September 13. 2015

Market Review

U.S. stocks ended the holiday-shortened week on a high note, with the main indexes advancing and posting solid weekly gains. The Dow Jones Industrial Average rose 2.0 percent for the week to close at 16,432.89. Among the blue-chip companies, 25 finished the week with gains. The S&P 500 gained 2.1 percent from last Friday’s close to finish at 1,961.01. The Nasdaq advanced 3.0 percent for the week to finish at 4,822.34. Among the key S&P sectors, technology and health-care stocks led the gains this week, while the energy sector was the only decliner for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended the week near 23.

Short-Term Technical Condition

Despite the fact that the market finished the week with solid gains, the readings within our short-term trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market still remains extremely bearish at the moment. This is mainly due to the fact that the S&P 500 was not even rudimentary able to break above the upper envelope line of this reliable indicator, which would be the first indication for a short-term trend reversal. Furthermore we can see that both envelope lines of the Trend Trader Index are drifting lower on a fast pace, 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 through these strong resistance lines, we will see lower lows and lower highs, which is a typical pattern if the market remains short-biased. This can be also seen if we focus on the Advance-/Decline 20 Day Momentum, which remains quite bearish and has, therefore, refused to confirm the latest bounce from the S&P 500! The case is slightly different if we focus on the Modified MACD as the indicator flashed a very weak but bullish crossover signal on Friday. Despite the fact that this can be interpreted as some form of positive divergence, the signal is still a way too weak to be taken too seriously at the moment!

This view is also strongly confirmed by short-term market breadth. Apart from the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a bullish crossover signal last week, the overall short-term oriented tape structure of the market remains quite shallow. This is mainly due to the fact the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) remain quite bearish, although the market showed solid gains last week! Additionally, we can see that there is a huge non-confirmation on a 50 days time frame as only 25 percent of all NYSE listed stocks remain within a short-term oriented uptrend at the moment. This is telling us that the recent recovery from the S&P 500 was mainly driven by heavy weighted stocks within major indexes, whereas the broad market is still lagging behind strongly. This picture is widely confirmed by the NYSE New Highs minus New Lows Indicator, as we have only seen a massive reduction in the amount of new lows instead of a substantial increase in new highs. As a matter of fact, the High-/Low Index Daily has not managed to flash a bullish crossover signal yet as the bullish gauge of this reliable indicator remains outright depressed!

As already mentioned last week, a typical bottom tends to occur as a process rather than as a V-shaped recovery (Charts of Interest). If the market hits an important bottom, we usually see a strong counter trend rally, which normally lasts about 5 to 10 trading sessions. After that, the market tends to show renewed weaknesses, which could then lead to a retest or even a break of its previous low. If this weakness comes along with more positive divergences within our market breadth indicators, we can be quite sure that the market hits rock bottom. Right now, our short-term oriented indicators are still indicating that the market is still in a bounce mode (and, therefore, renewed weaknesses can be still expected).

The situation on the contrarian side is almost unchanged compared to last week. Although last week’s bounce worked off some bearish sentiment (Program Trading Buy Sell Spread) we can see that the pessimism among the crowd remains persistent (the WallStreetCourier Index, Global Futures Put-/Volume Ratio, Global Futures Put-/Volume Ratio Oscillator, All CBOE Options Call-/Put Ratio, All CBOE Options Call-/Put Ratio Oscillator, Sentiment Market Vane and the Global Futures Sentiment Index). As most of those contrarian indicators are based on different option quotes, they are telling us that the crowed bought a massive amount of put options since we have seen the first down-leg. As approximately more than 90 percent of all options being bought expire worthless, it could easily be possible to see further bouncing/sideways trading until next Friday (as the option expiration date is due on that day) before further losses can be expected. This view would be in line with our Smart Money Flow Index, which is far away from confirming the current levels from the Dow, indicating further troubles ahead on a mid-term time horizon. Above all, we can see that the WSC Capitulation Index has not dropped by half of its rise yet and is, therefore, still indicating an extremely risk-off market environment.

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented condition of the market. Especially, the readings of the Global Future Trend Index are telling us that it is still a bit too early to get back into the market as its gauge kept trading well below its extremely bearish 20 percent threshold last week. As already mentioned in our previous market comments, as long as we do not see any stronger upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming bounce should be limited in price and time. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains below its bearish 60 percent threshold! Unchanged compared to last week, we can see that the WSC Sector Momentum Indicator continued to strengthen its bearish signal. This is telling us that the relative strength score of most sectors within the S&P 500 continued to underperform the relative strength score of riskless money market within our Sector Heat Map. In such a scenario, most sectors tend to perform negative on an absolute basis!

More importantly, the current bearish mid-term oriented trend is still strongly confirmed by mid-term oriented market breadth. This is mainly due to the fact that our entire mid-term oriented tape indicators remain outright bearish and have, therefore, not shown any signs of bullish divergences yet. Especially, the Modified McClellan Oscillator Weekly dropped to a new low last week and is, therefore, signaling that the overall mid-term oriented tape momentum remains outright weak at the moment. This can be also observed if we focus on the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators kept trading well below their bullish 50 percent threshold and are, therefore, far away from confirming the latest bounce from the S&P 500. In addition, these signals are telling us that the broad market is still quite damaged and, therefore, the recent recovery was mainly driven by short-covering so far. Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals kept trading at outright bearish levels. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, the recent recovery still looks quite fragile at the moment.

Long-Term Technical Condition

As per last week’s report, the long-term condition of the market continued to show major signs of exhaustion and, therefore, our bearish outlook has not been changed so far. Especially, the Global Futures Long Term Trend Index continued to deteriorate significantly for the week and, therefore, flashed a bearish signal last week. This is another indication that the current bull market (in the US) is showing strong signs of exhaustion. This can be also seen if we focus on the WSC Global Momentum Indicator as only 13 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. In a global context, we, therefore, received further confirmation that the current bull market has come to an end! Therefore, it is not a big surprise that the relative strength of all risky markets kept trading well below the one from U.S. Treasuries. More importantly, long-term oriented market breadth has also not shown any signs of bullish divergences yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground, whereas the percentage of stockss which are trading above their long-term simple moving averages and the High-/Low Index Weekly are far away from being supportive.

Bottom Line

The overall outlook remains almost unchanged compared to last week. In line with our recent outlook, the market is in the middle of a correction and, therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. As we have not seen any major positive signals/divergences within our short- to mid-term indicator framework yet, further down-testing towards the latest reaction low still looks quite likely (although further bouncing into expiration might cannot be ruled out at the moment). As a matter of fact, our approach is to watch the down-testing process and/or our short-to mid-term indicators quite closely as it will give us further guidance where the market is heading to. So if the S&P 500 drops to new lows without bearish confirmation, a stronger recovery is imminent, whereas confirmative bearish tape signals would give way to new record lows! Right now our best guess is that the market will follow our cyclical roadmap but we need to see further confirmation first. Stay tuned!