November 15. 2015

Market Review

U.S. stocks ended the week with steep losses, snapping a six-week winning streak. The Dow Jones Industrial Average slumped 3.7 percent over the week to 17,245.10, its worst weekly drop since September. The S&P 500 dropped 3.6 percent for the week to finish at 2,023.04, its worst weekly fall since September 4. The benchmark index turned negative for the year and fell below its 200-day moving average. The Nasdaq slumped to 4,927.88 and finished the week 4.3 percent lower, the tech-heavy indexes worst weekly drop since Aug. 21. Among the key S&P sectors, energy fell nearly 6 percent as the worst performer for the week, while utilities was the only sector to post gains for the week, up 0.3 percent. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, topped 20 for the first time since Oct. 6.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that we expected to see either a short-term consolidation/pullback or the market should be at least capped on the upside. Moreover, we mentioned that our strategic bullish outlook remained unchanged as long as we do see further improvements within our indicator framework. As a matter of fact, the recent pullback was not a big surprise at all, although we have been quite astonished by the speed of the recent decline. So the big question is, if renewed weaknesses can be expected or if the recent decline was just a typical healthy breather within an ongoing uptrend?

Anyhow, if we focus on our short-term oriented trend indicators, we can see that S&P 500 closed 57 points below the bullish 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 close above 2,080 (upper envelope line from the Trend Trader Index). This bearish price driven trend is also confirmed by the Modified MACD, which also flashed a quite strong bearish crossover signal last week, indicating that further down-testing is likely. Above all, we can see that the gauge from the Advance-/Decline 20 Days Momentum Indicator has not formed a positive divergence yet, which would be the first indication for a major trend reversal. Nevertheless, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish yet as both envelope lines of the Trend Trader Index were still holding up quite well. Anyhow, to evaluate if the current pullback is just part of a healthy washout or the beginning of a more significant (second) correction, short- to mid-term market breadth is 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 deteriorated significantly last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have shown major signs of exhaustion, indicating that the underlying tape momentum of the market is extremely bearish biased at the moment. 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 Highs minus New Lows Indicator, as we have seen a quite strong increase in the amount of new lows, whereas the amount of new yearly highs remains quite depressed! As a matter of fact, the High-/Low Index Daily also flashed a small bearish crossover signal week. Therefore, 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) dropped also below their 50 percent bullish threshold last week, and, therefore, further down-testing could be possible. Nonetheless, if we consider the magnitude of the recent decline, we think that the total amount of NYSE new lows should be much higher. The same is true if we focus on the absolute levels of the percentage of stockss which are trading above their short-term oriented moving averages (20/50). So in the end, most of the selling pressure was coming from large- and mega caps. Nevertheless, that does not change the fact that our entire breadth indicators turned bearish last week and, therefore, the recent decline cannot not be classified as a healthy breather.

The situation on a contrarian side slightly changed compared to last week. This is mainly due to the fact that the outright bearish readings within the All CBOE Options Call-/Put Ratio Oscillator, Global Futures Put-/Volume Ratio Oscillator and the WSC Index Oscillator Weekly diminished significantly last week. In such a situation, this is a quite encouraging signal as it indicates that the selling pressure is also likely to ebb off as well (at least from a pure contrarian point of view). Moreover, we can see that the market is quite oversold (Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily), plus WSC Capitulation Index is still signaling a risk-on environment for the time being. Above all, we can see that the big institutional investors are still betting on a year-end rally as the Smart Money Flow Index is still forming a huge bullish divergence to the Dow Jones.

Mid-Term Technical Condition

However, if we focus on our mid-term oriented indicators, it might be a bit too early to bet on that phenomenon. This is mainly due to the fact that the gauge of our reliable Global Future Trend Index dropped significantly below its bullish 60 percent threshold at the beginning of the week and is, therefore, definitely confirming the recent decline from the market! As already mentioned a couple of times, as long as the gauge of this reliable indicator remains below 60 percent (in combination with weak mid-term market breadth), the market remains highly at risk for further sharp-sell offs (or at least the upside potential of the market should be limited as well in such a situation). Only, from a pure price point of view the mid-term oriented up-trend of the market remains intact, as the gauge from the WSC Sector Momentum Indicator has not dropped below its bearish threshold yet. This can be also seen if we focus on our Sector Heat Map, as most sectors within the S&P 500 have still a higher momentum score than riskless money market. Nevertheless, the momentum score of money market almost doubled last week, which can be interpreted as another warning signal on the horizon!

Above all, mid-term oriented market breadth showed also major signs of exhaustion last week. Especially, the Modified McClellan Oscillator Weekly flashed almost a bearish crossover signal last week, indicating that the market internals are weakening. Such a broader non-confirmation can be also seen if we focus on the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly, as both indicators deteriorated significantly during the last couple of trading session. As a matter of fact, the Upside-/Downside Index Weekly turned slightly bearish, whereas the readings from the Advance-/Decline Index Weekly remain supportive but weak. This is telling us that a lot of purchasing power was pulled out of the market last week, which is another indication that the recent decline was not just a healthy breather. 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) as both indicators dropped deeper into bearish territory last week. So all in all, the mid-term technical condition of the market looks quite damaged at the moment.

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Above all, we can see that only 18 percent of all local market indexes around the world remain within a long-term oriented up-trend at the moment! This is telling us that the overall market environment remains highly selective in which broader diversified investors are usually underperforming. Anyhow, long-term market breadth remains quite bearish as the Modified McClellan Volume Oscillator Weekly, the High-/Low Index Weekly and the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (200) have not turned bullish so far. Nevertheless their readings have been already a bit weaker a couple of weeks ago.

Bottom Line

The bottom line: the recent pullback has clearly left its mark on our core-indicators. If we ignore the usual positive seasonal tendencies in Q4, the recent decline definitely looks corrective rather than healthy in its nature. Consequently, the risk of another fast paced sell-off remains high at the moment and, therefore, we are quite cautious for the time being. Despite the fact that we do not believe to see a pullback below the recent August low at 1,867, a move towards 1,985/1,950 and 1,913 cannot be ruled out if the S&P 500 closes below 2,000. As a matter of fact, we would advise our conservative members to place a stop loss around that limit. Stay tuned!