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May 01. 2016

Market Review

All three major U.S. averages finished the week with losses. The Dow Jones Industrial Average lost 1.3 percent over the week to close at 17,773.64. The blue-chip index gained 0.5 percent for the month. The S&P 500 lost 1.3 percent for the week as well to finish at 2,065.30. The broad index rose 0.27 percent for the month. The Nasdaq slid 2.7 percent for the week to end at 4,775.36. The index fell 1.94 percent for the month. Among the key S&P sectors, utilities was the best weekly performer, while technology dragged. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, closed at 17.09.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the market was overbought and looked vulnerable for a consolidation period as the readings from of our short-term oriented trend indicators had been quite stretched recently. Thus, it was just a question of time until the price action of the market would slow down and, therefore, the recent decline was not a huge surprise if we consider those circumstances. Anyhow, the recent consolidation period 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 slightly below the bearish threshold from the Trend Trader Index. Despite the fact that this can be seen as quite concerning trend signal on a very short-time frame, we should not forget that both envelope lines of the Trend Trader Index are still rising on a fast pace. This indicates that from a structural point of view, the short-term oriented uptrend of the market still remains intact. 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. As already mentioned a couple of times, 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 the recent bullish trend break will lead to stronger losses or if it is just part of a healthy consolidation period. This is due to the fact that a consolidation period is considered to be a 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!

If we focus on our short-term market breadth indicators, we can see that the recent pullback had hardly any major impact as the readings from most of our tape indicators still remain quite supportive at the moment. Especially the High-/Low Index Daily as well as the Nyse New Highs minus New Lows Indicator are indicating that the last week’s decline was mainly driven by a few heavy weighted stocks rather than by the broad market. Another indication is the fact that we only saw a small reduction in the number of stockss which are hitting a fresh yearly high, plus the number of stockss which have been pushed to a new yearly low remained quite depressed. The same is true if we have a look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact that their readings have come down a bit recently, the gauges of both indicators are trading well above their 50 percent bearish threshold, indicating that the majority of all NYSE-listed stocks are per definition in a short-term oriented uptrend. Above all, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain even more bullish ground on quite stretched levels, indicating that the underlying tape momentum also remains positive. So all in all, the current consolidation period/volatile sideways trading still looks quite healthy at this point in time and, therefore, it might be a bit too early to bet on a major short-term oriented trend reversal.

The overall situation on the contrarian side remains almost unchanged compared to last week. This is mainly due to the fact that the Smart Money Flow Index is still indicating new highs ahead, whereas the recent decline has definitely dampened short-term optimism (WallStreetCourier Index Oscillator, WallStreetCourier Index and the OEX Call-/Put Ratio Oscillator Weekly), which can be seen as another positive factor within the current consolidation period. Only on a very short-time frame, the market remains vulnerable for further increased volatility, as the WSC Capitulation Index has shown some strength recently.

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 recent consolidation period pushes the gauge 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 remains above the momentum score from riskless money market and the S&P 500.

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 outright bullish (100) or were at least trading at quite encouraging bullish 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 shows that about 78 percent of all local equity markets around the world (which are covered from our WSC Global ETF Momentum Heat Map) managed to close above their long-term oriented trend lines and, therefore, the global bull market is getting back on track. Above all, we can see that the relative strength score from risky assets remains supportive, whereas the Global Futures Long Term Trend Index continued to gain more bullish ground last week, although the indicator still remains bearish from a pure signal point of view. More importantly, this long-term bullish up-trend is still widely confirmed by long-term market breadth. Last week, the improvements within the bullish readings of the High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly and the percentage of stockss which are trading above their 200 day moving average continued to increase, which is another piece of evidence for our bullish strategic outlook.

Bottom Line

The situation compared to last week remains almost unchanged. On a very short time frame, the market looks vulnerable for further consolidation into early May. However, with quite solid readings all across the board, we strongly believe that the current consolidation period should be limited in price and time and, therefore, our strategic bullish outlook remains unchanged. 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!