April 20. 2014

Market Review

U.S. stocks ended the holiday-shortened week with solid gains. The Dow Jones Industrial Average gained 2.4 percent over the week to close at 16,408.54. The blue-chip index recouped all of the losses from the previous week. The S&P 500 jumped 2.7 percent for the week to finish at 1,864.85. The weekly gain was the best since July 2013. The Nasdaq advanced 2.4 percent over the past four days to end at 4,095.52. All key S&P sectors were positive for the week, led by energy. The CBOE Volatility Index (VIX), a measure of investor uncertainty, fell to 13.38. The measure has lost 22 percent this week, the most since January 2013.

Short-Term Technical Condition

In last week’s comment we highlighted the fact that the recent washout had started to have its designated impact on short-term optimism, which was needed to trigger an important bottom and, therefore, we should have seen the worst already. In fact, after some further down testing towards 1,815 from S&P 500 at the beginning of the week, U.S. stocks strongly rebounded, with major indexes climbing more than 2 percent for the week.

Anyhow, if we have a closer look at our short-term oriented trend indicators, we can see that the bounce from last week has pushed the S&P 500 into the neutral territory of the Trend Trader Index and, therefore, the market is just trading 1 point below the bullish threshold of this reliable short-term oriented trend indicator. Moreover, both envelope lines of the Trend Trader Index have started to turn flattish, which can be interpreted as another positive trend signal for market technicians. Furthermore, the gauge from the Advance-/Decline 20 Day Momentum Indicator gained more bullish ground last week and is, therefore, confirming the current rally from the S&P 500. Only the Modified MACD still remains bearish from a pure signal point of view. Nevertheless, it was quite encouraging to see that the Modified MACD showed some signs of recovery last week. Given the fact that we saw a strong surge in the short-term oriented gauge of this reliable indicator, we strongly believe that any upcoming weaknesses will most likely produce a bullish divergence in its readings, since quite heavy losses would be necessary to bring this short-term oriented gauge back to its former low!

Moreover, it was good to see that short-term oriented market breadth showed some improvements compared to last week, although not all of our tape indicators have turned bullish yet. The most encouraging signal is coming from the High-/Low-Index Daily as averaged amount of new highs have continued to improve for the week, indicating that the market internals are strengthening. 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. Another important fact is that there were fewer stocks which had hit a fresh low on Monday (where the S&P 500 dropped to 1,815) compared to early February, where the broad benchmark was trading at similar levels. This is telling us that it is highly likely that we should have seen the worst already as such a situation is a typical technical pattern for an important bottom. Nevertheless, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) have not turned bullish yet, indicating that most listed stocks on NYSE are still per definition in a short-term oriented down-trend. In addition, we can see that the Modified McClellan Oscillator Daily still remains bearish from a pure signal point of view, although the indicator itself has shown some signs of bottoming out.

From a pure contrarian point of view we have received even further confirmation signals that 1,815 from the S&P 500 represented an important low, as the WSC Capitulation Index nearly 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 Daily Put/Call Ratio All CBOE Options Indicator is still trading in outright contrarian territory, 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 Odd Lot Differential Index, which is telling us that the small fry is quite scared at the moment. This coincides with the fact that market sentiment is quite depressed at the moment and, therefore, a lot of money has been pulled out of the market. These are all the ingredients that are needed to trigger another significant up-leg within the next couple of trading weeks. Only the Smart Money Flow Index has not sorted out its bearish divergence to the Dow yet. But given the fact that the WSC Capitulation Index measures the momentum from the Smart Money Flow Index, we think that the current divergence should not be taken too serious right now!

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 11 percent for the week. As already mentioned last week, 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! Furthermore, the WSC Sector Momentum Indicator is still far away from being bearish, indicating that most sectors within the S&P 500 remain in a strong mid-term oriented uptrend and, therefore, any upcoming pullback should be limited in price and time. This can be also seen if we focus on our Sector Heat Map, as riskless money market still has a relative strength score of zero percent. This is indicating that all sectors are still performing on a positive note on a mid-term time frame.

More importantly, mid-term oriented market breadth is still confirming this strong mid-term oriented trend, although the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain bearish (100) or are trading at low bullish levels (150). This is mainly due to the fact that the Modified McClellan Oscillator Weekly is still showing a quite bullish gap, indicating that the mid-term oriented market internals remain quite healthy. The most important mid-term oriented breadth signals are coming from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly. Both measures continued to gain more bullish ground on high levels last week and, therefore, we would not be surprised to see a significant rally into mid May! This picture is in line with our cyclical roadmap (Charts of Interest and Cycles) where we are expecting to see a significant but maybe final rally into May/early June before a cyclical bear market might be due!

Long-Term Technical Condition

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 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. Nevertheless, the relative strength of most risky markets has slightly started to deteriorate. This is another small long-term indication that equities could run into an important top within the next couple of months. Anyhow, right now it is too early to get concerned about those facts as the WSC Global Momentum Indicator still remains bullish, indicating that most risky markets remain in a long-term uptrend. 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 are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover we can see that the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, indicating still a positive market breadth environment for the time being. Nevertheless, the High-/Low Index Weekly as well as the Modified McClellan Volume Oscillator Weekly are already forming a long-term bearish divergence to the market. Right now it is too early to get concerned about those readings. But given the fact that we are still expecting to see a cyclical bear market later this year (Charts of Interest), we would not be surprised if those bearish divergence will start to mounting up within the next couple of weeks.

Bottom Line

The bottom line: with broadening strengths in our short-term and especially within our mid-term oriented trend- as well as breadth indicators, we believe to see a significant rally into May, although increased volatility might be possible within the next couple of days. Nevertheless, aggressive market timers should use any upcoming weakness to build up exposure, whereas conservative members should hold their equity position as we still think that the S&P 500 could rally towards 1,920/1,950 into mid/late Q2 before a cyclical bear market might be due (Charts of Interest). Furthermore, we believe that the current pullback represents the last good buying opportunity for latecomers. Stay tuned!