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August 03. 2014

Market Review

U.S. stocks finished the week with deep losses. The Dow Jones Industrial Average slumped 2.8 percent over the week to 16,493.37. The blue-chip index suffered its biggest decline since the week ended Jan. 24. The S&P 500 dropped 2.7 percent for the week to finish at 1,925.15, its largest percentage drop since the week ended June 1, 2012. The benchmark index is now off 3.2 percent from its July 24 record close. The Nasdaq shed 2.2 percent for the week to end at 4,352.64. Among the key S&P sectors, health care was the best weekly performer, while energy dragged. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, jumped to 17.03.

Short-Term Technical Condition

The consolidation period, which had started almost four weeks ago, pushed the S&P 500 down nearly 3.2 percent from its former multi-year high in late-July. Last week, we highlighted the fact that we strongly believed that the recent consolidation period would definitely turn out be more corrective in its nature as we had received a growing number of evidence (within our indicator framework and according to our Cyclical Roadmap) that a major price top is forming! For that reason, we advised our aggressive traders as well as conservative members to place a stop-loss limit/start shorting if we saw a break below 1,950, as a fast paced pullback could not have been ruled out at this point of time! In fact, the market strongly tumbled for the week and closed out the session at its first major support level at 1,925. For that reason, the market is moving right in line with our recent call/Cyclical Roadmap, where we are expecting to see a stronger correction (7-12%) into September, before we see another significant tactical rebound (yearend rally) into Q4. This rebound should act as basis for another significant and more meaningful correction leg into Q1/Q2 2015, before we should see a major bottom in risky assets.

However, as our Cyclical Roadmap should only be seen as a general guideline instead of a precise trading plan, our indicators remain key area of focus! The short-term down-trend of the market gained more bearish ground last week, as the S&P 500 closed 52 points below the bullish threshold from the Trend Trader Index. Moreover, we can see that both envelope lines of this reliable indicator have started drifting lower, indicating that the resistance levels for the S&P 500 are decreasing as well. In other words, as long as the market is not able to break through this strong resistance lines, we will see lower lows and lower highs, which is a typical pattern for a negative price trend. Furthermore, the gauge from the Advance-/Decline 20 Day Momentum Indicator continued to drop deeper into bearish territory and is, therefore, confirming the recent sell-off we have seen. In addition, the Modified MACD picked up more negative momentum and remains in a free fall with a bearish widening gap, signaling that further declines are highly likely!

To evaluate if the current pullback is just part of a (final) washout or the beginning of a more significant correction, short-term market breadth is a key area of focus. Right now, the current short-term oriented bearish trend of the market is strongly confirmed by short-term market breadth and, therefore, further declines can be expected! Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped further into deep bearish territory, indicating that the underlying trend structure of the market remains outright bearish at the moment. To be more precise, only 21/28 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average. These are the lowest numbers we have seen for months and, therefore, the current decline has definitely nothing to do with a healthy breather. The same is true if we focus on the Modified McClellan Oscillator Daily, which reached a new low last week and, therefore, the underlying breadth momentum is outright bearish at the moment. In addition, the number of stockss hitting a fresh 52 week lows soared, causing that the High-/Low Index Daily was rolling over into bearish territory last week!

From a pure contrarian point of view, the chances for a volatile but not sustainable bounce are increasing, as most of our short-term oriented contrarian indicators (Market Timer Index, Global Futures Trading Index and the Global Futures Put/Volume Ratio) flashed a buy signal last week, plus the market looks heavily oversold (Arms (Trin) Daily, Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily) at the moment. Moreover, we can see that the option market (Daily Put/Call Ratio All CBOE Options) is outright bearish at the moment, which is another indication that any upcoming decline might be accompanied by nasty counter-trend rallies. On the other hand, we can see that Smart Money was definitely confirming the current decline and as long as our WSC Capitulation Index does not drop by half of its rise, we think it is too early to call for a major bottom from a pure contrarian point of view. However, given the strong negative readings within our short-term oriented indicator framework, we think that any upcoming (volatile) bounce should not be sustainable over the long run! Furthermore, as long as we do not see any bullish divergences (bearish trend breaks) in our short-term oriented trend- as well as breadth indicators, we strongly believe that further down-testing (in combination with volatile bounces) towards 1,890 is highly likely. Moreover, if the market breaks below that level, we think that a final overshoot towards our preferred price target of 1,850/1,820 for the current correction cycle into September looks quite possible.
From a pure contrarian point of view, the chances for a volatile but not sustainable bounce are increasing, as most of our short-term oriented contrarian indicators (Market Timer Index, Global Futures Trading Index and the Global Futures Put/Volume Ratio) flashed a buy signal last week, plus the market looks heavily oversold (Arms (Trin) Daily, Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily) at the moment. Moreover, we can see that the option market (Daily Put/Call Ratio All CBOE Options) is outright bearish at the moment, which is another indication that any upcoming decline might be accompanied by nasty counter-trend rallies. On the other hand, we can see that Smart Money was definitely confirming the current decline and as long as our WSC Capitulation Index does not drop by half of its rise, we think it is too early to call for a major bottom from a pure contrarian point of view. However, given the strong negative readings within our short-term oriented indicator framework, we think that any upcoming (volatile) bounce should not be sustainable over the long run! Furthermore, as long as we do not see any bullish divergences (bearish trend breaks) in our short-term oriented trend- as well as breadth indicators, we strongly believe that further down-testing (in combination with volatile bounces) towards 1,890 is highly likely. Moreover, if the market breaks below that level, we think that a final overshoot towards our preferred price target of 1,850/1,820 for the current correction cycle into September looks quite possible.

Mid-Term Technical Condition

Another main reason why we believe that the market has topped out is clearly the fact that the mid-term oriented condition of the market continued to deteriorate significantly last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped significantly for the week and is, therefore, only trading shy above its bearish 60 percent threshold. In such a situation, the risk of a fast paced correction remains outright high. On the other hand, we would be quite surprised to see sustainable/strong gains ahead, as long as the gauge of this reliable indicator remains depressed. Nevertheless, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend and according to our Sector Heat Map, energy, health care and technology are/remain the strongest industries for the time being. Compared to the WSC Sector Momentum Indicator, the Global Futures Trend Index is more the leading one and, therefore, we remain outright cautious at the moment!

More importantly, mid-term oriented market breadth had to take a hard hit during the last couple of trading sessions, which is another indication for major troubles ahead! Especially mid-term oriented advancing issues dropped significantly last week and are, therefore, just trading slightly above mid-term oriented declining issues, which is another indication for a major correction. The same is true if we have a look at the Upside-/Downside Volume Index Weekly, which shows that a lot of purchasing power has been pulled out of the market. Such a move was not a big surprise at all, as we have expected to see further deterioration within those two indicators over the next couple of weeks (please have a closer look at our previous Market Comment). Normally, bearish or extreme weak readings of those two indicators in combination with a mid-term oriented trend-break mostly led to a stronger correction or a cyclical bear market in the past. Another threatening tape signal is coming from the Modified McClellan Oscillator Weekly, which is signaling that the overall tape momentum turned bearish last week. Basically, the same is true if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150)! All in all, with such weak/bearish readings within our mid-term oriented trend- as well as -breadth indicators, we strongly believe that a major price top is in place and further declines are highly likely. For that reason, conservative members (who did not place a stop-loss limit at 1,950 last week) should reduce their equity exposure significantly and, thus, wait for a better technical environment.

Long-Term Technical Condition

The long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 85 percent of all global markets have not broken below their long-term uptrend yet. Nevertheless, we can see that the WSC Global Momentum Indicator dropped 10 percent last week, indicating that a lot of global equity markets have turned bearish from a pure structural point of view. If we have a closer look on the relative strength score of all risky markets, we can see that European equity markets are suffering the most at the moment, whereas Emerging Markets are the most attractive region from a pure asset allocation point of view. More importantly, apart from the High-/Low Index Weekly, long-term market breadth looks outright weak at the moment. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly flashed a bearish crossover signal, plus the percentage of stockss which are trading above their 200 day simple moving average dropped below their bullish threshold last week. This is another indication that one of the longest bull-market ever is losing steam and, therefore, we would not be surprised to see rough waters ahead within the next couple of months!

Bottom Line

The bottom line: On a very short-time frame the market is quite oversold and in combination with fresh buy signals from some of our contrarian indicators, a stronger volatile bounce might be possible. Nevertheless, we think that any upcoming bounce should be limited in price and time as our entire short- to mid-term oriented trend- as breadth indicators remain bearish! As a matter of fact such a counter-trend rally would only represent a classical bull-trap. Therefore, we would advise our aggressive members to sell into any upcoming strength/keep their short positions, as long as we do not see any significant drop in our WSC Capitulation Index, a bearish trend break in our Trend Trader Index or other bullish divergences within our short-term oriented indicators. Moreover, we think it is time for conservative members to cut their equity exposure significantly as we are expecting further steep losses into mid-September. Stay tuned!