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September 15. 2013

Market Review

U.S. stocks rallied for the week with all three major averages posting their second-straight week of gains. For the week, the Dow Jones Industrial Average jumped 3.0 percent to close at 15,376.06. The blue-chip average posted its second best weekly gain this year. The S&P 500 soared 2 percent in five trading days to 1,687.99, its best week in two months. The Nasdaq climbed 1.7 percent to 3,722.18. So far for the month, all three averages are up more than 3 percent. All 10 S&P sectors finished higher for the week, led by industrials and consumer discretionary. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, finished unchanged near 14.

Short-Term Technical Condition

In our last week?s comment we have highlighted the fact that there is a good chance for an important bottom, if we see a bearish trend break within our short-term oriented trend indicators, in combination with continued strengths in short-term market breadth. The market finished the week with solid gains and is, therefore, in line with our recent call, where we have expected to see a rally towards 1,685/1,695 by the S&P 500, after we have seen a bearish trend break within our entire short-term trend indicators (Trend Trader Index, Advance-/Decline 20 Day Momentum and the Modified MACD) at the beginning of the week. The S&P 500 is now trading 38 points above the bearish threshold from the Trend Trader Index, indicating that the market is per definition in a bull-mode as long as the broad equity benchmark does not close below 1,649. Furthermore, we can see that both envelope lines of this reliable indicator have started to bottom out as well, which can be seen as another encouraging trend-signal for market technicians. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which has shown a strong bullish divergence two weeks ago and has finally turned bullish on Tuesday. However, the most important short-term trend signal is coming from the Modified MACD, which has also flashed a bullish crossover last week. Given the fact that we have seen a quite strong surge in the short-term oriented gauge of this reliable indicator, we strongly believe that the market is now trading in a powerful uptrend, as quite heavy losses would be necessary to bring this indicator back into its bearish mode on a short-term time horizon.

More importantly, this fresh short-term uptrend is widely being confirmed by short-term market breadth (Upside-/Downside Volume Index Daily, High-Low Index Daily, Modified McClellan Oscillator Daily, Stocks above their 20/50 SMA). The current participation of short-term up-volume in the current up-trend looks absolutely healthy. The gauges of the Modified McClellan Oscillator Daily are smoothly trending higher, plus the percentage of stocks which are trading above their short-term oriented moving averages (20/50) have been pushed back above their 50 percent bearish threshold, indicating a quite healthy tape structure at the moment. Despite the fact that there had been some profit taking on Friday, as the amount of all NYSE listed stocks which have reached a new high have stalled on Friday, we can see that the new highs have started to recover within the last couple of weeks, whereas the new lows remain outright depressed at the moment, which can be seen as another positive market breadth signal.

According to the bulls & bear survey, a lot of bears have started to switch back into the bullish camp and for that reason a lot of purchasing power should come back into the market. Moreover, our reliable WSC Capitulation Index dropped by half of its rise and, therefore, we are quite sure that we have seen the worst for now. Furthermore, the bullish 48-cycle is due next week, plus we have received a rare buy signal from our Program Trading Buy/Sell Spread Indicator, which has been quite reliable in the past. The only concern at the moment is the outright bullish reading of the Daily Put/Call Ratio All CBOE Options. As the option expiring date is due next Friday, in combination with a quite overbought market, it could be possible to see a quite volatile week, before further strengths can be expected.

Mid-Term Technical Condition

The most important mid-term oriented trend signal is coming from the Global Futures Trend Index, which has been pushed back into the bullish consolidation territory on Wednesday, giving a strong buy signal for moderate members. Moreover, our reliable WSC Sector Momentum Indicator is still trading on its upper end, indicating that most sectors within the S&P 500 are showing an outright positive trend structure! If we have a closer look at our Sector Rotation Strategy Heat Map, we can see that the relative strengths score of riskless Money Market has dropped from 4.9 percent to 2.3 percent, telling us that the risk aversion among investors decreased during the last two weeks and, therefore, we could expect to see a positive surprise into deeper September.

Mid-term market breadth still remains bullish biased, as two of five mid-term oriented tape indicators still remain bearish from a pure signal point of view. Especially, the reading of the Advance-/Decline Index Weekly remains caught in a tug-of-war, whereas the Modified McClellan Oscillator Weekly has not turned bullish yet, although its gauges have slightly started to stabilize on quite low readings last week. However, the most encouraging mid-term oriented breadth signal is coming from the Upside-/Downside Volume Index Weekly, as we have seen a quite strong spike in upside volume, indicating that big institutional investors are getting back into the market. Moreover, the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) remain well above their 50 percent bearish threshold, indicating a quite healthy tape structure.

Long-Term Technical Condition

As per last week?s report, the long-term uptrend of the market remains bullish biased, as most of our long-term trend indicators remain well in force (Global Futures Long Term Trend Index and the Global Relative Strength). The Global Futures Long Term Trend Index remains unchanged and is, therefore, still indicating a technical bull-market. Furthermore, we can see that the relative strength of most risky assets have bottomed out and are now growing steadily, indicating that the risk appetite for global investors has risen significantly. It is also interesting to see that Commodities have passed the zero bullish percent threshold and Global EM are about to follow. In other words, Global Emerging Markets are now recovering from their bear market which has also a strong impact to Commodities, as most of them are heavily exposure to that sector. Therefore, global investors should have a closer look at those two asset classes, as they look quite attractive at the moment. Only the WSC Global Momentum Indicator is still slightly trading below its bullish threshold, although its gauge has shown some encouraging strengths recently, indicating that among all global ETFs which are covered by the Global Tactical ETF Model Portfolio, are regaining momentum. More importantly, long-term oriented market breadth remains quite ok and is, therefore, confirming the long-term uptrend of the market. Despite the fact that the Modified McClellan Volume Oscillator Weekly still remains bearish from a pure signal point of view, we have seen some improvements in long-term oriented market breadth. If we have a closer look at the High-/Low Index Weekly, we can see that the amount of new lows have started to decrease, whereas the amount of new highs have regained momentum, indicating an improvement in long-term market breadth. This signal is quite encouraging, as we have been worried about those low readings over the last couple of weeks. Moreover, the percentage of stocks which are trading above their 200 day simple moving average continued to increase for the week, indicating a quite healthy long-term oriented tape structure.

Bottom Line

The bottom line: with broadening strengths in our short-term to mid-term oriented trend- as well as breadth indicators, we strongly believe that we have seen the worst already, although further down-testing can be possible. Nevertheless, we strongly believe that the market will continue to show further strengths in deeper December, although we would not be surprised to some rocky sessions ahead. After we have recommended that aggressive short-term traders should get back into the market last week, we would advise our moderate members now to raise their equity exposure by buying into any upcoming weaknesses, as we strongly believe to see further strengths into deeper September, as our entire short- to mid-term oriented indicators have improved fairly. Stay tuned!