September 14. 2014

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 0.9 percent over the week to 16,987.51. The S&P 500 dropped 1.1 percent for the week to finish at 1,985.54. Both averages posted their first negative week in six weeks. The Nasdaq lost 0.3 percent for the week to end at 4,567.60. All key S&P sectors ended in red, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.5. The volatility measure jumped 10 percent this week, its biggest gain since Aug. 1.

Short-Term Technical Condition

Despite the fact, that the S&P 500 only lost 1 percent for the week, the technical picture of the market has changed quite fairly. The Trend Trader Index has been pushed into neutral territory, the Modified MACD flashed a bearish crossover signal on Wednesday, plus the Advance-/Decline 20 Day Momentum Indicator is about to drop below its bullish threshold, indicating a bearish biased short-term market trend. In addition, the readings of our entire short-term trend indicators are not confirming the current level from the S&P 500 and are, therefore, showing a quite bearish divergence. As already mentioned last week, it is not unusual that the readings from our entire short-term trend indicators are languishing during a consolidation period. To evaluate if the current consolidation period should be considered as healthy or if it will turn out to be more corrective in its nature, short- to mid-term market breadth are a key area of focus.

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 weaken significantly or even turned bearish last week. Especially the number of stockss hitting a fresh yearly high decreased fairly, while the number of stockss dropping to a fresh yearly low has started to increase on a quite fast pace. This is telling us that the current sideways trading is not really constructive in its nature anymore as the market internals have started to weaken. Therefore, the High-/Low Index Daily is about to flash a bearish crossover signal soon, which is another indication that the current sideway trading is definitely not healthy it its nature. Moreover, the Modified McClellan Oscillator Daily flashed also a strong bearish crossover signal last week, indicating that the momentum of the market internals definitely turned negative! This can be also seen if we have a closer look at the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) which remain bearish from a pure signal point of view and continued to deteriorate for the week. For that reason, we would be really surprised to see further sustainable gains ahead!

From a pure contrarian point of view, we can see that the market is a bit oversold (Arms (Trin) Daily and the Advance-/Decline Ratio Daily) and, therefore, the pace is likely to slow down within the next couple of trading days. More importantly, we can see that the gauge from the WSC Capitulation Index started to increase on low levels, indicating that further losses are likely. This picture is also confirmed by the Smart Money Flow Index, which does not confirm the current levels from the Dow. Only the option market still remains a bit too cautious and, therefore, it looks like the market still has to work off this predominant bearish sentiment. Moreover, from a cyclical point of view the market is entering a quite challenging time period until November. So all in all, given the current picture of the market, we think that the current consolidation period looks definitely corrective in its nature and, therefore, we remain quite cautious at the moment.

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 above 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 a fast paced correction could be at hand soon. Despite the fact that the market is trading at record levels, the Modified McClellan Oscillator Weekly continued to show a widening bearish gap, indicating that the momentum of the market internals remain 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), which are about to drop into bearish territory and are, therefore, definitely not confirming the current levels from the S&P 500. This is showing that the majority of all NYSE listed stocks are about to break below their mid-term uptrend! Above all, the most threatening mid-term breadth signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators turned bearish last week! This indicates that a lot of purchasing power was pulled out of the market and in such a situation the risk of a fast paced correction remains outright high! Given the overall weak mid-term oriented trend, in combination with quite bearish biased mid-term oriented market breadth, we think that the current consolidation period is definitely corrective in its nature. Even if we see further rallying towards 2,010 we think that it is time for conservative members to place a stop loss limit around 1,970. 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 lost momentum recently or remain below their bullish 50 percent threshold. Such a situation is normally not a big deal, as long as the readings from our mid-term to long-term market breadth indicators remain solid. But unfortunately, this is not the case right now! Apart from the High-/Low Index Weekly, long-term market breadth remains quite weak at the moment. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly continued to drop further, plus the percentage of stockss which are trading above their 200 day simple moving average remain weak. This is another indication that a correction might be at hand soon, if we do not see any improvements within our indicator framework over the next couple of weeks.

Bottom Line

The bottom line: as the evidences of a correction are increasing, we remain extremely cautious for the short-term to mid-term. For that reason, we would advise our conservative members to place a stop loss limit around 1,970. Aggressive traders should sell into strength, if the S&P 500 drops below 1,980 and should increase their exposure if we see further down testing below 1,970. Stay tuned!