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January 05. 2014

Market Review

All three U.S. indexes finished the first week of the year in negative territory. The Dow Jones Industrial Average lost 8.42 points, or 0.1 percent, to 16,469.99 for the week. The S&P 500 declined 0.5 percent to 1,831.37 in the holiday-shortened week, after completing 2013 with a nearly 30 percent gain, the most since 1997. The Nasdaq lost 0.6 percent to 4,131.91. Eight of 10 main S&P 500 groups retreated for the week, with energy and utility dropping at least. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, advanced 10 percent to 13.76 for the week. The gauge finished 2013 with a 24 percent drop, the largest decline since 2009.

Short-Term Technical Condition

The technical picture of the market remains quite unchanged compared to last week. On Friday, the S&P 500 closed 26 points above the bearish threshold from the Trend Trader Index, indicating that the market is per definition in a strong short-term oriented up-trend as long as the broad equity benchmark does not drop below 1,805. Furthermore, we can see that both envelope lines of this reliable indicator are smoothly drifting higher as well, which can be seen as a quite typical pattern for a quite solid short-term oriented up-trend. Moreover, the gauge of the Advance-/Decline 20 Day Momentum Indicator was able to wipe out its bearish divergence from last week and is now clearly confirming the latest level from the S&P 500, indicating that the underlying price breadth-momentum of the market has started to regain some strength recently. The Modified MACD still remains bullish from a pure signal point of view, but we can see that its short-term oriented trend line has started to lose momentum and we would not be surprised to see a bearish crossover signal soon, if we do not see a week of strong gains ahead. Such a situation often occurs, when the market price action of the market has slowed down for a couple of trading days. Anyhow, as long as our other short-term oriented trend-indicators remain quite bullish, would not take a bearish Modified MACD too seriously (for now) as it would only indicate some signs of exhaustion, which mostly leads to a short-term oriented consolidation period. The situation would be slightly different if we would see further trend breaks within our short-term oriented trend-indicators in combination with deteriorating short-term oriented market breadth, as this would indicate to see a stronger pullback rather than a healthy breather.

Right now, short-term oriented market breadth looks quite healthy as is, therefore, still confirming the current short-term oriented up-trend of the market. 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) remain quite stable at 70 and 65 percent, respectively. In addition, the number of stockss which are hitting a fresh yearly high have not show any significant signs of weaknesses yet although they came down a bit recently. Therefore, the High-/Low Index Daily is still far away from flashing any threatening bearish crossover signal, which indicates a quite bullish tape structure at the moment.

The technical picture from a contrarian point of view remains quite inhomogeneous. On a very short-time frame, the WSC Capitulation Index indicates a risk-on equity environment, as its gauge has not shown any signs of strengths so far. However, the situation is a bit different if we focus on our mid-term oriented contrarian indicators, as their readings look quite threatening! Especially, the fact that Smart Money has started to sell aggressively into strengths, as the SMFI has not confirmed the latest high from the Dow Jones Industrial Average. This coincides with the fact that the option market as well as dumb money is chasing the market aggressively on the upside, which is quite concerning as those guys normally tend to be dead wrong. Moreover, we have seen a spike in market sentiment (Bulls & Bears AII) two weeks ago whereas the bulls on Wall Street have slightly started to decrease last week. The last time we have seen such strong readings was in February 2012, two months before the S&P 500 crashed almost 10 percent. Anyhow, if the bearish readings of our contrarian indicators start to mounting up within the next couple of weeks, it can be definitely seen as a leading signal for a bigger correction. Right now, it is still too early to get concerned about those readings since our indicator framework still remains quite bullish at the moment. Nevertheless, we would not be surprised to see a growing number of bearish divergences within the next couple of weeks as our contrarian indicators tend to be correct in the long run. Moreover, on a very short-time frame it could be possible to see further consolidation ahead as the market has to work off this strong predominant bullish sentiment.

Mid-Term Technical Condition

The mid-term oriented up-trend of the market has strengthened last week, as the gauge of our reliable Global Futures Trend Index increased 800 basis points to 83 percent, indicating a healthy uptrend. Normally, 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/pullback 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 consumer discretionary and industrials remain the strongest sectors within the S&P 500, whereas materials and financials have started to regain momentum.

More importantly, this strong mid-term oriented up-trend is still mostly being confirmed by mid-term oriented market breadth and, therefore, the mid-term oriented up-trend of the market should not be in danger at the moment. Nevertheless, 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 has flashed a bearish crossover signal last week, whereas the Modified McClellan Oscillator Weekly has not turned bullish yet, indicating some form of exhaustion/bearish divergence. Right now it is a bit too early to get concerned about those readings since 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, plus the Upside-/Downside Volume Index Weekly is far away from being bearish and therefore, we think it is too early to get bearish from a strategic point of view. Nevertheless, if we see further deterioration within our mid-term oriented market breadth indicators and/or a weakening mid-term oriented up-trend, we will advise our conservative members to cut their equity exposure immediately!

Long-Term Technical Condition

Our long-term bullish view has not been changed so far, since the our Global Futures Long Term Trend Index is still indicating a technical bull market while the readings of our reliable WSC Global Momentum Indicator indicates that 60 percent of all global ETFs which are covered by the Global Tactical ETF Model Portfolio remain in a long-term oriented uptrend. This can be also seen, if we focus on the WSC Relative Strengths Indicator. According to this indicator, the momentum score of most risky assets managed to regain momentum, indicating that the risk appetite of global investors remain positive. Anyhow, long-term market breadth is still confirming the long-term uptrend of the market as the percentage of stocks which are trading above their 200 day simple moving average are far away from being bearish, while the High-/Low Index Weekly still remains bullish from a pure signal point of view. Moreover, it was good to see that the bullish gap from the Modified McClellan Volume Oscillator Weekly has slightly increased last week!

Bottom Line

The bottom line: although we have received quite concerning signals from our contrarian indicators, we remain bullish for the short-term since the short-term uptrend of the market has not been broken yet and short-term oriented market breadth still looks quite constructive for the time being. Nevertheless, we would not chase the market too aggressively on the upside. Conservative investors should remain invested in equities as we think it is still a bit too early to take the chips from the table. Stay tuned!