April 19. 2015

Market Review

U.S. stocks finished the week in negative territory. The Dow Jones Industrial Average lost 1.3 percent for the week to end at 17,826.10. The S&P 500 declined 1.0 percent from last Friday?s close to finish at 2,081.16. Both the S&P 500 and Dow recorded their first weekly losses after two consecutive weeks of gains. The Nasdaq lost 1.3 percent over the week to 4,931.81. Among the key S&P sectors energy was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

Short-Term Technical Condition

Despite the fact that a sharp decline on Friday left U.S. stocks lower for the week, major large-cap benchmarks climbed near their all-time highs at midweek. As already mentioned last week, we expected some headwinds and a few more attempts before new record highs could be expected. Anyhow, the technical picture of the market remains almost unchanged compared to last week although the S&P 500 finished the week on a lower note. The Trend Trader Index is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,075. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of a threatening bearish crossover signal yet. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator is still trading at quite encouraging bullish levels, although we saw a strong pullback on Friday.

Right now, it is a bit too early to get concerned about the recent weaknesses as our entire short-term market breadth indicators are still confirming the current short-term oriented uptrend of the market. The current trend participation of all NYSE listed stocks remains quite supportive, as only the percentage of stockss which are trading above their 20 days moving averages slightly dropped below their bullish threshold, whereas on a 50 day time frame the gauge was holding up quite well! In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are still smoothly trending higher, indicating that the underlying breadth momentum of the broad market remains outright constructive at the moment. Furthermore, we can see that the recent weakness is mainly driven by profit taking so far. This is mainly due to the fact that we have only seen a decline in the amounts of stocks which are hitting a fresh yearly high, whereas the amounts of stocks which have been pushed to a new yearly low remain outright depressed. For that reason, the High-/Low Index Daily remains quite bullish for the time being as the smoothed new lows have not shown any signs of strength yet and, therefore, the overall market internals look quite healthy at the moment.

The situation on the contrarian side is almost unchanged compared to last week. Dumb Money remains quite cautious, whereas the gauge from the Smart Money Flow Index was holding up quite well recently. This indicates that the pullback on Friday was used to increase exposure. Furthermore the readings within our NYSE Members Debt in Margin Accounts remain supportive. Only the z-score from the WSC Capitulation Index remains in cautious territory as we saw increased volatility over the past weeks. Nevertheless, with such strong readings within our indicator framework, we think any consolidation should be limited in price and time.

Mid-Term Technical Condition

Another reason why we remain outright bullish at the moment is the fact that the mid-term oriented uptrend of the market also continued to strengthen last week. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index closed slightly above its extremely bullish 90 percent threshold last week and has, therefore, clearly confirmed the latest all-time high by the S&P 500. In addition, the WSC Sector Momentum Indicator gained more bullish ground last week, indicating that most sectors of the S&P 500 have not shown any signs of weaknesses yet and they remain, therefore, still in a strong mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at low levels, whereas health care and consumer discretionary remain the strongest sectors for the time being. Above all, we can see that energy is definitely bottoming out as its relative trend score within our Sector Heat Map slightly increased last week.

More importantly, the current mid-term oriented up-trend of the market is still confirmed by mid-term oriented market breadth. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150) continued to strengthen slightly for the week and are now trading at encouraging 60 percent. This indicates that the current upside participation within the whole market remains quite broad-based! Moreover, the Modified McClellan Oscillator Weekly was holding up quite well, plus mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, indicating a quite bullish tape structure from a pure signal point of view! This can be also seen if we focus on most of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they continued to form an outright bullish divergence at the moment!

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, whereas most local market indexes around the world continued to regain their footing. This is mainly due to the fact that the gauge of the WSC Global Momentum Indicator increased to 55 percent and, therefore, the global bull market is getting broader based at the moment. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky markets (apart from commodities) kept trading well above their bearish threshold. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average continued to strengthen slightly last week. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Above all, the Modified McClellan Volume Oscillator Weekly did not show any signs of weaknesses last week, indicating that the tape structure of the market remains quite healthy at the moment.

Bottom Line

The bottom line: the technical picture of the market remains quite unchanged compared to last week. With quite bullish indicators all across the board, we think to see a strong and sustainable break-out towards new record highs soon, although a few attempts might be necessary. Tactically, we cannot rule out further volatility into next week, but all in all we continue to expect higher equity prices into May. For that reason, we would advise conservative members to hold/increase their equity position, while aggressive short-term traders should buy into any upcoming weaknesses. Stay tuned!