May 10. 2015

Market Review

U.S. stocks finished slightly higher after a turbulent week. The S&P 500 eked out a small gain of 0.4 percent for the week to finish at 2,116.09. The Dow Jones Industrial Average advanced 0.9 percent over the week to close at 18,191.11. The Nasdaq ended at 5,003.55 and, thus, finished the week roughly where it started. Nearly all key S&P sectors ended higher for the week, led by financials. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, closed at 12.89.

Short-Term Technical Condition

The week started quite encouraging as the S&P 500 was pushed towards 2,120 on an intraday basis on Tuesday before losing some steam to finish at 2114.4. At midweek stocks started to tumble as the S&P 500 dropped almost 3 percent towards 2,075 until Thursday. Only a strong rebound on Friday helped most of the leading benchmarks to overcome the steep losses to end modestly higher for the week. The increased volatility came not out surprisingly. In our last week’s comment we have already highlighted the fact that the market looked vulnerable for a stronger 2-4 percent pullback, before another (final) rally attempt/volatile top building process into late May/early June could be expected. Right now, such a scenario looks quite likely as the technical picture of the market continued to deteriorate (although the market finished nearly flat for the week) and, therefore, the air is getting increasingly thinner.

From a pure price point of view, the short-term trend of the market remains intact as the S&P 500 closed 15 points above the bearish threshold from the Trend Trader Index. Moreover, we can see that both envelope lines of the Trend Trader Index are still rising. This indicates that from a pure structural point of view, the short-term oriented up-trend of the market has not been broken yet. Nevertheless, we can see that the overall trend-momentum remains outright weak at the moment. This is mainly due to the fact that the gauge from the Advance-/Decline 20 Days Momentum Indicator dropped below its bullish threshold last week, whereas the Modified MACD continued to gain more bearish ground within the last couple of trading sessions. Consequently, both indicators are now definitely not confirming the current levels from the S&P 500! As already mentioned a couple of times, it is not quite unusual to see some bearish readings within some of our trend indicators, when the market is crawling higher on a very slow pace. In such a case, short- to mid-term market breadth is a key area of focus to evaluate if the market is taking a healthy breather or if a fast paced correction might be at hand soon.

Unfortunately, short-term oriented market breadth had to take a hard hit during the last couple of trading sessions as most of our tape indicators continued to deteriorate last week. If we focus on the percentages of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) we can see that both indicators still remain bearish, although the market is trading near record levels! This indicates that the current rally is mainly driven by large caps, whereas the broad market is already faltering. Especially on Friday both gauges (20/50) did not show any signs of recovery at all, although we saw an extremely strong bounce on that day. This is telling us that the recent rally was not really healthy as it was mainly large-cap driven. This can be also seen if focus on the NYSE New Highs-/New Lows Indicator as the total number of stockss hitting a fresh 52 weeks high remains outright low, whereas the number of stockss hitting a fresh 52 weeks low has started to show some strength recently. Consequently, the High-/Low Index Daily turned almost bearish last week and is, therefore, forming a huge bearish divergence if we consider the current levels from the S&P 500. Above all, the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily have not shown any signs of a bullish crossover signal so far, indicating that the overall tape momentum remains outright weak!

From a pure contrarian point of view, the overall technical picture of the market remains also quite bearish. That is mainly due to the fact that the gauge from the OEX Options Call-/Put Ratio Oscillator remains quite bearish, whereas Smart Money was definitely selling the rally on Friday. Above all, we can see that the fisher transformation of the WSC Capitulation Index clearly turned bearish last week, plus the absolute number of this indicator has also reached its highest level for months. Only the NYSE Members Debt in Margin Accounts has not shown any signs of non-confirmation so far and, therefore, an overshoot scenario cannot be ruled out from a pure contrarian point of view. Right down the line, the current technical short-term oriented picture of the market looks outright damaged at the moment. The main reason, why we have not seen any stronger pullback yet is the fact that large caps are still holding up quite well at the moment. However, such a situation can never be sustainable in the long run and, therefore, the market looks extremely vulnerable for a stronger pullback!

Mid-Term Technical Condition

Another main reason why we believe that a quite concerning correction risk is forming right now is the fact that the mid-term oriented condition of the market continued to deteriorate significantly last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped significantly for the week and is, therefore, only trading shy below its bearish 60 percent threshold. In such a situation, the risk of a fast paced correction remains outright high. On the other hand, we would be quite surprised to see sustainable/strong gains ahead, as long as the gauge of this reliable indicator remains depressed. Nevertheless, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. Nevertheless, if we focus on our Sector Heat Map, we can see that most sectors are underperforming the S&P 500 right now. This indicates that only some heavy weighted stocks are holding up quite well, whereas the broad market is strongly lagging behind!

In addition, mid-term market breadth does not look rosy at all, which is another indication that the market looks quite vulnerable for a fast paced correction at the moment. Despite the fact that the market is trading at record levels, the Modified McClellan Oscillator Weekly is about to roll over into bearish territory, indicating that the momentum of the market internals remains outright weak. This can be also seen if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). They are trading at quite low levels and are, therefore, not confirming the current levels from the S&P 500. Above all, the most threatening mid-term breadth signal is coming from the Advance-/Decline Index Weekly, which turned slightly bearish last week! This indicates that a lot of purchasing power was pulled out of the market. Only the Upside-/Downside Volume Index Weekly was still holding up quite well. However, given the overall weak mid-term oriented trend, in combination with quite bearish biased mid-term oriented market breadth, we think that the recent move definitely looks corrective in its nature. Even if we see further rallying towards 2,150 we think that it is time for conservative members to place a stop loss limit around 2,070. This stop loss limit should be in place until our mid-term indicator framework turns positive again!

Long-Term Technical Condition

Right now, the long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 70 percent of all global markets have not broken below their long-term uptrend yet. Nevertheless, we can see that the relative strengths of most risky market have lost momentum recently, which is underlining our short- to mid-term oriented view. However, right now long-term market breadth is giving no reason to worry and, therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stockss which are trading above their longer-term oriented moving averages (200)!

Bottom Line

The bottom line: the evidences for an important intermediate summer top are increasing at the moment. As a matter of fact, we are extremely cautious at the moment as the market looks extremely vulnerable for a fast paced correction at the moment. The main reason, why we have not seen any stronger losses so far is the fact that large-caps are still holding up quite well. Although such a situation can never be sustainable in the long run, a final overshoot scenario (due to large caps) can also not be ruled out at the moment. Anyhow, given the weak readings all across the board we think it is time for our conservative members to place a stop loss limit around 2,070. This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should sell into strength, if the S&P 500 drops below 2,090 and should increase their exposure if we see further down testing below 2,075. Stay tuned!