September 21. 2014

Market Review

U.S. stocks rose for the week, sending benchmark indexes to records. The Dow Jones Industrial Average added 292.23 points during the week, or 1.7 percent, to 17,279.74, ending the week at an all-time high. The blue-chip index notched its 18th record close this year. The Standard & Poor?s 500 Index rose 1.3 percent from the prior Friday’s close to a record 2,010.4. Both gauges have risen in six of the last seven weeks. The Nasdaq added 0.3 percent during the week to 4,579.79. All 10 of the S&P 500?s main groups advanced in the week. The Chicago Board Options Exchange Volatility Index (VIX), a gauge of investor concern derived from S&P 500 options prices decreased to 12.11.

Short-Term Technical Condition

Last week, we highlighted the fact that we remained outright cautious as we had received a growing number of evidence within our short- to mid-term technical indicators that the risk of a fast paced correction was outright high. Moreover, we mentioned that we still remained cautiously bullish as large caps were pulling the major indexes higher and further rallying towards 2,010 cannot be ruled out. Therefore, we advised our members to wait for a significant negative down-move (move towards1,980/1,970) first, before taking any actions. After the S&P 500 had overshot towards our projected price level of 2,010, the big question now is, if we see further strengths or just the last stages of a top-building process?

Not surprisingly, the short-term uptrend of the market slightly strengthened last week. This is mainly due to the fact that the Trend Trader Index flashed a small bullish signal on Thursday, after being more or less neutral/bearish biased during the whole week. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 1,991 (bearish threshold from the Trend Trader Index). Moreover, the Modified MACD flashed also a very weak bullish crossover signal on Friday, indicating that the overall trend structure of the market turned slightly positive. Nevertheless, both signals are a way too weak at the moment to take them too seriously, since any stronger down-day could easily produce a sell signal again. This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator which turned bearish last week, whereas the market was holding up quite well. Such a bearish divergence can never be sustainable over the long run. So weather the indicator will get back on track or the market will face stronger losses soon!

As already mentioned last week, in such a situation market breadth is key area of focus as during a consolidation period it is not quite unusual to see a lot of changing signals within short-term oriented trend indicators. Therefore, our tape indicators will give us guidance if the any upcoming pullback will be more significant or just shallow it its nature. Despite the fact that the market finished the week with solid gains, the readings within our short-term breadth indicators have been developing moderately so far. As a matter of fact, all of them are showing a huge bearish divergence if we consider the current levels from the S&P 500! Especially, the Modified McClellan Oscillator Daily picked up even more bearish momentum and remains in a free fall with a widening gap. This is signaling that the overall breadth momentum of the market remains outright weak at the moment. Above all, the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) are still trading below their 50 percent bullish threshold, indicating that only heavy weighted stocks are pushing major averages higher, whereas the broad market is still lagging behind! Another interesting fact is that short-term up-volume did not show any signs of strength last week, although the market added more than 1 percent. Moreover, there have been about 102 stocks on NYSE which dropped to a new yearly low. The last time we saw such readings was during the late July pullback, where the S&P 500 dropped almost 4 percent. The main reason, why this had no impact on the market at all was the fact that the amount of new highs were holding against quite well. Therefore, the High-/Low Index Daily did not flash a bearish crossover signal although its bearish divergence to the market cannot be ignored at the moment.

From a pure contrarian point of view, the situation remains almost unchanged compared to last week. The market remains a bit overbought (Arms (Trin) Daily), whereas the WSC Capitulation Index as well as the option market are/remain supportive on a very short-term time frame. On the other hand, we can see that the Smart Money Flow Index is still showing a huge bearish divergence to the Dow, which can be seen as a red flag on the horizon. Moreover, on Friday the market triggered a Hindenburg Omen (Charts of Interest), which is a quite rare bearish technical signal. Basically, when it occurs, the market should be at risk for a correction within the next 30 days. According to our research, this pattern occurred 56 times since 1966. Since then in 21.4 percent of all cases, the market faced a maximum loss, exceeding the 5 percent range.

So all in all, the current technical picture of the market looks quite damaged at the moment, although we saw some small improvements within our short-term oriented trend indicators. This is mainly due to the fact that short-term market breadth looks outright bearish at the moment and is, therefore, not confirming the readings from our short-term oriented trend indicators, also not the current levels from the S&P 500. Therefore, the risk of a pullback remains quite high at the moment, although we would like to see some strong negative price action first. This is mainly due to the fact that large caps are pushing major indexes higher and, therefore, overshooting is still possible.

Mid-Term Technical Condition

Another main reason why we remain outright cautious at the moment 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 deeper into its bearish trading range area last week and is, therefore, definitely not confirming the current levels from the S&P 500! In such a scenario, the risk of a fast paced correction remains outright high, especially in combination with weak mid-term market breadth. On the other hand, we would be quite surprised to see sustainable gains ahead, as long as the gauge of this reliable indicator remains depressed. Only, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is still holding up quite well. This indicates that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we focus on our Sector Heat Map, as the relative strengths score of riskless money market remains at zero percent.

More importantly, mid-term market breadth is far away from confirming any mid-term oriented uptrend at the moment. This is mainly caused by the fact that the Modified McClellan Oscillator Weekly dropped to a new low last week, indicating that the overall breadth momentum remains outright weak at the moment. This can be also seen if we focus on the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150), which are still trading below their bullish threshold. This is another serious bearish divergence, if we consider the current level from the S&P 500. Moreover, the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly have not really shown any signs of major strength yet, although the market finished with solid gains last week. With such weak readings within both indicators, we would be surprised to see sustainable gains ahead. And on the other hand, with such weak readings we think nasty waterfall declines are much more likely than those shallow pullbacks we saw during the last year, if the price trend reverses!

Long-Term Technical Condition

The picture for the long-term remains nearly unchanged compared to last week and, therefore, our long-term bullish outlook has not been changed so far. The our Global Futures Long Term Trend Index is still indicating a technical bull market while the readings of our reliable WSC Global Momentum Indicator indicates that slightly less than 70 percent of all global markets have not broken below their long-term uptrend yet. Nevertheless, we can see that the relative strength from most risky markets remain below their bullish 50 percent threshold, which is another indication for our mid-term scenario. This can be also seen if we focus on long-term market breadth. The Modified McClellan Volume Oscillator Weekly continued to decline for the week, indicating that the overall long-term breadth momentum of the market remains negative and is, therefore, not confirming the current levels from the S&P 500. This tremendous bearish divergence can be also seen if we focus on the percentage of stockss which are trading above their 200 day simple moving average, although the indicator itself still remains slightly bullish. Only the High-/Low Index Weekly is still quite bullish from a pure signal point of view, although the amount of long-term new lows is steadily increasing. As already mentioned last week, 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 large caps are pushing major indexes higher, further overshooting cannot be ruled out. Nevertheless, we received a lot of evidences that the current risk of a fast paced correction remains outright high at the moment. For that reason, we are extremely cautious for the short-term to mid-term, but we would like to see some negative price action first. As we do not fight an existing trend, we would advise our conservative members to place/keep/adjust their stop loss limit around 1,980. Aggressive traders should sell into strength, if the S&P 500 drops below 1,990 and should increase their exposure if we see further down testing below 1,980. Stay tuned!