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July 20. 2014

Market Review

The U.S. stock market finished a volatile week with modest gains. The Dow Jones Industrial Average rose 0.9 percent during the week to 17,100.18. The S&P 500 increased 0.5 percent from last Friday’s finish to 1,881.14. The Nasdaq scored a weekly gain of 0.4 percent to close at 4,432.15.
Most key S&P sectors finished higher, led by technology and financials, while health care ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, finished nearly unchanged at 12.06.

Short-Term Technical Condition

Despite the fact that the market finished the week on a higher note, the improvements in the readings of our short-term oriented trend indicators have been developing moderately. This is mainly due to the fact that the short-term uptrend of the market continued to deteriorate last week. From a pure price point of view, the short-term uptrend of the market remains intact as the S&P 500 managed to close slightly above the bullish envelope line of the Trend Trader Index. Worth mentioning is the fact that the S&P 500 touched the bearish line of that indicator on Thursday, before bouncing back into Friday’s closing bell. This was the first time since May, where the Trend Trader Index was about to flash a negative short-term trend scenario. Furthermore it looks like that both envelope lines of the Trend Trader Index are about to form a bearish rounding top. If that is the case than the current consolidation period could turn out to be part of a larger top building process rather than a healthy breather. This can be also seen, if we have a closer look at the Modified MACD, which picked up even more bearish momentum last week, indicating further consolidation/down-testing is quite likely! In addition, the gauge of the Advance-/Decline 20 Day Momentum Indicator almost broke below its bullish threshold last week and is, therefore, not confirming the current level from the S&P 500.

As already mentioning last week, it is not unusual that our entire short-term trend indicators are trading in bearish territory, if the market is taking a healthy breather. However, a consolidation period is considered to be healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening. Unfortunately, short-term market breadth did not show any signs of improvements last week, signaling that the current consolidation period could turn out to be more corrective by its nature. Especially, the Modified McClellan Oscillator Daily remains quite bearish, indicating that the overall tape momentum is weakening. Above all, both trend lines of this reliable indicator have not shown any signs of strength yet and are, therefore, still showing a widening bearish gap. More importantly, the percentages of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) remain quite bearish (20), or are about to break below their bullish threshold (50), although the S&P 500 is trading near record levels. This indicates that only heavy weighted stocks are driving major indexes higher, whereas the broad market is already faltering! This can be also seen if we have a closer look at the High-/Low Index Daily. Despite the fact that this indicator still remains bullish from a pure signal point of view, we can see that the amount of new highs has decreased significantly (especially in comparison to July where we saw the last break-out attempt by the S&P 500), indicating signs of a mature rally.

From a pure contrarian point of view, the situation has slightly changed compared to last week. Especially the fact that dumb money (ISEE Call-/Put Ratio and the Global Futures Dumb Money Indicator) is chasing the market aggressively higher can be seen as a strong warning sign for contrarians. The current levels from the VIX are indicating complacent among investors, plus the WSC Capitulation Index has shown some strong momentum on low levels and, therefore, further consolidation/down-testing might be possible. Only the Daily Put/Call Ratio All CBOE Options Indicator is still trading in quite bullish territory, which is another indication for a continuation of the back and filling scenario at the moment. All in all, the current readings from our short-term indicator frame-work is telling us that the market looks vulnerable for further down-testing or it should be at least capped on the upside (2,000). Anyhow, as long as not our entire short-term trend- as well as -breadth remain supportive, it looks like the market will stick within its trading range between 1,885/1,850. Nevertheless, it would make sense to place a stop-loss limit around 1,845/1,835 as the current trend condition of the market looks extremely weak-kneed at the moment!

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading far above its bearish 60 percent threshold. To be more precise, the gauge is trading within the upper range of its bullish consolidation area and, therefore, it is too early to issue a strategic sell signal at the moment. Nevertheless, as long as the Global Futures Trend Index keeps trading within its bullish consolidation area, the upside potential of the market should remain capped, plus further sideways trading/consolidation is quite possible. We would get quite cautious if the gauge would drop below 60 percent (in combination with weakening market breadth), as it would be an indication that a stronger correction lies ahead. Anyhow, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is far away from being bearish. This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas health care and energy are/remain the strongest sectors for the time being.

More importantly, mid-term oriented market breadth remains constructive for the time being and is, therefore, confirming the current mid-term oriented uptrend of the market. Nevertheless, we can see a lot of bearish divergences in their readings. Despite the fact that the Modified McClellan Oscillator Weekly remains bullish, it looks like that the indicator is about to flash a bearish crossover signal within the next couple of weeks, indicating a deteriorating tape momentum. Basically, the same is true if we examine the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both indicators remain bullish from a pure signal point of view, but their readings continued to deteriorate for the week. Therefore, they are far away from supporting the current level from the S&P 500. This is another indication, that right now only large cap stocks are pulling major indexes higher! These are the first evidences that the market could run into a top building process within the next couple of weeks. This would be in line with our cyclical roadmap, where we are expecting to see a cyclical bear market in late summer. Right now, it is still a bit too early to call for an upcoming correction as most of our mid-term oriented breadth indicators still remain bullish. Moreover it was good to see that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly gained some bullish ground on high levels. As long as we do not see a further deteriorating tape structure it is too early to call for an important market top. Moreover, there is no top without a (distributing) top-building process/formation. In general, a classical top building process can take a couple of weeks whereas the first stronger pullback (3-6 percent) is just part of a larger distribution top. Afterwards the market usually strongly bounces back (above or slightly below) to its former high, although most of our short- to mid-term oriented trend- as well as breadth indicators are already faltering/turn bearish! If this is the case we have a final confirmation for an intermediate market top.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in-force, and, therefore, our long-term bullish outlook has not been changed so far. If we have a look at our long-term oriented WSC Global Momentum Indicator, we can see that the current bull market remains globally in force, as roughly 97 percent of all local market indices (all denominated in USD) remain in a long-term oriented uptrend. Furthermore, the Global Futures Long Term Trend Index is still indicating a technical bull market and, therefore, our long-term bullish outlook has not changed so far. The same is true, if we have a look at our Global Relative Strengths Indicator. The relative strength of U.S. Treasuries is trading nearly below all risky markets, which is a strong sign when the market is in a long-term risk-on mode. Nevertheless, we can see that all equity markets are losing momentum, which is another indication for our cyclical roadmap. Those early warning signals for a cyclical bear market can be also seen if we focus on our long-term breadth indicators. Despite the fact that long-term oriented market breadth still looks quite constructive from a pure signal point of view, we can already see some major divergences in their readings. The percentage of stockss which are trading above their 200 day simple moving average remain above their bearish threshold, but the readings are not confirming the current level from the S&P 500! Moreover, we can see that the Modified McClellan Volume Oscillator Weekly is losing some steam and a bearish crossover signal within the next couple of weeks looks quite likely. Anyhow, right now we are monitoring our tape indicators quite closely but we would like to see further bearish crossover signals to issue a strategic sell signal. Furthermore, the High-/Low Index Weekly still remains quite bullish, indicating still a positive market breadth environment for the time being.

Bottom Line

The bottom line: the short-term situation remains unchanged compared to last week. Despite the fact that the market looks vulnerable for further down-testing/consolidation, our bullish outlook has not been changed so. This is mainly due to the fact that our indicator framework still looks constructive for the time being and, therefore, an overshoot (on low market breadth) from the S&P 500 towards 2,000 still looks possible. Nevertheless, we have received further confirmation that a market could run into an important top within the next couple of weeks, which would be in line with our cyclical roadmap. Therefore, we will monitor our indicators quite closely over the next couple of weeks and we will issue a strategic sell signal immediately, if our mid-term indicator framework continues to deteriorate. Stay tuned!