September 28. 2014

Market Review

U.S. stocks finished the week with strong losses. The Dow Jones Industrial Average lost 1 percent over the week to end at 17,113.19. The S&P 500 slumped 1.4 percent to 1,982.85 for the five days. The Nasdaq dropped 1.5 percent for the week to 4,512.19. All key S&P sectors finished in the red for the week, dragged by industrials. The Chicago Board Options Exchange Volatility Index, a measure of investor uncertainty, ended at 14.85, leaving it 23 percent higher on the week.

Short-Term Technical Condition

This is mainly due to the fact that he short-term oriented trend of the market turned definitely bearish last week, as the S&P 500 closed 16 points below the bullish threshold from the Trend Trader Index. Moreover, we can see that both envelope lines of this reliable indicator have started to drift lower, indicating that the resistance/support levels for the S&P 500 are decreasing as well. This can be seen as a quite bearish biased technical signal as lower highs and lower lows are a typical pattern for a bearish biased trend structure. Furthermore, the gauge from the Advance-/Decline 20 Day Momentum Indicator dropped even deeper into bearish territory and is, therefore, strongly confirming the recent sell-off we saw last week. In addition, our Modified MACD flashed a bearish crossover signal on Monday and even picked up more negative momentum during the week, signaling an outright weak trend condition at the moment. Especially, if we consider the fact that a lot of gains would be necessary to bring that indicator back on track!

More importantly, the current short-term oriented bearish trend is strongly confirmed by short-term market breadth! As a matter of fact, we think that the current pullback is definitely part of a larger distribution phase (start of a larger pullback) instead of a healthy breather. This is mainly due to the fact that our entire short-term breadth indicators gained even more bearish ground last week, although we saw a stronger rebound by the S&P 500 on Friday. The percentage of stockss which are trading above their short-term oriented moving averages (20/50) are telling us that less than 21/31 percent of all NYSE listed stocks remain in a short-term oriented uptrend. The last time when we saw such weak numbers was in early August, where the S&P 500 was trading 71 points below its current level. Another concerning fact is that both trend lines from the Modified McClellan Oscillator Daily reached their lowest levels since months, indicating that the underlying breadth momentum is outright bearish at the moment. With such weak readings, we would be quite surprised to see sustainable gains ahead! In addition, the number of stockss hitting a fresh 52 week low soared, causing that the High-/Low Index Daily was rolling over into clearly bearish territory last week! Although the market finished the week with hefty losses, the bearish divergences between the market and our entire short-term oriented breadth indicators have not been sorted out so far. This is another important indication that the market is still highly vulnerable for stronger losses. As already mentioned last week, the main reason why we have not seen a stronger correction so far, is the fact that large caps are still outperforming small caps (Charts of Interest). Therefore, major capital weighted indexes are holding up quite well, although the broad market is already strongly lagging behind. Such a situation can never be sustainable in the long run and, therefore, we remain outright cautious at the moment!

From a pure contrarian point of view, we received some evidences that a minor low is in place. This is mainly due to the fact that the market flashed a 9-to-1 down-day on Thursday, indicating a selling climax. After such an event, the market tends to rebound for a couple of days before further losses can be expected. In addition, the market is quite oversold and given the fact that the Market Timer Index, the Global Futures Trading Index and the Global Futures Bottom Indicator flashed a buy signal, an oversold bounce is likely. This can be also seen if we focus on the WSC Capitulation Index, which did not show any signs of strength last week. However, we think that any upcoming oversold bounce should be limited in price and time as long as the readings within our short-term oriented trend- as well as breadth indicators remain at current levels.

Mid-Term Technical Condition

The most concerning fact is that the mid-term oriented condition of the market continued to deteriorate significantly last week. This is primarily based on the fact that the gauge from the Global Futures Trend Index dropped deeper into its bearish trading range area last week and is, therefore, definitely not confirming the current levels from the S&P 500! As already mentioned last week, in such a scenario the risk of a (fast paced) correction remains outright high, especially if short- to mid-term market breadth continues to deteriorate. Moreover, with such weak readings within our Global Futures Trend Index the upside potential of the market also remains capped as well. Therefore, any upcoming stronger oversold bounce should be limited in price and time. Only, from a pure price point of view, the mid-term oriented uptrend of the market has not been broken yet as the WSC Sector Momentum Indicator is still holding up quite well. This indicates that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we focus on our Sector Heat Map, as the relative strengths score of riskless money market remains at zero percent.

More importantly, mid-term oriented market breadth continued to gain more bearish ground last week and is, therefore, not confirming the current levels from the S&P 500! In particular, the percentage of NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150) remain well below their bullish thresholds and are about to reach their lowest levels since months. In addition, the Advance-/Decline Index Weekly strengthened its bearish signal whereas the Upside-/Downside Volume Index Weekly flashed a small bearish signal. Normally, as long as both, advancing issues as well as up-volume are trading below their bearish counterparts, the underlying tape structure of the market remains outright weak. In such a scenario, the market is extremely vulnerable for a stronger correction and, therefore, the current risk/reward ratio is extremely low at the moment. As a matter of fact, conservative members should stay at the sideline at the moment until our short- to mid-term technical indicator framework turns positive again!

Long-Term Technical Condition

The long-term up-trend of the market remains intact so far, although we can see already some signs of exhaustions. This is mainly due to the fact that the relative strength of most risky markets remains quite depressed! Worth mentioning is the fact that the U.S market is holding up quite well compared to other equity markets. Anyhow, we can see that our WSC Global Momentum dropped to the lowest level for months, although the indicator itself still remains bullish from a pure signal point of view. This is another indication that global equities have started to be in a correction mode. Nevertheless, we should not forget that the absolute gauge of that indicator still remains quite constructive. This can be also seen if we focus on the Global Futures Long Term Trend Index, which still indicates a technical bull market. On the other hand we can see that long-term market breadth continued to show signs of fatigue as the Modified McClellan Volume Oscillator Weekly continued to show a widening bearish gap last week. The same is true if we focus on the percentage of stockss which are trading above their 200 day simple moving average as they dropped below their bullish threshold last week. Only, the High-/Low Index Weekly still remains quite constructive from a pure signal point of view, although we can see that the amounts of long-term new lows have started to increase. Therefore, the signs are gathering that the current bull market has entered a mature stage. This picture is even in line with our cyclical framework, as the Juglar Cycle is topping out in late August/early September, indicating that the market will face some structural headwinds within the next couple of months!

Bottom Line

The bottom line: the overall outlook remains almost unchanged compared to last week. The market is highly at risk for a stronger pullback/correction and, therefore, we remain quite cautious at the moment. As capital appreciation is the most important driver for long-term success, 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. For that reason, we would advise our aggressive traders close their profitable short positions, if the S&P 500 manages to close above 1,985 and to reopen a short-position again if we see the first meaningful bearish reversal candle. Stay tuned!