June 21. 2015

Market Review

U.S. stocks finished the week nearly unchanged. For the week, the Dow Jones Industrial Average eked out a small gain 0.3 percent to close at 17,898.84. The S&P 500 finished at 2,094.11 and ended the week up 0.06 percent for the longest streak of sub-1 percent weekly moves since 1993. The Nasdaq lost 0.3 percent for the week to end at 5,051.10. Among the key S&P sectors, health care was the best weekly performer, while financials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market slightly strengthened last week. This is mainly due to the fact that the Trend Trader Index flashed a small neutral signal on Friday, after being more or less bearish biased during the whole week. Moreover, the Modified MACD flashed also a very weak bullish crossover signal on Friday, indicating that the overall trend structure of the market turned slightly positive. Nevertheless, both signals are a way too weak at the moment to take them too seriously, since any stronger down-day could easily produce a sell signal again. This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator which kept trading at outright bearish levels during the whole week and was, therefore, forming a huge bearish divergence if we consider the current levels from the S&P 500. So all in all, the recent move still looks like an oversold bounce rather than the start of a new sustainable break-out!

This view is also strongly confirmed by our short-term oriented breadth indicators as most of them still remain quite weak/bearish, although the market finished almost unchanged for the week. Consequently, our entire short-term oriented breadth indicators have additionally formed a huge bearish divergence, if we consider the current levels from the S&P 500! Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily gained more bearish ground last week and have not shown any signs of a bullish crossover signal so far. This is signaling that the overall breadth momentum of the market remains outright weak-kneed, although the market did not show any signs of weaknesses yet! Another concerning fact is that the overall NYSE volume spiked on Friday. Normally, such a breadth-event suggests a buying-panic, which often marks an intermediate top. The situation looks quite similar if we analyze the current market participation. Although the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) managed to close clearly above their 50 percent bearish threshold, their absolute levels should be much higher if we consider the current level from the S&P 500. The same is true if we focus on the NYSE New Highs-/New Lows Indicator. There we can see that the total amount of new highs remains quite depressed, whereas the amount of new yearly lows slightly decreased for the week. As matter of fact, the High-/Low Index Daily flashed a very weak but bullish crossover signal last week.

The situation on the contrarian side is remains quite bearish as well. The bearish divergence between the Dow and the Smart Money Flow Index has not been sorted out so far, which is definitely a red flag on the horizon. Moreover we can see that the option market is getting increasingly greedy, whereas the z-score of the WSC Capitulation Index is still indicating a risk-off scenario. Above all we can see that the amount of bears on Wall Street is taking over the majority. On a very short-time frame, this might be a good contrarian indicator but on a mid-term time horizon a lot of purchasing power is pulled out of the market!

Mid-Term Technical Condition

Anyhow, the most concerning fact is that the mid-term oriented trend of the market still looks quite damaged at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within the middle part of its bearish trading range area and is, therefore, definitely not confirming the current levels from the S&P 500! As already mentioned a couple of times, as long as the gauge of this reliable indicator does not close above its 60 percent bullish threshold, the risk of a fast paced pullback remains quite high. In such a situation, stronger gains tend to have a corrective character rather than being the start of a new sustainable breakout. Only, from a pure price point of view the mid-term oriented up-trend of the market remains intact. This is not a big surprise at all, as we have not seen any stronger pullback yet. As matter of fact, the WSC Sector Momentum Indicator still remains quite bullish for the time being. This can be also seen if we have a closer look at our Sector Heat Map, as the majority of sectors still have a higher relative strength score than riskless money market. Nevertheless, the momentum score of riskless money market momentum score rallied to 20 percent last week, which is another indication that the market is in the middle of a top building process at the moment.

Another main reason why we remain outright cautious at the moment is the fact that the mid-term oriented market breadth has not shown any signs of bullish recovery yet. Apart from the fact that the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) have not turned bearish so far, we can see that the Modified McClellan Oscillator Weekly remains in a free fall, indicating that the overall breadth momentum remains outright weak at the moment. This can be also seen if we focus on the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, which gained more bearish ground last week (although the market finished the week on a higher note)! With such weak readings within both indicators, we would be surprised to see another sustainable break-out ahead and, therefore, the any upcoming bounce can be definitely categorized as oversold bounce!

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 dropped below their long-term trend-lines. This is mainly due to the fact that the gauge of the WSC Global Momentum Indicator dropped to 45 percent and, therefore, we received further confirmation in a global context that our suggested summer top is already in place. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky markets continued to decrease last week. More importantly, long-term oriented market breadth still remains quite weak at moment. Like the week before, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground last week, whereas the percentage of stocks which are trading above their long-term simple moving averages as well as the High-/Low Index Weekly continued to deteriorate, although it have not turned bearish so far!

Bottom Line

The bottom line: the short-term situation remains almost unchanged compared to last week. With deteriorating indicators all across the board, we received further confirmation that the market is on the way towards an important summer top. As a matter of fact, we think the chances are quite high that the recent consolidation period turns out to be corrective (although we could even see a false break-out attempt). Consequently, we would like to remind our conservative members once more to place a stop-loss limit around 2,065 (new pivotal support level) as the risk of a fast paced down-leg remains quite high at the moment. Moreover, a drop below that critical support level would give us the ultimate confirmation for our summer top scenario! Aggressive traders should sell into any upcoming bounces as long as our short-term oriented indicators remain bearish. Stay tuned!