August 09. 2015

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 1.8 percent over the week to 17,373.38. The longest losing streak for the index since the height of the debt-ceiling drama in the summer of 2011. The S&P 500 dropped 1.3 percent for the week to finish at 2,077.57. The Nasdaq lost 1.7 percent for the week to end at 5,043.54. Most key S&P sectors ended in negative territory for the week, led by energy. Utilities were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 14.

Short-Term Technical Condition

The consolidation period which started almost three months ago, has pushed the S&P 500 down around 3 percent from its former multi-year high in late-May. Normally, if the market is taking a healthy breather or remains within a (healthy) consolidation period, market breadth should regain momentum and/or existing bearish divergences should be sorted out, helping the market to push higher afterwards. Over the past couple of weeks our entire indicator framework continued to deteriorate significantly and/or even turned bearish and, therefore, the negative divergences even increased during that time period. As a matter of fact we remained outright cautious as we had received a growing number of evidences that the market was forming a major summer top. In fact, after the market had dropped below our critical key-support level in early July, we received the final confirmation that the latest reaction high from the S&P 500 in late-May represented an important market top. Additionally, such a summer top scenario was even supported from a cyclical point of view (Presidential Cycle)! As a result, we have advised our conservative members to stay at the sideline since then as the risk/reward ratio looked outright depressed. In such a weak breadth environment, stronger gains tend to be corrective in their nature and, therefore, it was not a big surprise at all that the market pulled back again last week.

Not surprisingly, the short-term oriented trend of the market turned bearish again after being more or less bullish biased for a couple of trading days. This is mainly due to the fact that the S&P 500 closed 32 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 2,109. Moreover, the Modified MACD flashed also a new but small sell signal last week, whereas the bearish Advance-/Decline 20 Day Momentum Indicator is still far away from confirming the current levels from the S&P 500!

More importantly, our entire short-term market breadth indicators remain outright bearish at the moment! As a result we think that any upcoming oversold bounce should not lead to a major trend reversal at this point in time! To be more precise, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) kept trading well below their 50 percent bullish threshold. This indicates an outright damaged underlying trend structure at the moment, as only slightly more than 70 percent of all NYSE listed stocks remain in a short-term oriented down-trend at the moment. Another concerning point is that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of bullish divergence yet, although they have shown some signs of strength recently. As a matter of fact, the underlying tape momentum can be still categorized as quite weak and, therefore, we would be surprised to see stronger sustainable gains ahead. On top of that we can see that the number of stockss hitting a fresh yearly low started to increase again and, therefore, the High-/Low Index Daily strengthened its bearish signal last week. So all in all, the market internals are extremely damaged at the moment and, therefore, it might be just a question of time until further strong losses can be expected!

From a pure contrarian point of view it might be still a bit too early for a major pullback as the market still has to work off the current predominant bearish sentiment within our contrarian indicators first (All CBOE Options Call-/Put Ratio, Global Futures Put/Volume Ratio, ISEE Call-/Put Ratio, Program Trading Buy-/Sell Spread, AII Bull & Bear and the WallStreetCourier Index). In such a situation, it is not quite unusual to see a stronger bounce towards new (marginal) highs as such a move tends to have its designated impact on short-term pessimism. So even if the market looks ready for a stronger oversold bounce, it will be limited in price and time, as the Smart Money Flow Index is far away from confirming the current levels from the Dow, whereas the WSC Capitulation Index grew back into bearish levels last week.

Mid-Term Technical Condition

This view is strongly in line with the recent developments of our mid-term oriented trend-indicators, where we received further confirmation for our summer top scenario. Especially, the gauge from the Global Futures Trend Index remains within the lower part of its bearish consolidation brackets and is, therefore, definitely not confirming the current levels from the S&P 500! In such a scenario, the risk of a fast paced correction remains outright high, especially in combination with weak mid-term market breadth. On the other hand, we would be quite surprised to see sustainable gains ahead, as long as the gauge of this reliable indicator remains depressed. Above all, the WSC Sector Momentum Indicator decreased significantly last week and has, therefore, just closed shy above its bullish threshold. This indicates that the momentum score between of the S&P 500 and the one from riskless money market is narrowing within our Sector Heat Map. This is a quite serious technical signal as it indicates that many sectors within the S&P 500 have started to break below their mid-term oriented trend-lines. Moreover, as energy has a momentum score of 0 percent, it is a way too early to bet on a major trend reversal.
This view is strongly in line with the recent developments of our mid-term oriented trend-indicators, where we received further confirmation for our summer top scenario. Especially, the gauge from the Global Futures Trend Index remains within the lower part of its bearish consolidation brackets and is, therefore, definitely not confirming the current levels from the S&P 500! In such a scenario, the risk of a fast paced correction remains outright high, especially in combination with weak mid-term market breadth. On the other hand, we would be quite surprised to see sustainable gains ahead, as long as the gauge of this reliable indicator remains depressed. Above all, the WSC Sector Momentum Indicator decreased significantly last week and has, therefore, just closed shy above its bullish threshold. This indicates that the momentum score between of the S&P 500 and the one from riskless money market is narrowing within our Sector Heat Map. This is a quite serious technical signal as it indicates that many sectors within the S&P 500 have started to break below their mid-term oriented trend-lines. Moreover, as energy has a momentum score of 0 percent, it is a way too early to bet on a major trend reversal.

More importantly, mid-term oriented market breadth is still strongly confirming the bearish biased mid-term oriented trend of the market! The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) kept trading quite far below their bullish threshold, whereas the Modified McClellan Oscillator Weekly continued to strengthen its bearish signal last week. This indicates that the overall momentum of the market internals remain outright damaged and, therefore, we would be quite surprised to see sustainable gains ahead!. Above all, we can see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at outright bearish levels and have not shown any signs of bullish strength yet, which is another indication that the market might face major troubles soon!

Long-Term Technical Condition

As per last week’s report, the long-term condition of the market continued to show major signs of exhaustion. This is in line with our short- to mid-term oriented bearish outlook. 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 its gauge continued to deteriorate for the week. This is another indication that the current bull-market (in the US) is showing strong signs of exhaustion. This can be also seen if we focus on the WSC Global Momentum Indicator as only 25 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines (3 percent down from last week). In a global context, we, therefore, received further confirmation that our suggested summer top is already in place. More importantly, long-term oriented market breadth has also not shown any signs of recovery yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground, whereas the percentage of stocks which are trading above their long-term simple moving averages and the High-/Low Index Weekly remain quite bearish, which is another serious long-term tape signal.

Bottom Line

The overall outlook remains unchanged compared to last week. In line with our recent outlook, the market is in the middle of a top building process and, 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, 2,044/2,050 represents an important key support level. A break below that numbers would be immediately bearish as further down-testing towards 2,014 and 1,980 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, aggressive traders should sell into strength rather than chasing the market too aggressively on the upside. Stay tuned!