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June 19. 2016

Market Review

All three U.S. indexes finished the week in negative territory. The Dow Jones Industrial Average lost 1.1 percent for the week to 17,675.16. Its worst since the one ended May 13. The S&P 500 declined 1.2 percent to 2,071.22 during the week. The Nasdaq lost 0.6 percent to 4,800.34. Among the key S&P sectors, telecommunications was the best performer on the week, while health care was the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower near 19.3. On Thursday, the VIX hit 22.89, its highest since February 19.

Strategy Review

In our last week’s comment we highlighted the fact that we expected to see further sustainable gains into summer as the underling technical condition of the market remained quite solid. As a result, we said that on a short-term time frame, increased volatility could be expected as the market still remained in a healthy consolidation period and, therefore, a couple of break-out attempts would be definitely necessary before new record highs could be expected. In this context the recent decline was not a big surprise at all, if we consider those circumstances.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend structure of the market deteriorated significantly last week. The Modified MACD flashed a bearish crossover signal last week, plus the S&P 500 closed slightly below the bearish threshold from the Trend Trader Index. Nevertheless, both envelope lines of the Trend Trader Index are still rising, which indicates that the short-term uptrend of the market still remains intact from a structural point of view. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which has not turned bearish so far and has, therefore, formed a quite bullish divergence recently. As already mentioned a couple of times, during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is no specific trend within a broad based trading range. Therefore, our short- to mid-term market breadth indicators will give us further guidance if the current price driven short-term oriented trend-break will lead to stronger losses or if it will be just shallow in its nature.

Unfortunately, short-term oriented market breadth had also to take a hard hit during the last couple of trading sessions as most of our tape indicators have started to weaken. After flashing a bearish crossover signal on Tuesday, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bearish ground last week. This indicates that the underling market breadth momentum of the market has turned quite bearish recently. 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) as both indicators turned quite bearish (20) or just dropped slightly below their bullish threshold (50). This indicates the recent pullback was driven by a broad basis and not just by a few heavy weighted stocks in the S&P 500. Despite the fact that this can be seen as a quite concerning fact, we should not forget that there are still hardly any stocks around which have dropped to a new low recently. On the other hand, we can see that the total amount of all NYSE listed stocks which had reached a new yearly high kept trading at quite encouraging levels. Especially, if we consider these numbers with the latest market top in late December. As a matter of fact, the High-/Low Index Daily remains quite bullish from a pure signal point of view and, therefore, it might be a bit too early to bet on a stronger pullback on a very short-time frame. So all in all, it looks like that the recent consolidation period might continue for a while.

The situation on the contrarian side remains almost unchanged compared to last week. The Smart Money Flow Index continued to strengthen its outright bullish divergence to the Dow, indicating that big institutional investors have not switched to the bearish side yet. This can be also seen if we have a closer look at the WSC Capitulation Index as it is still indicating a risk-on environment for risky assets. Above all, we can see that our reliable Global Futures Bottom Indicator as well as the WallStreetCourier Index Oscillator Weekly flashed a bullish signal last week. On the other hand, we can see that the greed among the option market remains persistent (Global Futures Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator Weekly and the OEX Options Call-/Put Ratio Oscillator) and, therefore, we think the increased volatility might continue for a while.

Mid-Term Technical Condition

Another main reason, why we believe that the current consolidation period looks still quite healthy in its nature is due to the fact that our entire mid-term oriented indicators still remain quite supportive for the time being. This is mainly due to the fact that the reading from the Global Futures Trend Index remains quite bullish, although it slightly lost some momentum for the week. Right now the indicator keeps almost trading within the top part of its bullish consolidation area. As long as this is the case, any upcoming pullback (in combination with bullish mid-term market breadth) should only turn out as a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. Right now this is not the case at all and, therefore, it is a way too early to take the chips from the table. Moreover, this view is also widely confirmed by the strong readings from the WSC Sector Momentum Indicator, which is telling us that the majority of sectors within the S&P 500 remain in a strong mid-term oriented uptrend at the moment. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market remains at zero percent and, therefore, the current mid-term oriented up-trend of the S&P 500 still looks quite healthy for the time being.

More importantly, mid-term oriented market breadth is still confirming the current mid-term oriented uptrend of the market. The Modified McClellan Oscillator Weekly is holding up quite well, plus mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts. This indicates that the underlying demand remains quite supportive and, therefore, it is a bit too early to get concerned about the current technical condition of the market. This can be also seen if we focus on most of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they have not confirmed the latest pullback we have seen last week. Only the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) have come down recently, although they remain quite bullish from a pure signal point of view. Right now it is a bit too early to get concerned about this fact, as their small deterioration is just the impact of the recent consolidation period. Consequently, as long as the readings from most of our mid-term oriented tape indicators remain quite strong, it might be a bit too early to issue a strategic sell signal.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is still indicating a technical bull market and our reliable WSC Global Momentum Indicator is trading at 82 percent. This indicates that the vast of global market indices (all denominated in USD) are still in a long-term uptrend. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky assets have started to get back on track. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average have not turned bearish so far, whereas the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly are still trading at quite encouraging levels!

Bottom Line

The bottom line: from a pure contrarian point of view, the increased volatility from last week might continue for a while and, therefore, swings in both directions look quite likely. On a very short-time frame further down-testing towards 2,050/2,040 cannot be ruled out at the moment, whereas on the upside the market looks also quite capped at 2,100 to 2,110. Nevertheless, with quite supportive readings all across the board, we strongly believe that the current consolidation period looks quite healthy in its nature. Therefore, it is just a question of time until further gains can be expected. Consequently, our bullish outlook remains unchanged and, therefore, we would advise our conservative members to hold/increase their equity position, while aggressive short-term traders should focus on buying the dips. Stay tuned!