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January 26. 2014

Market Review

U.S. stocks finished the holiday-shortened week with deep losses. The Dow Jones Industrial Average slumped 3.5 percent over the week to 15,879.11, its worst weekly percentage decline since 2011. The S&P 500 dropped 2.6 percent for the week to finish at 1,790.29. Its worst weekly percentage loss since June 2012. The benchmark index is now already 3.1 percent below its record high reached January 15. After two weeks of gains, the Nasdaq lost 1.7 percent for the week to end at 4,128.17. The technology-laden index is now down 1.2 percent since the start of the year. Among the key S&P sectors, utilities were the best weekly performer, while materials dragged. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, jumped nearly 32 percent to 18.14.

Short-Term Technical Condition

The consolidation period, which started almost seven four weeks ago, has pushed the S&P 500 down nearly 3.5 percent from its former multi-year high in late-December. Last week, we highlighted the fact that as long as the short-term uptrend of the market remains intact and as long as our short- to mid-term oriented breadth indicators remain strong, we do not fight the tape. Apparently, having a look at our indicators, the technical condition of the market has changed quite fairly, since we have seen a significant deterioration within our short- to mid-term indicator framework. This indicates that the market is about to follow our cyclical roadmap/decennial cycle for 2014 (Charts of Interest).

The short-term down-trend of the market gained more bearish ground last week, as the S&P 500 closed 39 points below the bearish threshold from the Trend Trader Index. Moreover, we can see that the gauge of the Advance-/Decline 20 Day Momentum Indicator decreased significantly and is about to drop into bearish territory, if we do not see a strong weeks of gains ahead. Plus the Modified MACD picked up bearish momentum and remains in a free fall with a widening gap, indicating that more down-testing is likely!

More importantly, this short-term bearish trend is now being widely confirmed by short-term market breadth, since the short-term oriented tape had to take a hard hit during the last couple of trading sessions, wiping out all those bullish divergences we saw a week ago. If we have a closer look at the short-term tape, we can see that the number of stockss hitting a fresh yearly high decreased significantly, while the number of stockss dropping to a fresh yearly low has started to increase, telling us that the current consolidation period is not only driven by profit taking anymore as the market internals have started to weaken. Another important fact was that we have seen the first 9-to-1 down day for months now, indicating that big institutional investors have started to reduce their equity exposure quite significantly. Furthermore, we can see that the Modified McClellan Oscillator Daily is about to flash a bearish crossover signal soon, indicating a strongly weakening tape structure. This can be also seen if we have a look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both gauges are indicating that the majority of all NYSE-listed stocks have switched from a short-term oriented bullish trend into a bearish one.

If we focus on our contrarian indicators, we still can see that the WSC Capitulation Index has not dropped by half of its rise yet, indicating that more troubles are ahead. Furthermore, this picture is in line with our Smart Money Flow Index, which has not shown any signs of a bullish divergence so far. Despite the fact that the recent decline has dampened the optimism among the crowd, we can see that the option market still remains too bullish in our point of view, which can be seen as another red flag on the horizon. From a trading point of view and according to our cyclical roadmap (Charts of Interest), we think the S&P 500 could drop towards 1,772 (and in extreme circumstances towards 1,730) into mid-February, before we could see another strong rally attempt into Q2.

Mid-Term Technical Condition

Right now, the mid-term uptrend of the market remains intact from a pure price point of view, since the gauge of our reliable Global Futures Trend Index is still trading above its bearish trading range bracket. Plus the WSC Sector Momentum Indicator is telling us that most of all underlying sectors within the S&P 500 are still trading in a strong mid-term oriented uptrend.

Nevertheless, we can see that the current mid-term oriented up-trend is running out of fuels, since we see a lot of non-confirmation in our mid-term oriented breadth indicators! Especially mid-term oriented up-volume dropped significantly last week and is, therefore, just trading slightly above mid-term oriented down-volume, indicating that a lot of purchasing power has been pulled out of the market. The same is true if we have a look at the Advance-/Decline Index Weekly, which shows that the amount of advancing issues on Nyse have also decreased fairly. Plus the Modified McClellan Oscillator Weekly is about to roll over into the bearish territory, if we do not see a couple of weeks with strong gains ahead! Another concerning fact is that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) dropped 13 percent and 9 percent for the week. This indicates that lot of stocks experienced a quite significant decline last week, although both indicators still remain quite bullish from a pure signal point of view. All in all, we have a deteriorating tape structure all across the board and, therefore, we strongly believe that after a 5-8 percent correction into mid-February another strong rally attempt by the market into Q2 is likely.

Long-Term Technical Condition

This coincides with the fact that most of our long-term oriented trend indicators still remain quite bullish for the time being. The Global Futures Long Term Trend Index is indicating that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Nevertheless, we can see that apart from the US and Europe, most global markets are underperforming US treasuries and, therefore, the gauge from the WSC Global Momentum Indicator dropped into bearish territory. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover, we can see that the number of stockss which are hitting a fresh 52 weeks high are trading well below their bearish counterparts, whereas the Modified McClellan Volume Oscillator Weekly still remains bullish from a pure signal point of view. As already mentioned last week, we would not be surprised to see deterioration within our long-term oriented indicators over the next couple of weeks, as we are still expecting to see a cyclical bear market this year.

Bottom Line

The bottom line: On a very short-time frame the market is slightly oversold (Upside-/Downside Volume Index Daily and the Advance-/Decline Ratio Daily) and, therefore, a short-lived volatile bounce might be possible. However, since the market remains short-biased, we would advise our aggressive members to sell into any upcoming strength, as long as we do not see any significant drop in our WSC Capitulation Index or a bearish trend break in our Trend Trader Index. Moreover, we think it is time for conservative members to cut their equity exposure significantly as we are expecting further losses into mid-February. Stay tuned!