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December 27. 2015

Market Review

U.S. stocks closed slightly lower on Thursday, but a rally during the previous three sessions left the main indexes with solid gains for the holiday-shortened week. The Dow Jones Industrial Average gained 2.5 percent over the week to end at 17,552.17. The S&P 500 rose 2.8 percent from last Friday’s close to 2,060.99. The Nasdaq advanced 2.6 percent over the week to 5,048.49. All key S&P sectors ended in positive territory for the week, led by energy. The CBOE Volatility Index, a measure of investor uncertainty, fell to 15.5.

Short-Term Technical Condition

Despite the fact that the market finished the week with solid gains, the readings within our short-term oriented trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market turned quite neutral, as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Apart from that fact, we have not really seen any positive developments within our remaining short-term oriented trend indicators so far. The negative gauge from the Advance-/Decline 20 Day Momentum Indicator has not confirmed the latest bounce at all, whereas the Modified MACD still remains quite bearish. On top of that we can see that both envelope lines of the Trend Trader Index are still decreasing on a very fast pace, which is another technical indication that the underlying bearish trend of the market remains well inforce.

Despite the fact that the overall short-term oriented trend remains quite bearish, it is likely to see further back and filling into the last couple of days of the year. This is mainly due to the fact that the Modified McClellan Oscillator Daily flashed a stronger bullish crossover signal last week, plus the percentage of stockss which are trading above their short-term oriented moving averages (20/50) managed to close slightly above their 50 percent bullish threshold (20) or have recovered significantly last week (50). Although this indicates some form of positive tape momentum, overall short-term market breadth still looks quite damaged/weak at the moment. Especially, if we focus on the NYSE New HighsNew Lows Indicator we can see that the recent bounce was mainly driven by short-covering so far. This is due to the fact that we only saw a small reduction in the number of stockss which is hitting a fresh yearly low, instead of a substantial increase in the total amount of new highs. As a matter of fact, the High-/Low-Index Daily still remains quite bearish and is, therefore, definitely not confirming the current levels from the S&P 500. This non-confirmation can be also seen if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50), as their gauges should be much higher if we consider the current levels from the S&P 500. This indicates that the broad market has not participated so far and, therefore, only heavy weighted stocks are pulling most indices higher. Thus, it was not a big surprise at all that the Modified McClellan Volume Oscillator Daily has not flashed a bullish crossover signal yet, as the overall tape momentum remains weak (in this large-cap driven market environment). Another major concern is the point that overall NYSE volume tends to slow down during the year end and, therefore, the overall price/tape information of the market is not as significant as within normal trading days. Consequently, the 9-to-1 up-day (refers to the volume of all NYSE-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose or fell on that day) from last week can be more or less ignored.

The situation on the contrarian side is quite mixed at the moment. The WSC Capitulation Index is still indicating a risk-off market environment, whereas the Program Trading Buy/Sell Spread Indicator and the ISE Equity Options Call/Put Ratio flashed further warning signals last week. Not surprisingly, the market is additionally quite overbought (Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily) and, therefore, the pace is likely to slow down in the next couple of trading sessions. On the other hand we can see that market sentiment as well as the WallStreetCourier Index Oscillator are getting increasingly supportive, whereas the Smart Money Flow Index has not formed a major bearish divergence yet. So from a pure contrarian point of view, further range bound trading looks quite possible (at least on a very short-time frame).

Mid-Term Technical Condition

Nevertheless, on a mid-term time horizon we have not seen any signs of major improvements/bullish divergences yet and, therefore, we remain outright cautious at the moment. This becomes quite obvious if we focus on the Global Futures Trend Index, which kept trading at outright bearish levels and is, therefore, definitely not confirming the latest recovery from the S&P 500. As already mentioned in our previous market comments, as long as we do not see any stronger upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming bounce should be limited in price and time. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains far below its outright bearish 60 percent threshold. As a matter of fact, it still can be possible to see at least another strong down-day which pushes the market back to the lower end of its current trading range. Only, 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 turned bearish so far (although it continued to deteriorate for the week). 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 overall momentum score of money market remains quite high which can be seen as another piece of evidence that the technical market condition looks quite vulnerable at the moment.

More importantly, the current bearish mid-term oriented trend is still strongly confirmed by mid-term oriented market breadth. This is mainly due to the fact that our entire mid-term oriented tape indicators remain outright bearish and have, therefore, not shown any signs of bullish divergences yet. Especially, the Modified McClellan Oscillator Weekly kept trading at quite low levels, signaling that the overall mid-term oriented tape momentum remains outright weak at the moment. 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). Both gauges remain quite bearish, although the market gained almost 3 percent for the week. Additionally, we can see that their absolute readings are far away from confirming the current level from the S&P 500. This is telling us that the recent recovery was mainly driven by a handful of heavy-weighted stocks, whereas the broad market still looks quite damaged at the moment. This broad based non-confirmation can also be seen within our entire advance-decline indicators (Advance-/Decline Line Daily, Upside-/Downside Volume Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line). Such large-cap driven recoveries are hardly sustainable in their nature. Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals slightly strengthened for the week. As a matter of fact both indicators are, therefore, trading at outright bearish levels. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, we think the current risk-/reward ratio is too low for conservative members to get back into the market.

Long-Term Technical Condition

The long-term condition of the market remains extremely weak-kneed as the Global Futures Long Term Trend Index remains outright bearish at the moment. This is telling us that the overall market environment for U.S. equities remains challenging. This can be also seen if we focus on the WSC Global Momentum Indicator as only 8 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. In a global context, we, therefore, received further confirmation that global equity markets remain at risk for further disappointments. Therefore, it is not a big surprise that the relative strength of all risky markets kept trading far below the one from U.S. Treasuries. Above all, we can see that long-term oriented market breadth has also not shown any signs of bullish divergences yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly still remains bearish, whereas the percentage of stockss which are trading above their long-term simple moving averages and the High-/Low Index Weekly are far away from being supportive.

Bottom Line

The overall outlook remains unchanged compared to last week. The market remains in the middle of a corrective consolidation process. Therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. Consequently, it is just a matter of time until we expect to see further sharp losses. From a pure trading point of view, 2,000/1,980 represents an important key support level. A break below that numbers would indicate that further down-testing towards 1,948 and 1,920 can be expected. On the other hand, we think the market looks quite capped on the upside as any upcoming bounce towards the recent May top should be limited in price and time. As a matter of fact, any upcoming bounce without corresponding improvements within our core-indicator dashboard should be limited in price and time. Stay tuned!