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May 03. 2015

Market Review

All three major U.S. averages finished the week with modest losses. The Dow Jones Industrial Average lost 0.3 percent over the week to close at 18,024.06. The S&P 500 lost 0.4 percent for the week to finish at 2,108.29. The Nasdaq slid 1.7 percent for the week to end at 5,005.39. Three out of the 10 key S&P sectors ended higher for the week, led by materials. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, closed at 12.69.

Short-Term Technical Condition

In our last week’s comment we had already seen some exhaustion within our short-term oriented tape indicators and, therefore, it was not a big surprise that the market took a breather last week. More important is the fact that the readings of our entire short-term oriented indicator framework started to deteriorate significantly, although the market finished nearly flat for the week. From a pure price point of view, the short-term uptrend of the market remains intact as the S&P 500 managed to close slightly above the bullish envelope line of the Trend Trader Index. Worth mentioning is the fact that the S&P 500 touched the bearish line of that indicator on Thursday, before bouncing back into Friday’s closing bell. This was the first time since late March, where the Trend Trader Index was about to flash a negative short-term trend scenario. Basically, we receive the same readings if we focus on the Advance-/Decline 20 Days Momentum Indicator. Despite the fact that its gauge remains bullish from a pure signal point of view, it dropped to quite non-confirmative levels last week. This indicates that further consolidation might be likely on a very short time frame. This picture is widely confirmed by the Modified MACD, which flashed a small bearish crossover signal last week. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the market is crawling higher on a very slow but volatile pace. In such a situation, short- to mid-term market breadth will give guidance if such a move can be classified as a intermediate top-building process or just a healthy breather.

Unfortunately, short-term oriented market breadth had also to take a hard hit during the last couple of trading sessions as most of our tape indicators have started to weaken. Especially, the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily flashed a small bearish crossover signal last week, indicating that the underlying breadth momentum turned negative. More importantly, the percentages of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) have also been pulled back below their bullish threshold (20/50), although the S&P 500 is trading near record levels. This indicates that only heavy weighted stocks rebounded on Friday, whereas the broad market did not recover at all. This can be also seen if we have a closer look at the High-/Low Index Daily. Despite the fact that this indicator still remains bullish from a pure signal point of view, it looks like it would flash a bearish crossover signal soon. This is mainly due to the fact that the number of stockss hitting a fresh yearly high remains on quite low levels, while the number of stockss dropping to a fresh yearly low has started to increase fairly. This is a quite concerning fact as it tells us that the underlying trend participation looks outright weak-kneed at the moment!

From a pure contrarian point of view, the overall technical picture of the market is also getting increasingly bearish on a very short-time frame. That is mainly due to the fact that the gauge from the Global Futures Dumb Money Indicator, the All CBOE Options Call-/Put Ratio Oscillator as well as the OEX Options Call-/Put Ratio Oscillator flashed a bearish signal last week. This indicates that the recent bounce on Friday caused a lot of optimism among dumb money/the crowd as the amount of calls increased significantly last week. On the other hand, we can see that smart money remains quite optimistic on a mid-term time horizon as the gauge from the NYSE Members Debt in Margin Accounts did not show any signs of non-confirmation, whereas the Smart Money Flow Index is still indicating further sideways trading.

Mid-Term Technical Condition

Despite the fact that the clouds are gathering for the short-term, the mid-term uptrend of the market remains intact at for the time being and, therefore, it is a bit too early to issue a strategic sell signal. This is mainly due to the fact that the reading from the Global Futures Trend Index remains quite bullish, although it dropped 14 percent for the week. Right now the indicator keeps trading within the middle part of its bullish consolidation area. As long as this is the case, any upcoming pullback (in combination with bullish mid-term market breadth) should only turn out as temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge would drop below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. Right now this is not the case, plus we can see that most sectors within the S&P 500 remain in a strong mid-term uptrend as the WSC Sector Momentum Indicator has not shown any signs of weaknesses yet. If we have a closer look at our Sector Heat Map, we can see that consumer discretionary and health care are/remain the strongest sectors within the S&P 500, whereas utilities remain the weakest ones.

More importantly, mid-term oriented market breadth is still confirming the current mid-term oriented uptrend of the market, although we can already see some signs of exhaustion. This is mainly due to the fact that apart from the Modified McClellan Oscillator Weekly most of our mid-term oriented tape indicators continued to deteriorate last week. Especially, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) came down recently, although they remain quite bullish from a pure signal point of view. The same is true if we have a look at the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly. Both indicators still remain quite bullish from a pure signal point of view, but their bullish gauges should be much higher if we consider the current level from the S&P 500. Right now it is a bit too early to get concerned about this fact, as their temporary weaknesses could be also just another indication that the market remains quite vulnerable on a very short-time frame. However, we will monitor their development quite closely within the next couple of weeks as bearish readings of those two indicators in combination with a mid-term oriented trend-break mostly led to a stronger correction in the past.

Long-Term Technical Condition

Our long-term bullish outlook has not been changed so far, since our entire long-term trend- and breadth indicators remain outright bullish at the moment. The Global Futures Long Term Trend Index is still indicating a technical bull market and our reliable WSC Global Momentum Indicator is trading at 68 percent, signaling that the vast of global market indices (all denominated in USD) are still in a long-term uptrend. If we have a closer look at our WSC Global Relative Strengths Index, we can see that most risky assets are losing somehow upside momentum although their relative strength score (apart from commodities and Latin America) has not turned bearish yet. For the time being we think this is another indication for a short-term oriented pullback/consolidation scenario, rather than a weakening long-term oriented uptrend. However, right now long-term market breadth is giving no reason to worry and, therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). Especially our long-term oriented High-/Low Index Weekly is trading at quite supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stockss which are trading above their longer-term oriented moving averages (200)!

Bottom Line

The bottom line: according to our cyclical roadmap (presidential cycle), the market looks ready for a 2-5 percent pullback before another rally-attempt into summer can be expected. Given the weak signals within our short-term oriented indicators in combination with still quite supportive readings within our mid-term time frame, such a scenario looks quite possible. As matter of fact a break below 2,090 would suggest more down-testing towards 2,075 whereas a break of that level would give way to a final overshoot towards 2,039 (which represents our worst-case scenario for the time being). On the other hand a daily close above 2,120 would be outright bullish from a pure trading point of view and would, therefore, neglect our short-term oriented pullback scenario. Although the clouds are gathering for the short-term, our mid- to long-term bullish outlook remains unchanged so far. As a matter of fact, we would advise conservative members to hold their equity position as long as we do not get further bearish implications on a mid-term time horizon. Stay tuned!