July 05. 2015

Market Review

In line with our recent call, U.S. stocks ended a volatile holiday-shortened week with losses. The Dow Jones Industrial Average fell 1.2 percent over the week to 17,730.11. The S&P 500 recorded a weekly loss of 1.2 percent as well and closed at 2,076.27. The Nasdaq booked a 1.4 percent loss over the week and finished at 5,009.21. Among the key S&P sectors, utilities was the only sector to post gains for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded higher near 17.

Short-Term Technical Condition

Over the past couple of weeks, we highlighted the fact that we remained outright cautious as we had received a growing number of evidences that the market was in the middle of a corrective top-building process. Moreover we mentioned that as long as the market kept trading above 2,065 (latest pivotal support), it was too early to sell (although we remained outright cautious)! On Monday, we received the final confirmation that a quite important summer top is in place, as the S&P 500 clearly dropped below 2,065 on that day. As a matter of fact, our strategic outlook clearly turned negative as the current risk-/reward ratio remains too depressed at the moment. From a pure cyclical point of view (Presidential Cycle), we expect to see further losses into mid-July before another but final rally attempt into mid-September should bring some relief and before another stronger down-leg into December looks quite likely (our cycles should only be seen as a general guideline instead of a precise trading plan and, therefore, our indicator framework is key area of focus).

Anyhow, if we focus on our short-term oriented indicators, we can see that the S&P 500 closed 29 points below the bullish threshold from the Trend Trader Index. So from a pure price point of view, the short-term oriented down-trend of the market remains intact as long as the S&P 500 does not close above 2,105. On top of that, we can see that both envelope lines of that reliable indicator continued to drift lower as well. This indicates lower lows and lower highs within the past 20 days, which is another quite bearish signal from a pure structural point of view. The same is true if we focus on the Modified MACD, as its readings clearly turned bearish last week and have, therefore, not shown any signs of positive divergences so far. In addition we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator dropped to a new low last week and has, therefore, clearly confirmed the sell-off from last week!

Not surprisingly, short-term oriented market breadth remains outright weak and, therefore, it looks like that any upcoming oversold bounce should not lead to a major trend reversal at this point in time. The percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped clearly below their 50 percent bullish threshold last week. This indicates that the underlying trend structure of the market remains outright weak at the moment. Moreover, both gauges (20/50) dropped to a new multi-month low and have, therefore, strongly confirmed the pull-back on Thursday! Another concerning fact is that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily remain in an outright bearish free fall, which is telling us that the underlying short-term oriented tape momentum of the market is collapsing! This coincides with the fact that the number of stockss hitting a fresh yearly low soared to 344 on Monday, reaching the highest level since December 2014! This number is a quite concerning, if we compare it with the latest correction low in mid-December 2014. There we saw almost a similar amount of new lows, although the current level from the S&P 500 is almost 100 points higher! Therefore, it was not a big surprise at all that our High-/Low Index Daily strengthened its bearish signal last week, indicating more troubles ahead!

From a pure contrarian point of view, we received some evidences that a minor low might be in place. This is mainly due to the fact that we saw a 9-to-1 down-day on Monday, in combination with soaring put/call ratios (Daily Put/Call Ratio All CBOE Options and the Global Futures Put/Volume Ratio), a spiking VIX, plus daily volume also exceeded its normal levels last week. On top of that, we can see that the WallStreetCourier Index and the WallStreetCourier Index Oscillator turned from supportive to bullish levels, whereas the Global Futures Bottom Indicator flashed a buy signal (but not bottom-signal yet) last week. After such an event, the market tends to rebound for a couple of days (5-10 trading sessions) before further losses can be expected. This view would be in line with our Smart Money Flow Index, which is far away from confirming the current levels from the Dow, indicating further troubles ahead on a mid-term time horizon. Above all, we can see that the WSC Capitulation Index has not dropped half of its rise yet and is, therefore, still indicating an extremely risk-off market environment.

Mid-Term Technical Condition

The mid-term oriented technical condition of the market continued to weaken and, therefore, we remain outright cautious at the moment. One major concern is definitely the fact that the gauge from the Global Futures Trend Index still remains within its bearish biased consolidation period area. As already mentioned last week, in such a case the chances of further fast paced pullbacks remain outright high (especially, in combination with outright weak short- to mid-term oriented market breadth indicators). Therefore, any upcoming bounce should be limited in price and time. Only, from a pure price point of view the mid-term oriented up-trend of the market remains intact. This is not a big surprise at all, as we have not seen any stronger pullback above 10 percent yet. As matter of fact, the WSC Sector Momentum Indicator still remains supportive for the time being. This can be also seen if we have a closer look at our Sector Heat Map, as the majority of sectors still have a higher relative strength score than riskless money market. Nevertheless, the momentum score of riskless money market rallied to 31 percent last week, which is another indication for our major summer top scenario.

More importantly, the current bearish biased mid-term oriented trend is also strongly confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to show an outright widening bearish gap, whereas the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) turned obviously bearish last week. This tells us that the upside participation is outright weak at the moment and, therefore, we would be surprised to see a major trend-reversal ahead. On top of that, we can see that the bearish readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly continued to strengthen last week. Therefore, the market remains extremely vulnerable at the moment as the underlying demand is diminishing. This can be also observed if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), which are far away from confirming the current levels from the S&P 500!

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. Despite the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, we can see that most local market indexes around the world are in the middle of a correction at the moment. This is mainly due to the fact that the WSC Global Momentum Indicator continued to drop 300 basis points to 35 percent last week. This indicates that less than 40 percent of all global markets which are covered by our Global ETF Momentum Heat Map remain within a long-term oriented up-trend for the time being. As global equity markets tend to be quite correlated to each other, this can be seen as another red flag on the horizon. Therefore, it is not a big surprise at all that the relative strength of most risky markets continued to decrease versus riskless money market. More importantly, long-term oriented market breadth clearly turned negative last week, which is another proof of evidence for our summer top scenario! This is mainly due to the fact that the High-/Low Index Weekly clearly turned bearish last week, whereas the Modified McClellan Volume Oscillator Weekly has not shown any signs of bullish divergences yet. Only the percentage of stocks which are trading above their long-term simple moving averages just managed to close shy above their bearish threshold last week.

Bottom Line

The bottom line: after the market had dropped below 2,067 last week, we received the final confirmation that a major summer top is in place! As a matter of fact, we would advise our conservative members to stay at the sideline as the current risk-reward ratio is too low at the moment! As some of our contrarian indicators flashed a buy signal last week, an oversold bounce might be possible. Nevertheless, we think that any upcoming bounce should be limited in price and time as our entire short-term trend- as well as breadth indicators remain bearish! Stay tuned!