February 02. 2014

Market Review

U.S. stocks ended another week with deep losses. The Dow Jones Industrial Average lost 1.9 percent during the week to 15,698.85. The S&P 500 slipped 0.4 percent to 1,782.59 in the week and recorded its third weekly decline in a row. Both gauges capped the worst month in almost two years, with the S&P 500 finishing January down 3.6 percent while the Dow dropping 5.3 percent. The Nasdaq lost 0.6 percent over the week to 4,103.88, its second-straight week of declines. The tech-heavy index is down 1.7 percent over the month. Among the key S&P sectors, utilities were the best weekly performer, while consumer staples dragged. The Chicago Board Options Exchange Volatility Index added 1.5 percent over the week to 18.41, the highest level since October. The gauge of S&P 500 options known as the VIX has jumped 34 percent this year.

Short-Term Technical Condition

As per last week’s report, the short-term down-trend of the market remains well intact, as the gauges of our entire short-term trend indicators (Trend Trader Index and the Modified MACD) are trading well below their bullish thresholds or remain outright weak (Advance-/Decline 20 Day Momentum). If we have a closer look at the envelope lines of the Trend Trader Index, we can see that they are definitely drifting lower, indicating that the resistance levels for the S&P 500 are decreasing as well. In other words, as long as the market is not able to break above these strong resistance lines, we will see lower lows and lower highs, which is a typical pattern for a strong short-term oriented down-trend. Another concerning fact is that the Modified MACD remains in a free fall with a widening bearish gap, indicating that more down-testing is likely! The same is true, if we focus on the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that this indicator still remains bullish from a pure signal point of view, its gauge is trading at outright low levels and has not shown any signs of bullish divergences yet!

More importantly, the current short-term oriented down-trend is still strongly confirmed by negative short-term oriented market breadth, indicating it is still a bit too early/dangerous to catch a falling knife. Especially, the Modified McClellan Oscillator Daily as well as the High-/Low Index Daily flashed a bearish crossover signal last week, whereas the percentage of stockss which are trading above their short-term oriented moving averages (20/50) gained more bearish ground last week, indicating that the underlying trend structure of the market remains outright weak at the moment. Moreover, short-term up-volume has not shown any signs of recovery yet, although the S&P 500 managed to gain 24 points from its low on Wednesday (1,770) into the closing bell on Thursday, indicating a weak demand. In addition, during the week, we did not see any major reduction in the number of stockss which are hitting a fresh 52-week’s low, rather than a small increased of those stocks which have hit a new 52 week’s high, indicating that the overall market internals remain quite damaged at the moment.

From a contrarian point of view, we can see that the expected pullback period has started to have its designated impact on short-term optimism, which is needed to trigger another significant up-leg. The option market has started to become slightly more bearish, as the gauge of our reliable Daily Put-/Call Ratio All CBOE Options Indicator moved out of its extremely bearish territory. Furthermore, the small-fry is about to throw in the towel, as the gauges from the ISE Call-/Put Ratio and the Odd Lots Purchases/Nyse Volume dropped back to normal levels. This picture is widely confirmed by the AII Bulls & Bears Survey, as the percentages of bulls among financial advisors have also decreased significantly, leaving enough room for positive surprises. On the other hand, we saw some small signs of smart buying last week, as our reliable Smart Money Flow Index did not confirm the latest decline in the Dow Jones Industrial Average, whereas the WSC Capitulation Index has started to pull back slightly. So, from a pure contrarian point of view, we have received some early indications that the market might run into an important low soon. This would be in line with our cyclical roadmaps (Charts of Interest), which are suggesting that the market is about to hit an important intermediate low within the next two weeks, before another significant up-leg into April might be possible. Moreover, a typical market bottom tends to occur as a process rather than a V-shaped recovery. Normally, if the market hits an important bottom, a final washout happens to occur, where we usually see at least one 9-to-1 down-day, in combination with increased new lows, a spiking VIX and soaring put/call ratios with daily volume exceeding its normal. After a strong counter trend rally, which normally lasts about 5 to 10 trading sessions, the market tends to retest or even break below its previous low. If this retest/break comes along with bullish divergences in market breadth, we have the final confirmation that an important low is in place. Right now, we have seen most of those mentioned facts above and, therefore, it might be possible to see a corrective bounce next week, before (a stronger and maybe final) retest towards 1,760/1,730 might be possible.

Mid-Term Technical Condition

The mid-term uptrend of the market has started to deteriorate, as the gauge of our Global Futures Trend Index was pushed into the bearish consolidation area last week. In general, as long as the gauge of this reliable indicator does not bottom, the market has entered a bearish biased trading range and, therefore, any upcoming short-term bounce should be corrective in its nature. Nevertheless, the mid-term uptrend of the market has not completely been broken yet, as the readings for the WSC Sector Momentum Indicator still remain outright bullish. This indicates that most sectors within the S&P 500 are still outperforming riskless money market.

Moreover, the current mid-term oriented up-trend is still confirmed by mid-term market breadth, as most of our tape indicators still remain bullish (biased). It was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly have not turned bearish yet, although most major averages faced stronger declines for the week. Furthermore, we can see that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are still trading above their bearish 50 percent threshold, although their readings came down quite significantly last week, indicating that most NYSE listed stocks are still per definition in a strong mid-term oriented up-trend. Nevertheless, the recent pullback has clearly lefts its mark on the Modified McClellan Oscillator Weekly, as this indicator flashed a bearish crossover signal last week. All in all, the current mid-term oriented technical picture of the market looks a bit damaged, but still constructive in its nature.

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. The Global Futures Long Term Trend Index is indicating that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Only the WSC Global Momentum remains quite bearish, as most global equity markets (especially emerging markets) have started to underperform riskless money market. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover, we can see that the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts, indicating a quite healthy tape structure. Only the Modified McClellan Volume Oscillator Weekly flashed a bearish crossover signal last week, indicating that the overall long-term demand is weakening. As already mentioned last week, we would not be surprised to see deterioration within our long-term oriented indicators over the next couple of weeks, as we are still expecting to see a cyclical bear market later this year.

Bottom Line

The bottom line: The S&P 500 reached our initial price target of 1,772 on Wednesday and given the fact that some of our contrarian indicators show some bullish divergences, a stronger but corrective bounce might be possible. Nevertheless, we think that any upcoming bounce should be limited in price and time as our entire short-term trend- as well as breadth indicators remain bearish. Furthermore, it is quite usual to see renewed weaknesses after such an event and, therefore, further down-testing towards 1,760/1,730 might be likely. For that reason, we would advise our aggressive traders close their profitable short positions, if the S&P 500 manages to break above 1,795 and to reopen a short-position again if we see the first meaningful bearish reversal candle. Despite the fact that the market might run into an important low from a cyclical perspective, we still think it is too early for conservative members to get back into the market, as we still want to see more bullish divergences within our indicator framework. Stay tuned!