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August 18. 2013

Market Review

Right in line with our recent call, U.S. stocks dropped significantly with all three major indexes logging their second weekly decline. For the week, the Dow Jones Industrial Average lost 344 points, or 2.2 percent, to close at 15,081.47, suffering its biggest weekly percentage drop and point loss of 2013. It was the blue-chip index’s worst weekly percentage slide since May 2012, and its largest point decline since June 2012. The S&P 500 slumped nearly 36 points, or 2.1 percent, in five trading days to end at 1,655.83, suffering its biggest weekly point drop of the year, but not its biggest percentage decline. The tech-heavy Nasdaq slid 1.6 percent for the week to close at 3,602.78. All key S&P sectors finished in the red for the week, dragged by utilities and consumer staples. The Chicago Board Options Exchange Volatility Index, or VIX, jumped 7.2 percent to 14.37 during the week and is up 21 percent from a low on Aug. 5. The equity volatility gauge is still down 20 percent for the year.

Short-Term Technical Condition

Last week, we have seen a typical set-up for a bull-trap, as the market started the week with strong gains, pushing the S&P 500 above 1,696 on an intraday basis, before the sell-off has begun. However, the S&P 500 has exactly reached our initial projected price target of 1,655 and, therefore, the big question is, if the market is about to hit rock bottom or are further declines likely? From a pure cyclical point of view, we think that the market is entering the most challenging period of the year. According to our cyclical roadmaps (Charts of Interest), more weaknesses into early/mid Q4 can be expected and this picture coincides with the fact that the current technical picture of the market looks outright grim at the moment. The short-term down-trend of the market remains well in force, since the S&P 500 is trading 40 points below the bullish envelope line of the Trend Trader Index. Furthermore, we can see that the envelopes lines of this reliable indicator have obviously turned bearish as well, which is for a strong down-trend. This can be also seen, if we have a closer look at the Modified MACD, which has picked up strong bearish momentum while the Advance-/Decline 20 Days Momentum Indicator has clearly confirmed the last week?s sell-off!

More importantly, this short-term down-trend is strongly confirmed by short-term market breadth and, therefore, we would not be surprised to see further declines ahead. If we have a closer look at those reliable indicators, we can see that short-term down-volume is trading well above short-term up-volume, the High-/Low Index Daily has flashed a bearish cross-over signal last week as the numbers of stocks hitting fresh yearly lows soared, plus the Modified McClellan Oscillator Daily has not shown any signs of bullish divergences yet. Furthermore, we have seen a significant break within the short-term oriented trend structure of all NYSE listed stocks, as the percentage of stockss which are trading above their shorter-term oriented moving averages fell below 50 percent (20) or decreased significantly (50). Especially, the fact that we have not seen any bullish divergences in their readings so far is indicating that the market has not entered a bottoming out process yet! However, the market is heavily oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily) and given the fact that some of our contrarian indicators (Market Timer Index and the Global Futures Trading Index) have flashed a buy signal last week, a volatile bounce towards 1,670/1,675 might be possible. Nevertheless, with such negative readings of our indicators all across the board, we think that any upcoming bounce should be limited in price and time.

This scenario coincides with the fact that we have not seen any smart buying so far or any significant decrease within our WSC Capitulation Index. Another reason to concern is that next week the 9-week crash cycle is due and the fact that the option market as well as dumb money is still a way too optimistic in our point of view, to trigger a sustainable counter-trend rally.

Mid-Term Technical Condition

Despite the fact that the WSC Sector Momentum Indicator has not dropped below its bullish threshold yet, the mid-term oriented trend of the market has continued to deteriorate. The main reason for that is clearly the fact that on Monday the gauge of the Global Futures Trend Index has been pushed into its bearish trading range brackets and has continued to worsen significantly for the rest of the week. Normally, as long as we do not see any upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, we would be surprised to see stronger gains ahead.

More importantly, mid-term market breadth is quite bearish biased since the Modified McClellan Oscillator Weekly has been pushed to a new low last week and the percentage of NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150) have decreased significantly for the week. The most important mid-term breadth signals are coming from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly. Last week, the Advance-/Decline Index Weekly has gained more bearish momentum, telling us that on a mid-term basis, more stocks on NYSE are declining than advancing. In addition, mid-term oriented up-volume is about to drop below its bearish counterpart and, therefore, the market internals are extremely fragile at the moment. Normally, as long as both, advancing issues as well as up-volume are trading below their bearish counterparts or remain depressed, the underlying tape structure of the market remains outright weak. As already mentioned last week, in such a scenario, nasty waterfall declines are highly likely and, therefore, we remain extremely cautious at the moment.

Long-Term Technical Condition

The long-term up-trend of the market remains intact so far, since our entire long-term oriented trend indicators have not turned bearish yet (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths). If we have a closer look at the WSC Global Momentum Indicator, we can see that 62 percent of 37 local markets indexes remain in a long-term up-trend and the Global Futures Long Term Trend Index is still indicating a technical bull market. From an asset allocation point of view, we think Europe will outperform other equity markets since its relative strengths score within our WSC Global Relative Strengths Indicator is about to take over the leadership. Since the readings from our long-term trend indicators are far away from being bearish, our long-term bullish view has not been changed so far, although we have received some bearish signals/divergences within our long-term breadth indicators. Especially, the Modified McClellan Volume Oscillator Weekly has flashed a bearish crossover signal last week, indicating that long-term up volume is strongly lagging behind. Furthermore, we can see that the amounts of new lows have soared significantly over the last couple of weeks and if this trend continues, we will be soon receiving a bearish crossover signal within that reliable tape indicator. Only the percentage of stockss which are trading above their 200 day simple moving averages are still holding up quite well. Anyhow, right now it is a bit too early to get concerned about those readings, but if those bearish developments continue we think that it is highly possible to see a cyclical bear market ahead!

Bottom Line

The bottom line: on a very short-time frame the market is quite oversold and in combination with a couple of buy signal from our contrarian indicators, a volatile bounce might be possible. On the other hand side, we are expecting the 9-week crash cycle as well and, therefore, we would not be surprised to see increased volatility ahead. However, since the market remains quite bearish (biased) for the short- to mid-term time horizon, we strongly believe that any upcoming bounce will be limited in price and time. For that reason, we would advise our aggressive members to sell into any upcoming bounce/keep their short position, as long as we do not see any significant drop in our WSC Capitulation Index or a bearish trend break in our short-term oriented trend-indicators. More conservative investors should stay at the sideline, since the current technical condition of the market remains outright weak at the moment.