August 17. 2014

Market Review

U.S. stocks finished the week with solid gains. The Dow Jones Industrial Average rose 0.7 percent in five trading days to end at 16,662.91. The blue-chip index recorded its best weekly gain in five weeks. The S&P 500 gained 1.2 percent over the week to close at 1,955.06. The benchmark index for American equities had its best weekly gain since July 3. The Nasdaq soared 2.2 percent to 4,464.93. The tech-heavy index recorded its best week since May. Among the key S&P sectors, health care was the best weekly performer, while energy dragged. The Chicago Board Options Exchange Volatility Index, a gauge of options prices known as VIX, lost 17 percent for the week and ended at 13.15.

Short-Term Technical Condition

Right in line with our recent call, U.S. stocks strongly bounced last week. Not surprisingly, the short-term uptrend of the market started to strengthen last week. This is mainly due to the fact that the S&P 500 was pushed into the neutral territory of the Trend Trader Index. As a matter of fact, the market is now just trading shy below the bullish threshold of this reliable short-term oriented trend indicator. This can be seen as quite constructive. Nevertheless, both envelope lines of the Trend Trader Index are still drifting lower, which indicates that the current trend structure of the market still remains quite bearish from a pure structural point of view. The same is true if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum. Both gauges improved fairly last week and, therefore, they flashed a small bullish signal last week (Advance-/Decline 20 Day Momentum) or about to do so (Modified MACD), if we see further strong gains ahead. Nevertheless, we can still see a lot of bearish divergences in their readings, as the Advance-/Decline 20 Day Momentum Indicator is trading at outright low levels and the readings from the Modified MACD should be higher, if we consider the current level from the S&P 500.

More importantly, last week’s bounce led to some encouraging crossover-signals within our short-term oriented breadth indicators and, therefore, it could be possible to see further gains next week. Especially, the Modified McClellan Oscillator Daily flashed a small bullish crossover signal last week, indicating that the market internals are strengthening, at least on very low levels. Furthermore, we have seen a reduction in the number of stockss which are hitting a fresh yearly low, together with an increase of stocks which have been pushed to a new yearly high. Therefore, the High-/Low Index Daily flashed a bullish crossover signal last week. Nevertheless, the amount of new highs should be much higher (at least 6-8 percent), if we consider the current level from the S&P 500. The same is true if we have a closer look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact, that both indicators have been pushed back into bullish territory (20) or about to do so (50), their gauges should be much higher if we consider the current level from the S&P 500. Therefore, the recent bounce by the S&P 500 was not supported by a broad basis!

Last week, we highlighted the fact that we would expect to see a stronger corrective bounce since we had received a growing number of evidence within our contrarian indicators that short-term pessimism among the crowd had been too extreme. Such a bounce normally relieves oversold conditions (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and dampens short-term pessimism before further losses can be expected. In fact, the recent bounce has slightly started to have its designated impact on short-term pessimism, which is typical pattern if the market is within a distributive top building process. Especially, the Daily Put-/Call Ratio All CBOE Options Indicator slightly started to decrease from its extreme high levels, plus market sentiment turned bullish again last week. Nevertheless, the Daily Put-/Call Ratio All CBOE Options Indicator, the Equity Options Call/Put Ratio Oscillator and the Global Futures Put/Volume Ratio Oscillator are still indicating that the current bounce might continue for a while. On the other hand, we can see that the Smart Money Flow Index did not confirm the latest move we have seen, plus the WSC Capitulation Index has not dropped by half of its rise yet and, therefore, we remain quite cautious for the next couple of weeks. All in all, it is not quite unusual to see an improving short-term oriented indicator framework if the market is in a bounce mode. In such a situation, the mid-term oriented condition of the market will give better guidance.

Mid-Term Technical Condition

Right now, the mid-term oriented trend of the market still looks quite damaged at the moment and, therefore, we believe that the current bounce should be limited in price and time. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within its bearish trading range area and is, therefore, not confirming the current levels from the S&P 500! As already mentioned last week, as long as the gauge does not close (strongly) above its 60 percent bullish threshold, the risks of sharp pullbacks remain outright high. Therefore, any upcoming gains have more a corrective bounce character rather than a sustainable breakout. However, from a pure price point of view, most underlying sectors within the S&P 500 remain in a mid-term oriented up-trend and, therefore, the WSC Sector Momentum Indicator still remains quite bullish at the moment. 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 health care and technology are/remain the strongest sectors for the time being.

More importantly, mid-term oriented market breadth remains quite bearish biased and, therefore, the current bounce looks absolutely corrective in its nature. Despite the fact the recent bounce has led to small improvements in the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), their readings still remain below their bullish thresholds. Moreover, their gauges are not confirming the current levels from the S&P 500 and, therefore, we would be surprised to see sustainable gains on a mid-term time horizon. This view is also confirmed if we focus on our other mid-term oriented breadth indicators. Especially mid-term oriented up-volume dropped further last week and is, therefore, just trading slightly above mid-term oriented down-volume, indicating that a lot of purchasing power was pulled out of the market. Moreover, the Advance-/Decline Index Weekly is signaling that the amount of advancing issues on NYSE remains outright depressed at the moment, which is telling us that the current rally looks quite mature. Another threatening tape signal is coming from the Modified McClellan Oscillator Weekly, which has not shown any signs of strength yet and, therefore, the overall tape momentum remains quite bearish at the moment. Given the overall weak mid-term oriented trend, in combination with quite bearish biased mid-term oriented market breadth, we think that the current bounce is definitely corrective in its nature. Even if we see further rallying towards 1,991, we think that conservative members should stay on the sideline as the current risk/reward ratio is too low at the moment!

Long-Term Technical Condition

The long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 70 percent of all global markets have not broken below their long-term uptrend yet. Nevertheless, we can see that the WSC Global Momentum Indicator dropped 8 percent last week, indicating that a lot of global equity markets turned bearish from a pure structural point of view. This is another indication that global equity markets are in a correction mode at the moment, whereas the US is still holding up quite well. If we have a closer look on the relative strength score of all risky markets, we can see that European equity markets are suffering the most at the moment, whereas Emerging Markets is the most attractive region from a pure asset allocation point of view. . More importantly, the situation within long-term oriented market breadth is almost unchanged compared to last week. Apart from the fact that the percentage of stockss which are trading above their 200 day simple moving average slightly rose above the bullish threshold last week, we have not seen any improvements within our long-term oriented tape indicators. Especially, the readings from the High-/Low Index Weekly continued to deteriorate, although the indicator itself still remains quite bullish. Moreover, we can see that the Modified McClellan Volume Oscillator Weekly still remains quite bearish, which is another indication that the global bull market is at a mature stage.

Bottom Line

The bottom line: the situation remains almost unchanged compared to last week as our mid-term bearish outlook has not been changed so far. Nevertheless, as our contrarian indicators are still quite bullish at the moment, we think that the current corrective bounce could continue next week. From a trading perspective, a break above 1,960 would give way to 1,975 and if the S&P 500 will manage to close above this threshold, a retest of 1,991 looks quite possible. On the other side, if the S&P 500 breaks below 1,904 further down-testing towards 1.860/1,814 can be expected. Despite the fact that the current bounce might look attractive for aggressive traders to play, we would advise them to use close stop loss limits. Moreover, we think conservative members should stay on the sideline, as the current risk/reward ratio is too low at the moment as we are still expecting to see stronger losses into September. Stay tuned!