March 15. 2015

Market Review

Stocks ended lower after a quite volatile week of trading. In the end, the Dow Jones Industrial Average lost 0.6 percent during the week to close at 17,749.31. The S&P 500 slipped 0.9 percent to 2,053.40 in the week. The Nasdaq lost 1.1 percent over the week to end at 4,871.76. Most key S&P sectors ended in negative territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.

Short-Term Technical Condition

The consolidation period which started almost three weeks ago, has pushed the S&P 500 down around 3 percent from its former multi-year high in late-February. Normally, if the market is taking a healthy breather or remains within a consolidation period, market breadth should regain momentum and/or existing bearish divergences should be sorted out, helping the market to push higher afterwards. Two weeks ago, the readings of our short- to mid-term oriented breadth indicators remained quite supportive and, therefore, the ongoing consolidation period looked quite healthy. Unfortunately, the technical condition of the market has changed quite fairly since then. This is mainly due to the fact that we saw a significant deterioration within our short- to mid-term indicator framework last week, although the S&P 500 lost only 0.9 percent on a weekly basis. This indicates that the recent consolidation period could easily turn out to be more corrective in its nature and, therefore, we remain quite cautious at the moment.

From a pure price point of view, the short-term oriented down-trend of the market gained even more bearish ground last week, as the S&P 500 closed 30 points below the bearish threshold from the Trend Trader Index. Furthermore it looks like that both envelope lines of the Trend Trader Index are about to form a bearish rounding top, which is another piece of evidence that the current weaknesses is definitely part of a bigger top building process rather than being a short-lived consolidation period. This can be also seen, if we have a closer look at the Modified MACD. Both trend lines of that reliable indicator picked up even more bearish ground last week and remain in a free fall with a widening gap, indicating that more down-testing is quite likely. In addition, the gauge of the Advance-/Decline 20 Day Momentum Indicator broke below its bullish threshold on Friday and is, therefore, definitely not confirming the current level from the S&P 500!

More importantly, the current short-term oriented down-trend looks quite intense at the moment as our entire short-term oriented tape indicators started to weaken significantly or even turned bearish last week. Especially, the number of stockss dropping to a fresh yearly low increased fairly, while the number of stockss hitting a fresh yearly high has started to decrease. This is telling us that the current sideways trading is not really constructive in its nature anymore as the market internals have started to weaken. As a consequence, the High-/Low Index Daily flashed a small bearish crossover signal last week, which is another piece of evidence that the recent consolidation period could easily turn out to be quite corrective in its nature. Above all, the McClellan Volume Oscillator Daily as well as the Modified McClellan Oscillator Daily continued to show a widening bearish gap, indicating an outright weakening tape structure at the moment. Moreover, the percentage of stockss which are trading above their mid-term oriented moving averages (20/50) dropped below their bullish threshold last week (20) or about to do so (50), indicating that the underlying trend participation of the overall market looks outright weak-kneed at the moment!

From a pure contrarian point of view, the overall technical picture of the market is remains quite mixed. That is mainly due to the fact that the gauge from the WSC Index remains within its supportive territory, whereas the Program Trading Buy-/Sell Spread Indicator flashed a seldom buy signal last week. Above all, we can see that the fear among the option market is increasing. This is caused by the fact that the z-score from the Daily Put/Call Ratio All CBOE Options got even stronger last week. This shows that the current Put/Call Ratio is two standard deviations away from its historical mean and, therefore, the chances for a stronger oversold bounce are increasing. On the other hand side, we can see that the open interest of all CBOE options fell to the lowest levels for years and, therefore, the readings from the option market might be a bit overestimated. Additionally, it is quite concerning that the WSC Capitulation Index has shown some strength recently, which indicates a growing risk-off scenario. As a matter of fact, we would not be surprised to see increased volatility next week.

Mid-Term Technical Condition

More importantly, if we focus on our mid-term oriented indicators, we have even received a growing number of evidences that the recent consolidation period could easily turn out be outright corrective in its nature. The main rationale behind that is the fact that the gauge of our reliable Global Future Trend Index dropped significantly below its bullish 60 percent threshold and, therefore, the chances for a fast paced pullback/correction remain outright high at the moment! So even if we do not see a stronger correction within the next weeks, as long as the gauge of this indicator remains below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well. Therefore, the opportunity costs of not being invested at all also remain quite subdued! However, from a pure price point of view the mid-term oriented up-trend of the market remains intact. This is not a big surprise at all, as we have not seen any stronger pullback yet. As matter of fact, the WSC Sector Momentum Indicator still remains quite bullish for the time being. This can be also seen if we have a closer look at our Sector Heat Map, as consumer discretionary and health care are/remain the strongest sectors, whereas it is still too early to bet on a sustainable bottom within energy.

More importantly, mid-term market breadth does not look rosy at all, which is another indication for major troubles ahead. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) are just shy trading above their bearish threshold, whereas the Modified McClellan Oscillator Weekly flashed a bearish crossover signal last week. This indicates that the overall momentum of the market internals started to decrease significantly, although the market is just trading near record highs. Above all, we can see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly continued to deteriorate for the weak. Consequently both indicators are telling us that a lot of purchasing power was pulled out of the market recently. In such a situation the risk of a fast paced correction remains outright high! So all in all, given the overall weak mid-term oriented trend-structure, in combination with quite bearish biased mid-term oriented market breadth, we think that the current consolidation period could easily turn out to be corrective in its nature. For that reason, we think it is time for conservative members to place a stop loss limit around 2,035/2,030. This stop loss limit should be in place until our short- to mid-term oriented indicator framework turns positive again!

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. From a regional point of view, we can see that the global bull market remains quite selective as only 45 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. From a pure asset allocation point of view, we can see that the relative trend score of all risky assets remain above their bearish zero percent thresholds. Nevertheless, we can see that commodities remain the weakest asset class and, therefore, it is still too early to bet on a recovery of that asset class. More importantly, long-term oriented market breadth has slightly started to weaken, as the Modified McClellan Volume Oscillator Weekly turned bearish last week. Apart from that fact, we can see that the percentage of stockss which are trading above their 200 day simple moving average as well as long-term new highs remain supportive for the time being.

Bottom Line

From a pure contrarian point of view, a short-term oversold bounce is possible. However, since the market remains short-biased, we would advise our aggressive members to sell into any upcoming strength, as long as we do not see any significant drop in our WSC Capitulation Index, a bearish trend break in our Trend Trader Index or other bullish divergences within our short-term oriented indicators. Moreover, we think it is time for conservative members to place a stop loss limit around 2,035/2,030 as the evidences for a fast paced correction are increasing. Even if we do not see a stronger correction immediately, the upside potential of the market looks quite capped as well, given the outright weak readings within our indicator framework. Stay tuned!