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August 16. 2015

Market Review

All three major U.S. averages finished the week with modest gains. For the week the Dow Jones Industrial Average eked out a small gain of 0.6 percent to end at 17,477.40. The S&P 500 added 0.7 percent for the week to finish at 2,091.54. The Nasdaq advanced 0.1 percent from the week-ago close to 5,048.24. Energy and financials led gainers among the S&P?s 10 major sectors. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.

Short-Term Technical Condition

Despite the fact that the market finished the week on a higher note, the readings within our short-term oriented trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market turned quite neutral, as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Apart from that fact, we have not seen any positive developments within our remaining short-term oriented trend indicators. The Advance-/Decline 20 Day Momentum Indicator dropped towards a new yearly low, whereas the Modified MACD remains quite bearish and has additionally not shown any signs of bullish divergences yet. This indicates that the underlying trend momentum of the market remains extremely weak-kneed at the moment. Consequently, any upcoming gains should be categorized as bounce rather than the beginning of a new sustainable up-trend.

This view is broadly being confirmed by short-term oriented market breadth. Apart from the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a very weak but bullish crossover signal last week, the short-term tape condition of the market looks quite damaged. This is mainly due to the fact that the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) kept trading far below their bullish 50 percent threshold! This is telling us that only heavy weighted stocks are pushing major averages higher, whereas the broad market is still strongly lagging behind! Another interesting fact is that we only saw a strong decrease in the total amount of new yearly lows, whereas the total amount of new highs remained depressed. This shows that last week’s gain was mainly triggered by short-covering and was, therefore, not driven by bargain hunters. This can be also seen if we have a closer look at the High-/Low Index Daily, as its bullish gauge has not shown any signs of major strength yet! Moreover, the bullish crossover signals from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are a way too weak to take them too seriously at the moment. So all in all, the bearish tape condition of the market remains quite unchanged compared to last week. This is telling us that the market remains in a bearish biased trading range, which normally tends to have a corrective nature.

As already mentioned last week, from a pure contrarian point of view it might be still a bit too early for a major pullback as the market still has to work off the current predominant bearish sentiment within our contrarian indicators first (All CBOE Options Call-/Put Ratio, Global Futures Put/Volume Ratio, ISEE Call-/Put Ratio, Program AII Bull & Bear and the WallStreetCourier Index). Normally, in such a situation it is not quite unusual to see a stronger bounces (even towards new (marginal) highs) as such a move tends to have its designated impact on short-term sentiment. In fact, this process is already going on as the gauge from the ISEE Call-/Put Ratio and the Program Trading Buy-/Sell Spread got back to normal levels last week. As a matter of fact, further bouncing into next week cannot be ruled out. This view is also confirmed by the WSC Capitulation Index, which dropped back into bullish territory last week. Although this indicates a risk-on environment on a very short time frame, the Smart Money Flow Index is still indicting major troubles on a mid-term time horizon!

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented technical condition of the market. Especially, the gauge from the Global Futures Trend Index remains in the middle of its bearish consolidation brackets and has, therefore, not shown any signs of strength yet. As already mentioned in our previous market comments, as long as we do not see any 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 outright bearish 60 percent threshold! On top of that, the WSC Sector Momentum Indicator kept trading at outright low bullish levels. This shows that the gap between the momentum score of the S&P 500 and riskless money market within our Sector Heat Map remains quite tight. This is a quite serious technical signal as it indicates that many sectors within the S&P 500 have started to break below their mid-term oriented trend-lines.

Above all, mid-term oriented market breadth did not show any signs of recovery last week and is, therefore, still confirming the bearish biased mid-term oriented trend of the market. The Modified McClellan Oscillator Weekly dropped to a new low last week, signaling that the overall breadth momentum remains outright bearish at the moment. This can be also seen if we focus on the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150). Both gauges remain quite bearish, although the market gained 0.7 percent for the week. Furthermore, this bearish divergence becomes quite obvious if we compare their absolute readings with the current levels from the S&P 500! Unchanged compared to last week, the bearish gauges from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly kept trading at outright negative levels and, therefore, we would be quite surprised to see sustainable gains ahead. On top of that, we can see that the bearish divergences within our advance-decline indicators (Advance-/Decline Volume Line Percent, Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line Weekly) got even stronger last week and, therefore, the market remains extremely vulnerable at the moment! Those divergences are also telling us that only large caps where holding up quite well, whereas the broad market is already breaking down. This is probably another reason, why we have not seen a stronger decline in major capitalized indexes yet. Anyhow, as such a situation can never be sustainable in the long run, we remain outright cautious if we consider the current risk/reward ratio!

Long-Term Technical Condition

As per last week’s report, the long-term condition of the market continued to show major signs of exhaustion. This is in line with our short- to mid-term oriented bearish outlook. Despite the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, we can see that its gauge continued to deteriorate for the 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 28 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 our suggested summer top is already in place. More importantly, long-term oriented market breadth has also not shown any signs of recovery 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 remain quite bearish, which is another serious long-term tape signal.

Bottom Line

The overall outlook remains unchanged compared to last week. In line with our recent outlook, the market is in the middle of a top building process and, therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. Consequently, it is just a matter of time until we expect to see further sharp losses. From a pure trading point of view, 2,044/2,050 represents an important key support level. A break below that numbers would be immediately bearish as further down-testing towards 2,014 and 1,980 can be expected. On the other hand, we think the market looks quite capped on the upside as any upcoming bounce towards the recent May top should be limited in price and time. As a matter of fact, aggressive traders should sell into strength rather than chasing the market too aggressively on the upside. Stay tuned!