October 23. 2016

Market Review

U.S. stocks finished the week with small gains. The Dow Jones Industrial Average added 0.04 percent for the week to end at 18,145.71. The S&P 500 advanced 0.4 percent from last Friday?s close to finish at 2,141.16. The Nasdaq climbed 0.8 percent over the week to 5,257.4. Most key S&P sectors finished higher, led by materials, while industrials and consumer staples ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower near 13.4.

Strategy Review

Although the market was able to finish on a higher note last week, the technical picture of the market does not look rosy at all. This is mainly due to the fact that large caps are holding up quite well, although the broad market is already lagging behind strongly. As such a situation can never be sustainable in the long run, such a pattern is a typical warning sign for a major pullback. As a matter of fact, we remain quite cautious at the moment and according to our indicator framework we received even more confirmation that the market is highly vulnerable for a stronger pullback at the moment (and, therefore, we remain outright cautious at the moment).

Short-Term Technical Condition

According to our short-term oriented trend indicators, the down-trend from last week remains well in force. The S&P 500 did not manage to break above the bearish threshold from the Trend Trader Index and above all we can see that both envelope lines are still driving lower. This is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical technical pattern for a strong short-term oriented down-trend. Another concerning trend signal is coming from the Modified MACD, as its short-term oriented gauge dropped towards new lows last week. As a matter of fact, it has formed an outright bearish divergence to the current levels from S&P 500. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which just dropped to a new low on Friday. As this indicator tends to be a leading one, we would not be surprised to see further (stronger) down-testing ahead. Consequently, it is a way too early to bet for a sustainable trend reversal at the moment.

The picture is also widely confirmed by short-term market breadth. The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gap lower into bearish ground last week, indicating an outright bearish tape momentum at the moment. Consequently, it was not a big surprise at all, that the number of stockss which are hitting a fresh yearly high have not shown any signs of bullish spikes so far (although the S&P 500 keeps trading near all-time highs). As a matter of fact, the High-/Low Index Daily continued to show major signs of non-confirmations, although the indicator itself has not turned bearish yet. Anyhow, the overall tape deterioration can also be seen if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both indicators are telling us that less than 45 percent of all NYSE listed stocks remain in a short-term oriented uptrend at the moment. As a matter of fact, the overall upside participation remains extremely weak-kneed at the moment. The last time when we saw such weak numbers was in mid-June during the Brexit polls in Europe. So all in all, if we consider the current levels from the S&P 500 in combination with such weak readings within our breadth indicators, it is quite obvious that only large cap stocks are holding up quite well at the moment (whereas the broad market is already faltering)! This is just another piece of evidence (for our recent call) that the current consolidation period looks outright corrective in its nature.

On the contrarian side, the situation remains quite neutral. On a very short time frame, the WallStreetCourier Index is still giving some support, whereas the WSC Capitulation Index is still indicating a risk-off scenario. Moreover, we can see that the big guys continued to reduce their equity exposure since the Smart Money Flow Index continued to widen its bearish divergence to the Dow Jones Industrial Average.

Mid-Term Technical Condition

However, the most concerning fact is that the mid-term oriented condition of the market remains extremely weak-kneed at the moment. This is primarily based on the fact that the gauge from the Global Futures Trend Index continued to deteriorate and has, therefore, closed in the lower part of its bullish consolidation area. As already mentioned last week, if this trend continues it is just a question of time until we see a drop (of this indicator) below 60 percent. In the past, readings below that important threshold, in combination with weak or bearish readings in mid-term oriented market breadth were always a predictable signal for a stronger correction. Right now we are not completely there yet but if we consider the outright weak tape readings within our mid-term oriented tape indicators (see below), the ingredients for a correction are almost complete! However, from a pure price point of view, the mid-term oriented uptrend of the market has not been broken yet as the WSC Sector Momentum Indicator kept trading at quite bullish levels so far. This is telling us that the spread between the momentum score of the S&P 500 and the momentum score of riskless money market remains positive (within our Sector Heat Map). Nevertheless, the momentum score of riskless money market keeps grinding higher and higher, which is another proof of evidence that the market internals look quite damaged at the moment.

A further concern regarding the current condition of the market is the fact that mid-term oriented market breadth has not shown any signs of recovery so far. This becomes quite obvious if we focus on the Modified McClellan Oscillator Weekly, which indicates an outright negative tape momentum at the moment. Also the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) deteriorated significantly for the week and are, therefore, just trading shy above their bullish threshold. Consequently, they are forming a huge bearish divergence if we consider the current levels from the S&P 500. On top of that, we can see that the bearish readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly remain nearly unchanged compared to last week. This is telling us that the market remains extremely vulnerable towards negative driven news flow as the broad market is already faltering. So even if we do not see a stronger pullback immediately, with such weak readings within our mid-term oriented tape indicators, we would be surprised to see stronger sustainable gains ahead!

Long-Term Technical Condition

The long-term uptrend of the market remains well intact and, therefore, our long-term bullish outlook has not been changed so far. As a consequence, we do not believe that a stronger correction would lead to bear market at least for the time being. To be more precise, the Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 78 percent of all local equity markets around the world remain in a long-term oriented uptrend at the moment. Only the WSC Global Relative Strength Index showed a negative picture last week, as the relative strength of all risky markets dropped. This is another indication that the market looks quite vulnerable at the moment. Right now, this long-term oriented uptrend of the market is still widely confirmed by long-term market breadth. This is due to the fact that apart from the Modified McClellan Volume Oscillator Weekly, our entire long-term oriented tape indicators (High-/Low Index Weekly and the percentage of stockss which are trading above their 200 day moving average) remain somehow supportive at the moment.

Bottom Line

Our key call remains unchanged compared to last week. Although the market only trades a few percentages below its all-time high, we remain outright cautious! This is due to the fact that the technical condition of the market looks extremely damaged at the moment. With such weak readings all across the board the market is outright vulnerable and, therefore, the risk of a stronger correction remains outright high. Nevertheless, we would like to see some stronger negative price action below 2,095 first, before we advise our members to take any actions (This is due to the fact that the Global Futures Trend Index is still somehow supportive and, therefore, another ? not sustainable ? large-cap driven rally attempt cannot be ruled out at the moment). As a matter of fact, we would advise our conservative members to adjust their stop-loss limit towards 2,095. This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 2,095 and should increase their exposure if we see further down testing below 2,075/2,050. Stay tuned!