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August 30. 2015

Market Review

U.S. stocks wrapped up one of the most tumultuous weeks of trading in recent memory with modest weekly gains after closing little changed on Friday. The Dow Jones Industrial Average finished at 16,643.01. The blue chip index was down 6.6 percent at its lows for the week and ended up 1.1 percent in its biggest reversal since the last week of October 1987. The S&P 500 recorded a 0.9 percent weekly gain to close at 1,988.87. The broad index?s 0.9 percent gain for the week masks a volatile period in which the benchmark plunged the most since 2011 to enter a correction, only to rally more than 6 percent over two days. The gauge is down 5.5 percent for the month. The Nasdaq Composite finished at 4,828.32. The tech-index ended up 2.6 percent for the week, recovering more than a 8.79 percent plunge, in its biggest intra-week reversal on record. The index is the only major average positive for the year so far. Most key S&P sectors ended in positive territory for the week, led by energy. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 27.

Short-Term Technical Condition

After our members have successfully side-stepped the recent turmoil, the big question is if last week’s massive decline was just the vanguard of a more significant sell-off or if it might be a great time to get back into the market? The recent rebound was not a big surprise at all, as we saw typical patterns for an intermediate low on that day. To be more precise, on Tuesday the S&P 500 plunged to 1867.6, a drop of more than 10 percent from its high. Nevertheless, the CBOE Volatility Index closed lower than the day before, where the S&P 500 finished the session 30 points higher. This strong non-confirmation was accompanied by the fact that we only saw 252 new lows, compared to 1,335 new lows on Monday. Additionally, the market was extremely oversold (Advance-/Decline Ratio Daily, Trin (Daily) and the Upside-/Downside Volume Ratio Daily) on that day. However, what was kind of unusual was the magnitude of the recent bounce as the S&P 500 managed to rally more than 6 percent within 2 days.

Despite the fact that the market showed some solid recovery last week, the improvements in the readings of our short-term oriented trend indicators have been developing moderately so far. If we have a closer look at the Trend Trader Index, we can see that the S&P 500 was not even rudimentary able to break above the lower resistance line of this reliable indicator, which would be the first indication for a short-term trend reversal. Furthermore, we can see that both envelope lines of this reliable indicator continued to drift lower on a fast pace, indicating that the support/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 these strong resistance lines, we will see lower lows and lower highs, which is a typical pattern for a strong short-term down-trend. This can be also seen, if we focus on the Modified MACD which continued to show a widening bearish gap and has, therefore, refused to confirm the recent recovery from the S&P 500. Another strong non-confirmation is coming from the Advance-/Decline 20 Day Momentum Indicator, as its gauge is far away from being bullish. So from a pure short-term trend perspective, the recent recovery can be still categorized as bounce rather than the beginning of a new sustainable up-trend.

This view is also strongly confirmed by short-term market breadth, as we have not seen any major bullish crossover signals or some positive divergences yet. The readings from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily dropped towards new lows last week, indicating that the underlying breadth momentum of the market is outright bearish at the moment. We have not even seen any stronger signs of recovery within those indicators, although the S&P 500 rallied for more than 6 percent last week. This is telling us that last week’s bounce was mostly driven by short-covering and not by a massive amount of bargain hunters. This picture is widely confirmed by the NYSE New Highs minus New Lows Indicator, as we have only seen a massive reduction in the amount of new lows instead of a substantial increase in new highs. As a matter of fact, the High-/Low Index Daily remains outright bearish, although its bearish gauge decreased significantly for the week. Another strong non-confirmation signal is coming from the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both indicators just recovered from record lows last week instead of showing major signs of improvements, indicating that the market internals remain outright damaged!

From a pure contrarian point of view an intermediate (but not final) low looks quite likely as we received a huge amount of buy signals last week (the WallStreetCourier Index, the Global Futures Put-/Volume Ratio, Program Trading Buy Sell Spread, Global Futures Put-/Volume Ratio, Global Futures Put-/Volume Ratio Oscillator, All CBOE Options Call-/Put Ratio, All CBOE Options Call-/Put Ratio Oscillator, Sentiment Market Vane, Global Futures Sentiment Index and the Global Futures Bottom Indicator). As a matter of fact, further bouncing towards 2,000/2,020 cannot be ruled out at the moment. Nevertheless, we have not seen any confirmation from our Smart Money Flow Index for a sustainable bottom, plus the WSC Capitulation Index is still indicating a risk-off market environment.

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented condition of the market. This is mainly due to the fact that the gauge from the Global Future Trend Index continued to deteriorate and dropped, therefore, into bearish territory last week! As already mentioned in our previous market comments, as long as we do not see any upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming bounce should be limited in price and time. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains below its outright bearish 60 percent threshold! Like last week, the WSC Sector Momentum Indicator continued to strengthen its bearish signal, indicating that the relative strength score of most sectors within the S&P 500 have started to underperform the relative strength score of riskless money market within our Sector Heat Map. In such a scenario, most sectors tend to perform negative on an absolute basis!

More importantly, the current bearish biased mid-term oriented trend is still strongly confirmed by mid-term oriented market breadth. This is mainly due to the fact that our entire mid-term oriented tape indicators remain outright bearish and have, therefore, not shown any signs of bullish divergences yet. Especially, the Modified McClellan Oscillator Weekly dropped to a new low last week and is, therefore, signaling that the overall mid-term oriented tape momentum remains outright weak at the moment. This can be also observed if we focus on the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators have been pushed to their lowest levels for months and are, therefore, far away from confirming the current levels from the S&P 500. In addition, these signals are telling us that the broad market is still quite damaged and, therefore, the recent recovery was mainly driven by short-covering so far. Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals strengthened last week. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, the recent recovery still looks quite fragile at the moment.

Long-Term Technical Condition

The long-term condition of the market continued to deteriorate and, therefore, our bearish outlook has not been changed so far. 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 18 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. In a global context, we, therefore, received further confirmation that the current bull-market is slightly running out of steam. As a consequence, it is not a big surprise at all, that the relative strength of all risky markets is trading well below the one from U.S. Treasuries. More importantly, long-term oriented market breadth has also not shown any signs of bullish divergences yet! As per last week’s report, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground, whereas the percentage of stockss which are trading above their long-term simple moving averages and the High-/Low Index Weekly strengthened their bearish signals!

Bottom Line

The overall outlook remains almost unchanged compared to last week. In line with our recent outlook, the market is in the middle of a correction and, therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. Furthermore, we have not seen any major positive signals/divergences within our short- to mid-term indicator framework yet to call for an important bottom at the moment. Nevertheless, from a pure contrarian point of view further bouncing towards 2,000/2,020 cannot be ruled out, before another (final) down leg might be due. This view is also strongly in line with our cyclical roadmap (presidential cycle), where a final retest could turn out to be an intermediate buying opportunity for aggressive traders as the bounce could bring new marginal highs into mid-September (before major weaknesses into December might be due!). Stay tuned!