August 23. 2015

Market Review

Right in line with our recent call, U.S. stocks finished the week with deep losses and with the main benchmarks recording their deepest weekly declines since 2011. For the week the Dow Jones Industrial Average dropped 5.8 percent to 16,459.55, marking a pullback of more than 10 percent from its record close set in May. The S&P 500 also lost 5.8 percent over the week to end at 1,970.90. Both, the Dow and the S&P 500, posted their biggest weekly declines since September 2011. The Nasdaq declined 6.8 percent from the week ago close to finish at 4,706.04. The weekly fall was the largest for the tech-heavy index since August 2011. Energy was the worst decliner for the week, with no sectors posting weekly gains. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 28.

Short-Term Technical Condition

Over the past couple of weeks, we received a growing number of evidences that the market was forming a major summer top. In early July, we then advised our conservative members to step at the sideline as our strategic outlook had clearly turned negative. Due to the strong performance of a few large- and mega-caps, the market was trading more or less sideways since then although the underlying tape structure was already faltering. We have warned our members that such a situation never can be sustainable over the long run and, therefore, it was just a question of time until stronger losses could be expected! In fact, within the last two weeks the ingredients for a stronger correction even increased and, therefore, it was not a big surprise at all that the S&P 500 suffered its worst week since 2011. Not surprisingly, the short-term oriented trend of the market turned outright bearish last week. This is mainly due to the fact that the S&P 500 closed 165 points(!) below the bullish threshold from the Trend Trader Index. Above all we can see that both envelope lines of this reliable indicator also kept drifting lower for the week, indicating an outright underlying bearish trend-structure at the moment. The same is true if we focus on the Modified MACD, as its short-term oriented gauge gained even more negative momentum last week and has additionally not shown any signs of positive divergences so far. Above all, the Advance-/Decline 20 Day Momentum Indicator remains quite bearish, although its gauge refused to confirm the latest low on Friday. Despite the fact that this indicates some form of positive divergence, this signal is a way too weak to be taken too seriously at the moment.

This view is also strongly confirmed by short-term oriented market breadth. This is due to the fact that we have not seen any bullish divergences/crossover signals so far, which would be the first indication for a short-term oriented trend reversal. As a matter of fact, any (stronger) upcoming gains should tend to be corrective in their nature rather than the start of a new short-term oriented up-trend. This is mainly due to the fact that 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. To be more precise, slightly more than 80 percent of all NYSE listed stocks are now trading well below their 20 and 50 day moving averages and have, therefore, clearly confirmed the sell-off on Friday! Another quite concerning fact is that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily turned clearly bearish last week and have, therefore, not shown any signs of positive strength yet. This indicates that the underlying breadth momentum of the market is far away from being bullish biased and, thus, we would be quite surprised to see sustainable gains ahead! On top of that we can see that the bearish gauge from the High-/Low Index Daily climbed towards new highs last week! This is mainly driven by the fact that the number of stockss hitting a fresh yearly low soared to 627 on Friday, the highest level for years! This number is quite concerning, especially if we compare the current levels from the S&P 500 with its latest correction low in late-December 2014, where only 410 stocks dropped to a new 52-weeks low. So in other words, there might be still some little room left, before the market might hit rock bottom.

From a pure contrarian point of view, the overall technical picture of the market is a bit intermingled at the moment. This is mainly due to the fact that the market flashed a 9-to-1 down-day on Friday, indicating a selling climax. After such an event, the market tends to rebound for a couple of days before further losses can be expected. In addition, the market is becoming increasingly oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and given the outright bullish readings from the option market (All CBOE Options Call-/Put Ratio, All CBOE Options Call-/Put Ratio Oscillator, Global Futures Put/Volume Ratio and the ISEE Call-/Put Ratio) a stronger oversold bounce is likely. However, on a mid-term time frame, the bearish divergence between the Dow and the Smart Money Flow Index has not been sorted out yet and, therefore, it might be still a bit too early to bet on a sustainable trend reversal!

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented 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! Above all, the WSC Sector Momentum Indicator also turned slightly bearish last week. Last time this happened was in summer 2011, where the S&P 500 declined for nearly 20 percent! So all in all, this is a quite serious mid-term oriented trend signal, as it indicates that the relative strength score of riskless money market rose above the one from the S&P 500 within our Sector Heat Map. In the past (since 2000), the average return of the S&P 500 was minus 10 percent, when its relative strength score dropped below the one from riskless money market!

More importantly, mid-term oriented market breadth continued to gain more bearish ground last week and has, 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. 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 have been pushed to their lowest levels for months, whereas the S&P 500 is still trading near its latest correction low in late-December 2014. As a matter of fact both indicators are, therefore, still showing a huge bearish divergence to the current levels from the S&P 500. In addition, the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at outright bearish levels and have not formed any signs of bullish divergences yet. In such a situation, we would be outright surprised to see sustainable gains ahead!

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. 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 22 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 is slightly running out of steam. Therefore, it is not a big surprise at all, that the relative strength of all risky markets is 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 strengthened their bearish signals.

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. Furthermore, we have not seen any major positive signals/divergences within our short- to mid-term indicator framework 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. Stay tuned!