June 26. 2016

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average declined 1.6 percent over the week to 17,399.86. The S&P 500 dropped 1.6 percent as well to finish at 2,037.40. Its largest one-week drop since February. Both the S&P 500 and the Dow wiped out their year-to-date gains. The Nasdaq lost 1.9 percent for the week to end at 4,707.98. Nine of the 10 main S&P sectors closed sharply lower. Financials, materials, and tech stocks led the losses. Utilities were the only weekly performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, briefly topped 26 to its highest since mid-February before holding near 23.5.

Strategy Review

In our last week’s comment we highlighted the fact that our bullish mid-term oriented outlook remained unchanged; but on a very short-time frame the up- as well as the down-side potential of the market looked quite capped at 2,110/2,040. Consequently, we expected to see increased volatility within that broad based trading range first, before further gains into summer could be expected. Until Thursday, the S&P 500 rallied towards 2,113 (our initial upper price target) before the broad benchmark plunged more than 3 percent to 2,037 on Friday. Despite the fact that the market finished the week on the lower range of our initial price target, the question if the technical market condition has changed since last week well arises. This is mainly due to the fact that the market plunged more than 3 percent on Friday, whereas the Dow Jones Industrial Average scored its eighth-largest point loss ever on that day. To answer that question, our indicator framework (especially on a mid- to long-term time horizon) remains key area of focus.

Short-Term Technical Condition

As per last week’s report, the short-term oriented trend of the market remains short-biased, as the gauges of nearly our entire short-term trend indicators are trading well below their bullish thresholds or remain weak. From a pure price point of view, the short-term oriented down-trend of the market strengthened as the S&P 500 closed 50 points below the bearish threshold from the Trend Trader Index. Above all, we can see that our reliable Modified MACD slightly continued to gain more bearish ground last week, indicating that further down-testing looks quite likely. Nevertheless, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish yet as both envelope lines of the Trend Trader Index are still rising. This is telling us that within the past 20 days we have seen mostly higher highs and higher lows, which can be seen as quite bullish divergence if we consider the current market circumstances. Basically, the same is true if we focus on our Advance-/Decline 20 Day Momentum Indicator which has not turned bearish so far and has, therefore, definitely not confirmed the carnage on Friday.

Apart from the fact that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) plunged far below their 50 percent bullish threshold, most of our short-term oriented tape indicators have formed a quite bullish divergence to the current readings of the S&P 500. This becomes quite obvious if we focus on the High-/Low-Index Daily as the averaged amount of new highs have continued to improve for the week, although the market finished in negative territory for the week. This is mainly due to the fact that during the whole week, we saw an encouraging increase of stocks which hit a fresh 52 weeks high, whereas the total amount of new lows remained outright depressed. Especially on Friday, where U.S. stocks plunged more than 3 percent, there were only 53 stocks on NYSE which dropped to a new yearly low, whereas the total amount of new highs kept trading at quite encouraging levels! This indicates that a lot of that decline was mainly driven by profit taking rather than by a huge decline within the broad market. On top of that, we can see that both gauges from the Modified McClellan Oscillator Daily and our Modified McClellan Volume Oscillator Daily have also formed a quite bullish divergence, although both indicators remain or just have slightly turned bearish recently. So all in all, most of our short-term tape indicators are definitely not confirming the current levels from the S&P 500, although the sharp decline on Friday has left its mark on the readings of our tape indicators.

From a pure contrarian point of view, the overall technical picture of the market is also getting increasingly bullish on a very short-time frame. Apart from the fact that the WSC Capitulation Index is obviously indicating an extreme risk off market environment on a very short-time frame, we can see that the Smart Money Flow Index refused to confirm the strong pullback from the Dow. Furthermore, the increased volatility from last week caused a lot of fear among market participants as the amount of puts being bought soared. As a matter of fact, we received quite strong supportive signals from the WallStreetCourier Index, the WallStreetCourier Index Oscillator and the Daily Put-/Call Ratio All CBOE Options Indicator, plus the Global Futures Put Volume Ratio has shown some signs of improvements recently.

Mid-Term Technical Condition

Despite the fact that there is a lot of dust in the air on a very short-time frame, the mid-term uptrend of the market remains well intact for the time being. This is mainly due to the fact that the reading from the Global Futures Trend Index remains extremely bullish, although it slightly lost some momentum for the week. Right now the indicator keeps trading within the top part of its bullish consolidation area. As long as this is the case, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. Above all, even from a pure price point of view, the mid-term oriented up-trend of the market remains well intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This is telling us that most sectors (apart from financials) within the S&P 500 have not broken below their mid-term oriented up-trend so far. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market keeps trading at outright low levels (although it has shown some signs of strengths on low levels recently).

More importantly, the mid-term oriented market breadth is still confirming the current mid-term oriented uptrend of the market, although we can already see some small signs of exhaustion. This is mainly due to the fact that apart from the Modified McClellan Oscillator Weekly, most of our mid-term oriented tape indicators slightly deteriorated last week. Especially, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) have come down recently, although they remain quite bullish from a pure signal point of view. Basically, the same is true if we have a look at the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly. Right now it is a bit too early to get concerned about this fact, as their small deterioration is just the impact of the recent pullback. Consequently, as long as the readings from most of our mid-term oriented tape indicators remain quite strong, it might be a bit too early to issue a strategic sell signal.

Long-Term Technical Condition

Right now, 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 65 percent of all global markets have not broken below their long-term uptrend yet (although its reading slightly dropped for the week). Moreover, we can see that the relative strengths of most risky markets keeps trading above the one from U.S. Treasuries, indicating that the long-term oriented risk appetite among investors remains intact. Last but not least, long-term oriented market breadth also still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average decreased last week, but they still remain in the bullish territory. Additionally, our long-term oriented High-/Low Index Weekly is still trading at supportive levels, whereas the Modified McClellan Volume Oscillator Weekly did not show any signs of weaknesses last week, indicating that the tape structure of the market remains quite healthy at the moment.

Bottom Line

Despite the fact that there are still a lot of clouds visible on a very short time frame, the situation remains almost unchanged compared to last week. On a very short time frame, the market looks vulnerable for further volatility into late June, but given the quite solid readings on a mid- to long-term time horizon, our strategic bullish outlook remains unchanged. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a complete short-term oriented trend break which is completely confirmed by bearish readings within short-term market breadth. Stay tuned!