January 10. 2016

Market Review

In line with our latest call, U.S. stocks finished the week with deep losses and the major averages posted their worst week since 2011. For the week, the Dow Jones Industrial Average slumped 6.2 percent, or more than 1000 points, to 16,346.45. The S&P 500 suffered a weekly loss of 6.0 percent to finish at 1,922.02. The Nasdaq dropped 7.3 percent from the week-ago close to 4,643.63. This is the longest losing streak for the index since November 2011. All key S&P sectors finished in the red for the week, led by materials. Seven of the benchmark’s 10 main industries sank more than 5.5 percent this week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, was near 27.

Short-Term Technical Condition

Over the past couple of weeks, we received a growing number of evidences that the market was in the middle of a corrective top-building process. Our indicator framework showed that only due to the strong performance of a few large- and mega-caps, the market was trading more or less sideways back then, although the underlying tape structure was already faltering. We warned our members that in such a situation the upside potential of the market remained capped as long as we do not see further improvement within our tape indicators. Consequently, the risk-/reward ratio started to deteriorate significantly. As the ingredients (within our indicators) for a stronger correction had even increased towards mid-December, our strategic outlook clearly turned negative back then. As a result we advised our conservative members to step at the sideline and to be patient as it should be a question of time until sharp waterfall declines could be expected. Consequently, we even argued against chasing the market higher in the final days of 2015 (in contrast to the general market sentiment back then) as the so called year-end rally looked outright corrective.

In fact, the predicted correction started early in the morning of the first trading day of the year, making it nearly impossible for the crowd to react on time. In the end, the Dow Jones Industrial Average and S&P 500 had their worst first five-day performance of a year in history, whereas major indexes closed out the week with losses of nearly 6 percent or more. Despite the fact that the magnitude of the decline as well as the correction itself was not a big surprise at all (at least for our members), we are always be a bit amused, who or what fundamental facts got blamed for the sell-off afterwards. Anyhow, after the S&P 500 slightly dropped below our initial price target of 1,948, the question is if last week’s massive sell-off was just the vanguard of a more significant correction/bear market or if it might be a great time to slightly get back into the market?

Not surprisingly, the short-term down-trend of the market remains well in force and even gained more bearish ground last week. From a pure price point of view, we can see that the S&P 500 closed 94 points below the bearish threshold from the Trend Trader Index. So from a pure price point of view, the short-term oriented bearish trend of the market remains intact as long as the S&P 500 does not manage to close above 2,016 (lower envelope line from the Trend Trader Index). This negative price driven trend is also confirmed by the Modified MACD, which flashed a quite strong bearish crossover signal at the beginning of last week, indicating that further down-testing is likely. Above all, we can see that the gauge from the leading Advance-/Decline 20 Day Momentum Indicator remains quite bearish and, therefore, it might be a bit too early to bet on a major trend reversal.

More importantly, this negative view is also strongly confirmed by short-term market breadth and, therefore, further selling pressure is highly likely. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are telling us that the underlying tape momentum of the market remains extremely damaged. With such weak readings, it would be a bit too early to bet on a stronger trend-reversal for the time being. This picture is widely confirmed by the NYSE New HighsNew Lows Indicator, as we have seen a quite strong and confirmative spike in the amount of new lows, whereas the amount of new highs remains outright depressed. As a consequence, the High-/Low-Index Daily flashed also an outright strong bearish crossover signal last week and, therefore, the chances for a healthy rebound are extremely low at the moment. Moreover, its reading is also telling us that the whole market looks quite damaged as not only heavy weighted stocks have pulled the S&P 500 lower. Consequently, it was not a big surprise at all, that also the percentage of stockss which are trading above their short-term oriented moving averages (20/50) closed far below their 50 percent bullish threshold last week. So in the end, most of the selling pressure was coming from the broad market rather than from a few large-caps and, therefore, it is a way too early to bet on a sustainable trend reversal.

From a pure contrarian point of view, the chances for an oversold and, therefore, corrective bounce are increasing. This is mainly due to the fact that the market looks quite oversold at the moment (Upside-/Downside Volume Ratio Daily, Advance-/Decline Ratio Daily and the Trin (Daily)) and above all, we can see that a lot short-term panic has been priced in already. This is due to the fact that a lot of our option based contrarian indicators flashed a buy signal last week (Daily Put/Call Ratio All CBOE Options, Global Futures Put/Volume Ratio, WallStreetCourier Index, WallStreetCourier Index Oscillator, Bottom Indicator and the ISE Equity Options Call/Put Ratio). Despite the fact that those signals can look quite encouraging, we have not seen any signs for a major bottom building process within our market breadth indicators yet. Furthermore, we can see that the more mid-term oriented WSC Capitulation Index is still signaling a risk-off environment for the time being. Thus, we think that any upcoming oversold move should be limited in price and time.

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented condition of the market, which has not shown any signs of bullish divergences yet and remains, therefore, quite damaged at the moment. Especially, the gauge from the Global Futures Trend Index deteriorated significantly for the week and remains, therefore, well below its bearish 60 percent threshold. As already mentioned a couple of times, from a formal point of view, the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold. Above all, we can see that the mid-term oriented trend has now also been broken from a pure price point of view. This is mainly due to the fact that the gauge from the WSC Sector Momentum Indicator dropped below its bullish threshold last week. This indicates that the momentum score from riskless money market rose above the one from the S&P 500 within our Sector Heat Map. In such an environment, most sectors tend to perform negative on an absolute basis and, therefore, we think that any upcoming oversold bounce should be limited in price and time (especially if it is not accompanied by a strengthened tape structure).

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 showed a widening bearish gap 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 dropped to outright bearish levels, indicating that the sell-off was driven by the broad market rather than by a few heavy-weighted stocks. This view is broadly confirmed by the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators finished the week at quite bearish levels and, therefore, it is a way too early to bet on a sustainable trend-reversal for the time being.

Long-Term Technical Condition

On a long-term horizon, the situation remains almost unchanged compared to last week. The Global Futures Long Term Trend Index kept trading far below its bullish threshold, indicating that the U.S. equities remain in an extremely risk-off environment at the moment. This can be also seen if we focus on the WSC Global Momentum Indicator as only 2 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 global equity markets are at risk for further disappointments. Consequently, it is not a big surprise at all that the relative strength of all risky markets kept trading far below the one from U.S. Treasuries. On top of that, we can see that this negative long-term trend is widely confirmed by long-term market breadth. 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 strengthened their bearish signals.

Bottom Line

The overall outlook remains almost unchanged compared to last week. In line with our recent call, the market is in the middle of a correction. Therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment to act contrarian. This is mainly due to the fact that we have not seen any major positive signals/divergences within our indicator framework yet to call for an important bottom at the moment. Nevertheless, from a pure contrarian point of view an oversold but corrective bounce looks quite possible, before further down-testing can be expected. As a matter of fact, aggressive traders should sell into strength rather than chasing the market too aggressively on the upside. From a pure trading point of view, a break below 1,913 would call for further down-testing towards 1,900 and then 1,881, whereas a break above 1,950 would indicate further bouncing towards 1,971. Stay tuned!