November 30. 2014

Market Review

U.S. stocks rose for the holiday-shortened week, capping a second straight monthly increase. The Dow Jones Industrial Average eked out a gain of 0.1 percent for the week to close at a record of 17,828.24. The S&P 500 rose 0.2 percent over the week to end at 2,067.58. Both the Dow and S&P 500 posted a second straight month of gains and the 8th in 11 months this year. Additionally, both indexes barely held onto their 6th straight week of gains, their longest winning streak in a year. The Nasdaq jumped 1.7 percent over the week to close at 4,791.63, its first 6-week win streak since February 2013. Technology and health care led gainers among the S&P?s 10 major sectors. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.

Short-Term Technical Condition

Although the S&P 500 nearly finished flat for the week, the short-term uptrend of the market remains outright bullish at the moment as the S&P 500 closed 32 points above the bearish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines from the Trend Trader Index continued to drift higher as well, which is another typical pattern for a healthy uptrend. Above all, the Modified MACD continued to show a widening bullish gap in the last couple of trading sessions, after it had flashed a bullish crossover signal almost six weeks ago. Furthermore, the gauge from the Advance-/Decline 20 Day Momentum Indicator is still trading at quite encouraging bullish levels, although it did not confirm the latest high from the S&P 500.

Right now this fact is not a big threat at all, as the current short-term oriented up-trend of the market is still supported by short-term market breadth! Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bullish ground last week, indicating that the underlying breadth momentum of the broad market remains quite constructive at the moment. Another interesting fact is that the amount of new yearly highs on Wall Street spiked to the highest level since early November, which can be interpreted as quite confirming tape signal. Worth mentioning is also that simultaneously the amount of new lows increased significantly as well. This is a typical year end phenomena (window dressing), as large money manager have started to add winners/drop losers within their portfolios. As a matter of fact, stocks which did quite well during the year have been pushed back above their new yearly high and vice versa. As a matter of fact, the bullish gauge of the High-/Low Index Daily strongly increased for the week and is now strongly trading well above its bearish counterpart, indicating that the current rally might continue for a while. If we focus on the overall trend participation of all NYSE listed stocks (20/50), we can see that the current rally is not really supported by a broad basis! Despite the fact that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain bullish from a pure signal point of view, their readings should be much stronger if we consider the current levels from the S&P 500. This indicates that the current rally is mainly driven by the outperformance in defensive mega-caps, such as consumer staples, heavy weighted tech-stocks as well as health-care stocks. As long as those mega-caps remain strong, the current rally is not in danger at all. Nevertheless, such a mega-cap rally can never be sustainable over time as a healthy trend needs to be broad based. However, right now it is a bit too early to get concerned about this fact as our remaining short-term oriented trend- as well as breadth indicators remain constructive. In addition, from a cyclical point of view, the last month of the year tends to be quite supportive for equities. Nevertheless, we think that this situation will become a major thread in early Q1 2015.

The situation on the contrarian side is getting increasingly bearish. This is mainly due to the fact that the amount of call volume decreased significantly over the last couple of days/weeks. As a matter of fact the WSC Index, the WSC Index Oscillator Weekly and the Equity Options Call-/Put Ratio Oscillator Weekly grew deeper into bearish territory, whereas the Global Futures Put/Volume Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator flashed a new sell-signal last week. Moreover, the bullish sentiment on Wall Street is getting increasingly stretched, which will definitely become a major burden after the seasonal bullish tendencies in December will have come to an end! So all in all, the clouds are definitely gathering, although on a very short time frame, the WSC Capitulation Index is still signaling an all clear environment for the time being. In addition, as long as we do not see any bearish crossover signals within our short-term trend- as well as breadth indicators, it might be a bit too early to act contrarian.

Mid-Term Technical Condition

The technical picture for the mid-term remains more or less unchanged compared to last week. Despite the fact that the gauge of the WSC Sector Momentum Indicator lost some strength recently, it is still trading at quite comfortable bullish levels. This is indicating that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we focus on our Sector Heat Map, as all industries, apart from Energy, have a higher relative strength score than riskless money market. Nevertheless, we can see that the relative strength of riskless money market started to increase last week, which can be seen as another red flag on the horizon, especially if we consider the current levels from the S&P 500. So if we see that the relative strength score of other industry start to drop below the relative strength score of risk-less money market over the next 2-4 weeks, we have another indication that the market is heading into major problems in early 2015. Such a situation looks quite likely, as the gauge from our reliable Global Futures Trend Index has not managed to pass its extremely bullish 90 percent threshold yet, although the market is trading at a multi-year high! Despite the fact that this situation is another hint for more troubles to come after the typical year-end rally, the current divergences can be ignored for the time being. This is mainly due to the fact that as long as the gauge keeps trading above 60 percent in combination with quite solid readings within our mid-term breadth indicators, the market is not at risk for a significant correction. Therefore, it was good to see that mid-term market breadth has regained some strength on low bullish levels recently.

Especially, the Modified McClellan Oscillator Weekly continued to show strong signs of recovery and is, therefore, about to flash a bullish crossover signal soon. This indicates that the underlying market breadth momentum is regaining strength, albeit on quite low levels. More importantly, 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) continued to strengthen last week, which can be seen as quite positive tape signal (for the very short-term). Nevertheless, their gauges are still showing a quite bearish divergence to the current levels from the S&P 500, as most of them have not managed to rise above their old September top. Such a broader non-confirmation can also be seen if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Despite the fact that their readings remain bullish from a pure signal point of view, their gauges should be much stronger, given the fact that the S&P 500 is trading at record levels. This is another piece of evidence that the current rally is not really supported by a broad basis. However, as large-caps tend to push major equities higher, an overshoot in terms of price but not in terms of a longer time-frame can be expected. If we focus on the underlying demand, we can see that both, mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading above their bearish counterparts. As long as this is the case, the market is not at risk for heading into a major correction, as both indicators tend to flash a bearish crossover signal before (like in late September). As a matter of fact, both indicators in combination with the Global Futures Trend Index will be definitely key-area of focus during the next couple of weeks as the overall bearish divergences remain a big thread at the moment. So either, those bearish divergences will be sorted out by the end of the year or they will mount up and lead to a significant correction leg in early 2015.

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 major local market indexes around the world are still trading well below their recent all-time high. As a matter of fact, the gauge of the WSC Global Momentum Indicator remains well below its bullish threshold, although it continued to recover last week. This is not a big surprise at all, as the year-end rally is not only happening in the U.S. Moreover, from a pure asset allocation point of view, U.S. equities remain the most attractive region as its relative strength score is leading all other risky markets. Moreover, we can see that the current bull market is quite selective as the relative strength of most local equity markets remain below their bullish 0 percent threshold. More importantly, long-term market breadth still remains quite bearish biased at the moment although we saw some signs of recovery last week. Especially, the Modified McClellan Volume Oscillator Weekly continued to show some signs of bottoming out, indicating that the long-term market internals are strengthening (at least on low levels). Moreover, we can see that the amount of long-term new highs is slowly increasing, although the High-/Low Index Weekly still remains bearish from a pure signal point of view. In addition, the percentage of stockss which are trading above their 200 day simple moving average remain above their bullish threshold, indicating that most NYSE listed stocks are still in a long-term oriented uptrend. Although we saw some encouraging signs of improvements within our long-term oriented tape indicators, their bearish divergences remain evident, which is another indication that equities could face a quite challenging start in 2015.

Bottom Line

The overall technical market outlook remains almost unchanged compared to last week. Despite the fact that we can see major bearish divergences within our market breadth indicators, we remain bullish. Nevertheless, we will watch the quality of the current rally quite closely as it will give us more guidance within the next couple of 2-3 weeks. Either those bearish divergences will be sorted out by the end of the year or they will mount up and lead to a significant correction leg (very late 2014/early 2015), once we see a break within our short to mid-term oriented trend indicators. Aggressive traders should remain bullish, as long as our short-term oriented indicators remain supportive. From a pure trading point of view, a break above 2,075 would call for more overshooting towards 2,095, whereas a break below 2,035 would be the first sign meaningful indication that a more important tactical top is forming. More conservative members should remain long as long as the Global Futures Trend Index keeps trading above 60 percent. Stay tuned!