April 27. 2014

Market Review

All three major U.S. averages finished the week with losses. The Dow Jones Industrial Average lost 0.3 percent over the week to close at 16,361.46. The S&P 500 lost 0.1 percent for the week to finish at 1,863.40. The Nasdaq slid 0.5 percent for the week to end at 4,075.56. Four out of the 10 key S&P sectors ended higher for the week, led by utilities. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, closed at 14.06. The gauge is up 2.5 percent for the year.

Short-Term Technical Condition

Despite the fact that the market finished nearly unchanged for the week, the short-term up-trend of the market has slightly continued to strengthen. Apart from Friday, the S&P 500 managed to stay above the bullish threshold from the Trend Trader Index. As a matter of fact, both envelope lines of this reliable indicator have started to drift 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. Moreover, we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is still far away from being bearish and is, therefore, clearly confirming the current levels from the S&P 500. The most important short-term oriented trend signal is coming from the Modified MACD, which flashed a strong bullish crossover signal on Monday, indicating that the underlying trend structure of the market has started to gain positive momentum. Nevertheless, it is obvious that the bullish readings within the Modified MACD are still a bit weak-kneed and, therefore, any stronger down-day could easily trigger another bearish crossover-signal. As already mentioned last week, such a situation would only produce a bullish divergence within that indicator, since a lot of weaknesses would be necessary to pull the short-term oriented gauge back to its former low two weeks ago. Therefore, we would take another bearish crossover signal not too serious, as long as short- to mid-term market breadth remains strong.

During the last couple of trading sessions, short-term market breadth has slightly improved compared to last week. Especially the encouraging surge in the number of stockss which reached a fresh yearly high, in combination with quite subdued new lows is telling us that the market internals remain strong. Even on Friday, where the S&P 500 nearly lost 0.9 percent, there were hardly any stocks around which have reached a new yearly low. This indicates that only heavy weighed stocks have pulled the major indexes lower! This can be also seen if we focus on the High-/Low-Index Daily. The bullish gauge of this proven indicator rose to the highest level since early April, indicating that the recent pullback was mainly driven by profit taking so far. In addition, the Modified McClellan Oscillator Daily managed to flash a small bullish crossover signal last week, telling us that amount of daily advancing issues on NYSE have started to gain momentum. Nevertheless, we should not forget that this crossover signal is still a bit weak-kneed. This coincides with the fact that the percentage of stockss which are trading above their short-term oriented moving averages have been pushed back (20) below their bullish 50 percent threshold or remain bearish (50). Therefore, the upside participation is still lagging behind, which indicates that the S&P 500 remains in a consolidation mode.

From a pure contrarian point of view, we even have received some contradicting signals. The gauge of the Daily Put-/Call Ratio All CBOE Options Indicator is still trading in contrarian territory, whereas market sentiment remains outright depressed at the moment. As a matter of fact, the crowd is quite scared at the moment and, therefore, a lot of money is still waiting to be put back to work, which can be seen as a quite constructive environment. On the other hand, we can see that the small fry is chasing the market aggressively higher (ISEE Call-/Put Ratio and the Global Futures Dumb Money Indicator) and in combination with the upcoming 9-week crash cycle, we would not be surprised to see a strong wash-out day next week. However, given the fact that the WSC Capitulation Index dropped by half of its rise, in combination with quite constructive market breadth, we strongly believe that we have seen the worst already and it is just a question of time until we see renewed rallying.

Mid-Term Technical Condition

The mid-term oriented uptrend of the market continued to strengthen. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index grew to the middle part of its bullish consolidation area, indicating that any upcoming short-term oriented pullback should be limited in price and time. Above all, the WSC Sector Momentum Indicator is still trading on the upper end of its scale, indicating that the entire underlying sectors within the S&P 500 are per definition 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 zero percent, whereas materials and industrials remain the strongest sectors for the time being.

More importantly, the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially the strong readings within mid-term oriented advancing issues as well as within mid-term oriented up-volume are telling us that it is too early to get bearish from a strategic point of view. The same is true if we focus on the Modified McClellan Oscillator Weekly which showed an increasing bullish gap last week. Nevertheless, we can already see some signs of an ageing rally as the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remain bearish (100) or quite are quite depressed (150). Moreover, they have formed a quite long-term bearish divergence if we consider their actual readings and current level from the S&P 500. In our opinion, those bearish divergences within our mid-term breadth indicators will start to mounting up within the next couple weeks as we are still expecting to see a cyclical bear market later this year (Charts of Interest). Another evidence for such an event is the current rotation from small- into large caps, which is another typical pattern for a mature bull-market. Right now, large cap indexes (S&P 500, S&P 100) are outperforming small cap ones (Russell 2000). During the last stages of a bull market, large caps tend to pull the major indexes higher (as they are heavier weighted within major indexes) whereas the broad market tends to lag behind.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains quite strong and, therefore, our long-term bullish outlook has not been changed so far. According to the Global Futures Long Term Trend Index, the current bull market remains in force and, therefore, it is not a big surprise that the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Moreover, we can see that emerging markets are picking up strong momentum versus other risky markets. This is another indication that the risk appetite among investors remains quite high. This coincides with the fact that the gauge from the WSC Global Momentum Indicator keeps trading on quite encouraging levels and, therefore, most risky markets remain in a long-term uptrend. More importantly, long-term oriented market breadth is still confirming the current long-term oriented uptrend of the market, although we can see already some bearish divergences in their readings. The percentage of stockss which are trading above their 200 day simple moving average remain above 50 percent, although their gauge is a way too low compared to the current level from the S&P 500. Nevertheless it is still too early to get concerned about those facts since the High-/Low Index Weekly as well as the Modified McClellan Volume Oscillator Weekly has not turned bearish yet. Therefore, the current long-term market breadth environment still remains supportive.

Bottom Line

The bottom line: despite the fact that we saw some improvements within our short-term breadth indicators, there is still a small chance to see another (stronger) washout day next week. Such a wash-out would dampen short-term optimism among dumb money and would give way for renewed rallying. As the mid-term oriented up-trend of the market is well supported by mid-term oriented market breadth, any upcoming short-term oriented pullback should be limited in price and time. Therefore, aggressive traders should start to buy into any upcoming pullback, whereas conservative members should hold their equity position as we still think that the S&P 500 could rally towards 1,920/1,950 into mid/late Q2 before a cyclical bear market might be due (Charts of Interest). Stay tuned!