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April 13. 2014

Market Review

U.S. stocks finished the week with deep losses. The Dow Jones Industrial Average fell 2.4 percent in five trading days to end at 16,026.75, its first weekly drop in four. The S&P 500 recorded a 2.7 percent loss over the week and closed at 1,815.69. The Nasdaq slumped 3.1 percent for the week to 3,999.73. The technology-laden index had its worst weekly hit since June 2012 and its longest weekly loss streak since late 2012. Most key S&P sectors ended in negative territory for the week. Utilities was the only advancing sector. The Chicago Board Options Exchange Volatility Index (VIX), the gauge of S&P 500 options known as the VIX, jumped to 17.01.

Short-Term Technical Condition

Right now, the market is moving right in line with our cyclical roadmap (Charts of Interest and Cycles) as the S&P 500 closed out the week exactly on second price target of 1,815. However, if we have a closer look at our short-term trend indicators, we can see that the S&P 500 is now trading 57 points below the bullish threshold from the Trend Trader Index, plus the Modified MACD clearly turned bearish last week. On the other hand, we can see that the Advance-/Decline 20 Days Momentum Indicator still remains bullish on low levels and, therefore, the short-term trend of the market has not completely turned bearish yet. More importantly, the gauge from the Advance-/Decline 20 Days Momentum Indicator refused to confirm the latest low from the S&P 500, which can be seen as a quite positive divergence at the moment.

As already mentioned last week, short- to mid-term market breadth is a key area of focus during a consolidation period to evaluate if a strong pullback is just part of a (final) washout or the beginning of a more significant correction. After the strong sell-off from last week, many of our short-term breadth indicators have turned bearish, indicating a weakening tape structure. Especially the percentage of stockss which are trading above their short-term oriented moving averages (20/50) and the Modified McClellan Oscillator Daily have obviously turned bearish, indicating that the market internals have started to weaken. Nevertheless, we can see that there were only 53 NYSE-listed stocks that reached a new low on Friday. This is a quite small number if we consider the washout character of last week’s pullback and if we compare this number with similar events in the past (January and March 2013). For that reason, the High-/Low Index Daily has not turned bearish yet and, therefore, the overall short-term oriented technical environment can be still classified as consolidation period.

From a pure contrarian point of view we have received a lot of evidences that a bottom is at hand soon. The put/call ratio on CBOE soared to the highest level since months, indicating that a lot of investors are searching for protection. Therefore, the gauge from our Daily Put/Call Ratio All CBOE Options Indicator is already reaching contrarian territory, whereas the Global Futures Trading Index, the Global Futures Large Block Indicator as well as the Global Futures Large Block Oscillator flashed a buy signal last week. Another important bullish contrarian signal is coming from our reliable Global Futures Bottom Indicator, which indicates that a bottom is at hand soon. Moreover, the market is also slightly oversold according to the Advance-/Decline Ratio Daily and the Advance-/Decline Ratio Daily. Another positive signal is coming from our sentiment indicators, as the amount of bears has slightly exceeded the amount of bulls on Wall Street. Therefore, a lot of selling took already place last week. On the other hand, we can see that the Smart Money Flow Index has not turned bullish yet or has not shown any bullish divergences yet, which is still a reason of concern. This coincides with the fact that the WSC Capitulation Index has not dropped by half of its rise yet although its gauge kept on trading sideways last week, indicating that a bottom building process might be in force. So all in all, we think that the evidences that we have seen the worst already are definitely increasing. Therefore, we would not be surprised if the market will start to bottom out process soon, although in extreme circumstances further down-testing towards 1,795 might be possible!

Mid-Term Technical Condition

Despite the fact that the recent sell-off has been quite strong, equities do not appear to be at risk of entering a high double digit drop or even a new cyclical bear market right now, as the mid-term uptrend of the market remains quite solid at the moment. The Global Futures Trend Index is still trading within its upper range of its bullish consolidation area and, therefore, the current weaknesses should be seen as a temporary consolidation period within the ongoing bull market. In addition, the WSC Sector Momentum Indicator is far away from being bearish, indicating that most sectors within the S&P 500 are per definition still in a strong mid-term oriented uptrend. If we have a closer look at our sector heat map, we can see that money market still has a momentum score of zero percent, indicating still a risk-on scenario.

More importantly, mid-term oriented market breadth is still confirming this strong mid-term oriented trend, although the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) turned bearish (100) or about to do so (150). This is mainly due to the fact that the amount of advancing issues as well as mid-term oriented up-volume are giving no reason to worry right now, since their gauges are trading at quite encouraging levels at the moment. In addition, the Modified McClellan Oscillator Weekly has not turned bearish yet, indicating that the mid-term oriented market internals remain quite healthy. Normally, as long as both, advancing issues as well as mid-term oriented up-volume are trading above their bearish counterparts, the underlying tape structure of the market remains outright bullish. We would start to get cautious, if we see some non-confirmation in their readings. Furthermore we have never seen any situation where the market entered a strong correction with such strong readings in those to indicators! This is telling us that the current weaknesses should be limited in price and time and, therefore, we stick to our mid-term call that the market will grow higher into Q2!

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 well in-force,, therefore, our long-term bullish outlook has not been changed so far. The WSC Global Momentum Indicator slightly increased last week, indicating that 65 percent of all global market ETFs, which are covered by the WSC Global Tactical ETF Portfolio, are still in a long-term uptrend. If we have a closer look at the global relative strength scores, we can see that Emerging Markets are picking up momentum fast, which is another indication that the risk appetite among investors remains high. Furthermore, the Global Futures Long Term Trend Index is still indicating a technical bull market and, therefore, our long-term bullish outlook has not changed so far. More importantly, long-term oriented market breadth is still confirming the readings from our long-term oriented trend indicators. Especially the percentage of stockss which are trading above their 200 day simple moving average are still trading at 57 percent, plus the Modified McClellan Volume Oscillator Weekly has not turned bearish yet. Furthermore, we can see that the High-/Low Index Weekly still remains quite bullish from a pure signal point of view, although it is already forming a long-term bearish divergence to the market. As already mentioned last week, we are still expecting to see a cyclical bear market in late Q2/early Q3 (Charts of Interest) and, therefore, we would not be surprised to see increased bearish divergences within our long-term market indicator framework over the next couple of weeks.

Bottom Line

The bottom line: with quite encouraging readings within our contrarian indictors, we think that we have seen the worst already, although further down-testing can be possible. However, there is a good chance that the market is about to enter a bottom building process within the next couple of trading sessions. Therefore, aggressive market timers should use any upcoming weakness to build up exposure, 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). Furthermore, we believe that the current pullback represents the last good buying opportunity for latecomers. Stay tuned!