed to close 49 points above the bearish threshold from the Trend Trader Index. Moreover, the gauge from the Advance-/Decline 20 Day Momentum Indicator has been pushed to the highest level since late January and is, therefore, strongly confirming the current rally from the S&P 500. The most important short-term oriented trend signal is coming from the Modified MACD, which flashed a strong bullish crossover signal on Monday, indicating further strengths ahead. Furthermore, we can see that a lot of weaknesses would be necessary to trigger a bearish crossover signal in that indicator, and, therefore, we believe that the market will be pushed to new highs soon.

Right now, short-term oriented market breadth looks quite healthy and is, therefore, strongly confirming the current short-term oriented up-trend of the market. The current participation of short-term up-volume in the present up-trend looks absolutely healthy and the gauges of the Modified McClellan Oscillator Daily flashed an outright bullish crossover signal on Monday, indicating an intensifying tape structure. Moreover, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have been pushed back into bullish territory, whereas the High-/Low Index Daily continued to improve for the week. This is mainly due to the fact that we saw an encouraging increase of stocks which hit a new high last week, in combination with one of the lowest readings of stocks which dropped to a fresh 52 weeks low. These facts can be seen as another extremely positive market breadth signal at the moment.

From a pure contrarian point of view we have received even further confirmation signals for our preferred rally scenario into Q2, as the WSC Capitulation Index dropped by half of its rise last week, indicating that we have seen the worst already. Another strong positive contrarian signal is coming from the option market. The gauge from the CBOE Call/Put Ratio Oscillator Weekly flashed a buy signal last week, indicating that the majority of investors are betting on further declines as the amount of puts being bought soared. This can be also seen if we have a closer look at the Daily Put/Call Ratio All CBOE Options Indicator, which is still trading in outright bullish territory right now. This coincides with the fact that market sentiment is quite depressed at the moment, indicating that there is still much room for improvement until the bullish sentiment among investors will reach extreme values. For that reason we strongly believe that the market has priced in a lot of bad news already, leaving the market better positioned to rally on positive surprises!

Mid-Term Technical Condition

The most important mid-term oriented trend signal is coming from the Global Futures Trend Index, which was pushed back into the bullish consolidation territory on Wednesday, giving a strong buy signal for moderate members. Moreover, the gauge of our reliable WSC Sector Momentum Indicator Weekly slightly grew on high levels last week, indicating that the mid-term oriented up-trend of all underlying sectors within the S&P 500 continued to strengthen for the week. According to our Sector Heat Map, health care and industrials remain the most attractive sectors right now, whereas utilities and consumer staples will continue to underperform the S&P 500 in relative terms. Another encouraging sign is the fact that the relative strength score of riskless Money Market still remains at zero percent, indicating that the risk appetite among professional investors remains quite high at the moment.

More importantly, the current mid-term oriented up-trend is now strongly being confirmed by mid-term oriented market breadth, since we have seen a quite encouraging spike in mid-term oriented advancing issues as well as within mid-term oriented up-volume. For that reason, both, the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly are quite bullish at the moment and, therefore, we think that any upcoming weaknesses should be limited in price and time. The same is true if we have a look at the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both measures, were pushed back to encouraging 61 and 66 percent, respectively and, therefore, the current upside participation within the whole market looks quite healthy at the moment. Another positive sign is coming from the Modified McClellan Oscillator Weekly, which flashed a small bullish crossover signal last week.

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 bullish biased 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. Only the WSC Global Momentum remains quite bearish, as most global equity markets (especially emerging markets) are still underperforming riskless money market. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average have increased for the week and are, therefore, far away from being bearish. Moreover, we can see that the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, indicating a quite healthy tape structure. Only the Modified McClellan Volume Oscillator Weekly remains bearish, indicating that the overall long-term demand is weakening. As already mentioned last week, we would not be surprised to see deterioration within our long-term oriented indicators over the next couple of weeks, as we are still expecting to see a cyclical bear market later this year.

Bottom Line

The bottom line: with broadening strengths all across the board, we think that the market is ready for another strong rally attempt into Q2. Despite the fact that we still could see some rocky sessions ahead, we think that aggressive traders should buy into any upcoming weaknesses as long as our short-term trend- as well as breadth indicators remain strong. Furthermore we think that it is time for conservative members as well as for late-comers to use any upcoming weaknesses to add exposure. Stay tuned!