December 14. 2014

Market Review

U.S. stocks finished the week in negative territory, with all major benchmark indexes posting sizable weekly losses. The Dow Jones Industrial Average lost 3.8 percent from the week-ago close to finish at 17,280.83, its worst weekly loss since November 2011. The S&P 500 suffered a weekly loss of 3.5 percent to end at 2,002.34. The broad index recorded its worst weekly hit since May 2012. The Nasdaq recorded a weekly decline of 2.7 percent to 4,310.65. Most key S&P sectors ended in red for the week, led by energy. Utilities were the only gainers. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, jumped to 21.08.

Short-Term Technical Condition

In line with our cyclical roadmap, the market strongly pulled back last week. Not surprisingly, our entire short-term oriented trend indicators turned bearish last week. On Wednesday, the Trend Trader Index flashed a bearish short-term oriented trend scenario, after the S&P 500 had been trading in a quite strong uptrend since mid-October. In addition, we can see that both envelope lines of that reliable indicator have slightly started to build a bearish rounding top. Therefore, we have received even more confirmation that the current weakness is definitely part of a bigger top building process (into January) rather than being a short-lived (and healthy) consolidation period. This can be also seen, if we have a closer look at the Modified MACD, which has picked up strong bearish momentum after it had flashed a bearish crossover signal on Monday. Above all, the Advance-/Decline 20 Days Momentum Indicator dropped also below its bearish threshold last week, although its gauge was holding up quite well, if we consider the strong pullback from last week.

Although this small bullish divergence can be interpreted as a first sign for a possible trend reversal, short-term oriented market breadth is telling otherwise. This is mainly due to the fact that our entire short-term oriented tape indicators had to take a hard hit during the last couple of trading session as most of them continued to weaken significantly, or event turned bearish last week. If we have a closer look at them, we can see that short-term down-volume is trading well above short-term up-volume, the High-/Low Index Daily flashed a bearish cross-over signal last week as the numbers of stocks hitting fresh yearly lows soared. Additionally, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of bullish divergences yet. Furthermore, we have seen a significant break within the short-term oriented trend structure of all NYSE listed stocks, as the percentage of stockss which are trading above their shorter-term oriented moving averages fell below their bullish 50 percent threshold. Nevertheless, on a 50 days’ time frame, the gauge was holding up quite well, if we consider the magnitude of last week’s decline. Moreover, the amount of new yearly highs was also holding up quite well, given the recent sell-off. Therefore, we also have to consider that a lot of selling pressure was driven by the current bear-cycle in energy- and energy related stocks.

The situation on the contrarian side is getting increasingly bullish. This is mainly due to the fact that the market is getting increasingly oversold (Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily), plus most of our options based indicators (oscillators and z-scores) grew into supportive or bullish territory last week (Uptick-/Downtick Ratio Daily, Global Futures Put/Volume Ratio, All CBOE Options Put/Call Ratio, OEX Options Call-/Put Ratio Oscillator and the ISEE Call-/Put Ratio). In addition, we saw a 9-to-1 down-day last week, which indicates some form of capitulation among investors and, therefore, we should have seen a lot of selling pressure already. From a pure seasonal point of view, we expected to see a pullback towards Christmas before the classical year-end rally should bring some relief. So there is still a week to go from a cyclical point of view and this is also confirmed by our WSC Capitulation Index, which has not dropped into bullish territory so far. So all in all, given the weak readings within our short-term oriented trend- as well as breadth indicators, we think further down-testing into next week is likely. Nevertheless, we do not think that a new correction cycle is in place right now. This is mainly due to the fact that it would be quite unusual that a bigger correction cycle starts in December as overall volume tends to slow down during that time. In addition, over the last couple of weeks, we highlighted the fact that the sharp recovery after the correction low in October should be just part of a multi-week and corrective rebound pattern/top building process, which should finally led to a strong and significant correction/bear leg in early Q1. As matter of fact, the market is moving right in line with our overall outlook but we need to see further confirmation on a mid-term time horizon first, which is not the completely the case right now.

Mid-Term Technical Condition

Although, the gauge of the Global Future Trend Index dropped into its bearish trading area last week, the mid-term oriented up-trend of the market has not been completely broken yet. This is mainly due to the fact that the WSC Sector Momentum Indicator still remains quite bullish from a pure signal point of view, indicating that most sectors within the S&P 500 remain in a mid-term oriented price driven up-trend at the moment. This can be also seen if we have a closer look at our Sector Heat Map. Despite the fact that the relative strength score of riskless money market continued to strengthen for the week, it remains below most other industries and, therefore, the overall mid-term oriented up-trend remains intact so far. Nevertheless, the upside potential of the market should remain capped on a mid-term time horizon as long as the Global Future Trend Index keeps trading within its bearish trading range. Therefore, we received even more confirmation that the recent decline is definitely part of a larger distribution pattern, which should unfold in early Q1 2015 at the latest.

The main reason, why we believe that it is too early to call for the ultimate top right now is the fact that mid-term oriented market breadth was still holding up quite well last week. Especially, the amount of mid-term oriented advancing issues is still trading at outright bullish levels at the moment, plus the Upside-/Downside Volume Index Weekly has not turned bearish yet. Normally, both indicators tend to turn bearish before a correction is at hand or before a major market top is in place. Right now, both indicators are still a bit too bullish in our point of view and, therefore, we think further top-building into January looks likely. Nevertheless, mid-term oriented market breadth still looks a bit damaged as the percentage of stockss which are trading above their mid-term oriented moving averages dropped slightly into bearish territory, whereas the Modified McClellan Oscillator Weekly is indicating a weakening tape structure. All in all, we received more confirmation for our corrective multi-week rebound scenario, which should finally unfold in early 2015. Nevertheless, we think to see at least one more rally attempt by the market as not our entire mid-term oriented trend- as well as breadth indicators have turned bearish yet!

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. Nevertheless, we can see that the global bull market continued to lose steam as only 32 percent of all local equity markets around the world remain in a long-term oriented up-trend, according to our WSC Global Momentum Indicator. From a pure asset allocation point of view, US equities remain the place to be as they are still leading all other risky markets in terms of relative strength. More importantly, long-term market breadth deteriorated significantly last week, which is another sign that the global bull market reached a quite mature stage. Especially, the Modified McClellan Volume Oscillator Weekly turned significantly bearish last week, after it had flashed a small bullish crossover signal recently. This indicates that the overall long-term oriented breadth momentum turned negative last week. The same is true if we focus on the percentage of stockss which are trading above their long-term oriented moving average (200). Only the High-/Low Index Weekly Indicator still remains slightly bullish from a pure signal point of view. So all in all, the signs for a mature bull market are increasing, which is another piece of evidence for our multi-week rebound scenario.

Bottom Line

The short-term situation remains unchanged compared to last week. Given the overall seasonal tendencies, together with increased bearish signals within our short-term trend- as well as tape indicators, further selling-pressure towards Christmas is likely. Nevertheless, if we consider the quite supportive readings within our mid-term indicator framework together with the typical upcoming year-end rally effect, we think that at least one rally attempt by the S&P 500 is still likely. Such a rally attempt would be another typical pattern for a distributive and corrective top building process, before major troubles might be due in very early Q1 2015. As a matter of fact, aggressive traders should buy into weaknesses rather than chasing the market too aggressively on the upside. More conservative members should hold their equity position as our mid- to long-term outlook has not been changed so far. Nevertheless, it would make sense to place a stop-loss limit around 1,955 just in case if the market is not about to follow our cyclical roadmap. Stay tuned!