March 29. 2015

Market Review

U.S. stocks closed steadily lower this week, dropping big on Tuesday and Wednesday while never fully recovering. For the week, the Dow Jones Industrial Average dropped 2.3 percent to 17,712.66, whereas the S&P 500 dropped 2.2 percent to 2,061.02. Both the Dow and the S&P 500 suffered their worst week since Jan 30. The Nasdaq declined 2.7 percent from last Friday’s close, ending at 4,891.22. The heavy-tech index had its worst since week since October. All key S&P sectors finished in the red for the week, dragged by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the up- as well as the down-side potential of the market looked quite capped. Consequently, we expected that the market would drop back into its trading range, as market breadth was not supporting a broad based and sustainable break-out. As a matter of fact, further consolidation could be expected, whereas such a distribution would definitely turn out to be a fork in the road. In fact, after the false break-out attempt by the S&P 500 on Monday morning, the broad index ended almost where it had started two/three weeks ago: in the middle part of its trading range. Obviously, the predicted short-term pullback caused a deterioration of the short-term uptrend of the market, as the Modified MACD flashed a bearish crossover signal last week, plus the S&P 500 closed slightly below the bearish threshold from the Trend Trader Index. Above all, the Advance-/Decline 20 Day Momentum Indicator also turned bearish last week and was, therefore, clearly confirming the recent move from the S&P 500. However, in a volatile, sideways market it is quite common to see a lot of changing signals within our short-term oriented trend indicators. And, therefore, short-term market breadth as well as our mid-term oriented trend- as well as breadth indicators remain key area of focus!

Interestingly, short-term market breadth still looks somehow constructive although the impact from last week’s sell-off has definitely left its mark on our tape indicators. This is mainly due to the fact that the Modified McClellan Oscillator Daily as well as the percentage of stockss which are trading above their 20 day moving average turned slightly bearish last week. Although this indicates somehow a deteriorating tape structure on a very short time frame, their readings could have been much worse if we consider the magnitude of last week’s decline. Basically, we receive the same picture if we focus on the NYSE New HighsNew Lows Daily Indicator. This indicator is telling us that the recent sell-off was mainly driven by profit taking. To be more precise, only the number of stockss which are hitting a fresh yearly high came down significantly, whereas there was hardly any increase in the amount of new yearly lows! Especially on Wednesday, there were only 17 stocks which were pushed to a new yearly low, although the market faced a stronger sell-off on that day! As a matter of fact, the reading of the High-/Low-Index Daily still remains quite bullish for the time being. Furthermore, we can see that the percentage of stockss which are trading above their 50 day moving average as well as the Modified McClellan Volume Oscillator Daily were also holding up quite well for the week. So all in all, short-term market breadth still looks quite constructive for the moment and is, therefore, not confirming the current short-term down-trend of the market. As a matter of fact, we think that the down-side potential of the market still remains quite limited at the moment!

After last week’s decline, the readings of our entire contrarian indicators got back to normal levels. Only the fisher transformation of the WSC Capitulation Index turned from its cautious into bearish territory on Wednesday, indicating a risk-off scenario on the very short-time frame. However, the absolute levels of that indicator still remain quite subdued, which can be interpreted as bullish divergence.

Mid-Term Technical Condition

Despite the fact that further back and fill environment is likely on a very short-time frame, equities do not appear at risk for a stronger correction at the moment! This is mainly due to the fact that the mid-term oriented trend condition of the market strengthened significantly last week. Last week, we were quite cautious as the Global Futures Trend Index was clearly trading below 60 percent, which is normally an early indication for a major correction. Therefore, it was good to see that its gauge was pushed pack into the middle part of its bullish consolidation area and, therefore, the recent correction risk (we worried about) has clearly diminished! Consequently, as long as its gauge remains supportive we strongly believe that the market is heading into a make instead of a break scenario. Another positive fact is coming from the WSC Sector Momentum Indicator, which gained more bullish ground last week. This is telling us that most sectors within our Sector Heat Map have a higher relative strength score than riskless money market and, therefore, the mid-term oriented up-trend of the market remains well intact.

Despite the fact that the recent sell-off has slightly caused a small deterioration within the Modified McClellan Oscillator Weekly, our remaining mid-term oriented breadth indicators were holing up quite well. This indicates that the recent decline was only driven by heavy weighted stocks, whereas the broad market still has shown some signs of strength recently. As a matter of fact, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) did not turn bearish at all last week. This can be also seen if we focus on the ratio between the S&P 500 and the Russell 2000, which indicates a quite healthy mid-term oriented tape structure at the moment. Above all, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at quite solid levels. As a matter of fact, it might be a bit too early to get concerned about the recent sell-off we saw last week!

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. Moreover, we can see that the global bull market continued to regain its footing as 48 percent of all local equity markets around the world remain in a long-term oriented up-trend. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky markets continued to strengthen last week. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average kept trading at quite bullish levels. The amounts of stocks which are hitting fresh 52 weeks high remains quite supportive, whereas the Modified McClellan Volume Oscillator Weekly finished the week more or less unchanged.

Bottom Line

So all in all, we strongly believe that the market is heading into a make instead of a break scenario. Although, further down-testing into the first week of April cannot be ruled out at the moment, we think the downside potential of the market remains quite limited at the moment. Even if the S&P 500 breaks below 2,035, we would only expect to see a re-test of the 200 day moving average line around 2,010/2,000 instead of a broad-based break-down. Therefore, it might be just a question of time until renewed strength into May can be expected. As a matter of fact, conservative members should remain invested (and remove any existing stop-loss limits), whereas aggressive traders should build up exposure if we see the first bullish crossover signals within our short-term oriented indicators, or they should buy into the first meaningful reversal candle if they want to act contrarian.