April 09. 2016

Market Review

U.S. stocks closed the week in negative territory. For the week, the Dow Jones Industrial Average slipped 1.2 percent to finish at 17,576.96. The S&P 500 dipped 1.2 percent in five trading days as well to end at 2,047.60. The Nasdaq slumped 1.3 percent for the week to close at 4,850.69. Most key S&P sectors finished in red, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, declined to near 15.4.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the market looked ready for a short-lived but healthy consolidation period that should relieve overbought conditions and dampen short-term optimism before further gains could be expected. In fact, last week?s move caused a deterioration of the short-term uptrend of the market, as the Modified MACD flashed a bearish crossover signal last week, plus the S&P 500 closed within the neutral territory of the Trend Trader Index. Nevertheless, both envelope lines of the Trend Trader Index are still rising, which indicates that the short-term uptrend of the market still remains intact from a pure structural point of view. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which has not turned bearish so far, although its gauge have come down recently. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the market is entering a consolidation period or if the market is taking a breather. In such a situation, short- to mid-term market breadth will give guidance if further losses or if renewed strengths can be expected. Normally, a consolidation period is considered to be healthy one as long as short-term to mid-term market breadth does not completely turn bearish and as long as our mid-term oriented trend-indicators remain supportive!

Right now, short-term market breadth still looks quite constructive although the impact of the pullback from last week has definitely left its mark on our tape indicators. This is mainly due to the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal last week, indicating that the tape momentum of the market turned negative. Moreover, the percentage of stockss which are trading above their 20 day moving average were pushed below their bullish threshold, indicating a weakening upside participation on a very short time frame! Nevertheless, the recent consolidation period still looks quite constructive as there where absolutely no increases in the number of stockss hitting a yearly new low, plus the total amount of new highs remains quite supportive. As a matter of fact, the reading of the High-/Low-Index Daily still remains quite bullish, plus the percentage of stockss which are trading above their 50 day moving average are still trading at quite encouraging levels and, therefore, it might be a bit too early to bet on a major short-term oriented trend reversal.

From a pure contrarian point of view, the situation looks quite mixed at the moment. This is mainly due to the fact that the Smart Money Flow Index is still telling us that major institutional investors have not changed their bullish view on the markets, whereas the gauge from the WSC Capitulation Index has not switched into a risk-off environment for the time being. On the other hand, we can see that the WallStreetCourier Index Oscillator as well as the Program Trading Buy-/Sell Spread are still indicating increased volatility ahead.

Mid-Term Technical Condition

However, on a mid-term time horizon, those short-term oriented swings can be definitely ignored at the moment. This is mainly due to the fact that the Global Futures Trend Index is still trading far above its extremely bullish 90 percent threshold and, therefore, it is a way too early to issue a strategic sell signal at the moment. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening market breadth), as it would be an indication that a stronger correction lies ahead. Therefore, the current short-term oriented deterioration still looks quite healthy for the time being. In addition, we can see that the WSC Sector Momentum Indicator gained even more bullish ground last week, indicating that most sectors of the S&P 500 got back 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 momentum score of most sectors (and especially from the S&P 500) remains above the momentum score from riskless money market. Only energy, health care and financials have a lower momentum score and, therefore, it is too early to bet on a sustainable trend-change in those sectors.

Another main reason why we believe that the downside potential of the market remains quite capped is due to the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap last week, indicating that the overall tape momentum remains quite positive for the time being. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators where holding up quite well and, therefore, they remain bullish (100) or were at least holding up quite well at quite encouraging levels (150). This indicates that the total upside participation within the market still looks quite broad based, which is another indication that it might be a bit too early to take the chips from the table.

Long-Term Technical Condition

The long-term oriented technical picture of the market showed further signs of improvements last week. Especially, the gauge from the WSC Global Momentum grew another 800 basis points for the week, indicating that 65 percent of 35 local equity markets all around the world (which are covered from our WSC Global ETF Momentum Heat Map) got back into a long-term oriented up-trend last week. Above all, we can see that the relative strength score from risky assets are gearing up momentum, whereas the readings from the Global Futures Long Term Trend Index stabilized on low levels. Above all, we can see that long-term market breadth also continued to brighten up as the High-/Low Index Weekly flashed a bullish crossover signal last week, whereas the Modified McClellan Volume Oscillator Weekly continued to gain even more bullish ground last week. Last but not least, we can see that the percentage of stockss which are trading above their 200 day moving average were also holding up quite well, although they have not turned bullish so far.

Bottom Line

Despite the fact that the market is entering a quite challenging time period from a pure seasonal point of view (Presidential Cycle), our strategic bullish outlook has not been changed so far. This is mainly due to the fact that the readings from our indicator framework are still a way too bullish (especially on a mid-term horizon) to take the chips from the table or to play a major trend reversal. Moreover, given the quite solid readings within our indicator framework, we think any upcoming consolidation period should be limited in price and time. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a significant drop within short-term market breadth. Stay tuned!