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May 22. 2016

Market Review

Last week U.S. stocks finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.2 percent in five trading days to end at 17,500.94. The blue-chip index posted its first 4-week losing streak since 2014. The S&P 500 eked out a 0.3 percent gain over the week to finish at 2,052.32. The Nasdaq Composite added 1.1 percent to 4,769.56 for the five days. Among the key S&P sectors, energy was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell to trade near 15.2.

Short-Term Technical Condition

As expected, the short-term down-trend of the market remains well in force and even gained more bearish ground last week. From a pure price point of view, we can see that the S&P 500 closed 20 points below the bullish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines of this reliable indicator have now clearly started to drift lower on a very fast pace, which was definitely in line with our expectation from last week. Anyhow, this is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical technical pattern for a strong short-term oriented down-trend. The same is true if we focus on the Modified MACD, as its short-term oriented gauge dropped towards a new low and has, therefore, clearly formed an outright bearish divergence to the current levels from S&P 500. Another concerning fact is that the gauge from the Advance-/Decline 20 Day Momentum Indicator just dropped slightly below its bullish threshold on Friday. As this indicator tends to be a leading one, we would not be surprised to see further (stronger) down-testing ahead. Consequently, it is a way too early to bet for a sustainable trend reversal at the moment.

The picture is also widely confirmed by short-term market breadth. Our Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bearish ground last week and also the number of stockss which are hitting a fresh yearly high again decreased significantly during the last week. As a matter of fact, the High-/Low Index Daily has also shown major signs of non-confirmation recently. Additionally, also the percentage of stockss which are trading above their short-term oriented moving averages remain in their bearish (20/50) area. This indicates an extremely weakening upside participation at the moment as the majority of stocks on NYSE has clearly turned bearish last week. Moreover, if we consider the current levels from the S&P 500 in combination with such weak readings within our breadth indicators, it is quite obvious that only large cap stocks are holding up quite well at the moment (whereas the broad market is already faltering)! This is just another piece of evidence (for our recent call) that the current consolidation period looks outright corrective in its nature.

If we focus on our contrarian indicators, we can see that the fear among the crowd remains persistent. This becomes quite obvious if we focus on the readings from our option based indicators (WallStreetCourier Index Oscillator Weekly, Global Futures Put-/Volume Ratio Oscillator Weeky, All CBOE Options Put-/Call Ratio, All CBOE Options Put-/Call Ratio Oscillator Weekly and the Equity Options Call-/Put Ratio Oscillator Weekly). As a consequence, a stronger but corrective bounce still looks quite likely. In our opinion, such a move could then mark the final piece of a typical text book like market top, where we often see a final rally attempt (bull-trap) although market breadth is already faltering. And as already underlined several times, our cyclical roadmap (Presidential Cycle), is also forecasting an important summer top and, therefore, it looks like that the market is following those historical patterns quite closely.

Mid-Term Technical Condition

Another main reason why we believe that a correction might be at hand soon is due to the fact that the mid-term oriented condition of the market also 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 has, therefore, closed in the middle of its bullish consolidation area. If this trend continues it is just a question of time until we see a drop (of this indicator) below 60 percent. If this is the case, the risk of a fast paced correction is extremely high (of course only in combination with weak or bearish readings in mid-term oriented market breadth). Right now we are not completely there yet but nevertheless, it is time to get a cautious stance as the gauge could drop quite quickly below that important threshold. On the other hand, it is also important to mention that from a pure signal point of view, the gauge remains in bullish consolidation area. Consequently, there is still a small chance for a large-cap driven overshoot but we would be really surprised to see sustainable gains ahead as long as the gauge of this reliable indicator remains depressed. However, from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. This can be also seen if we focus on our Sector Heat Map as the momentum score from the S&P 500 remains weak but still keeps trading above the one from riskless money market.

Another reason why we believe that the market is highly at risk to form an important summer top is due to the fact that apart from the Modified McClellan Oscillator Weekly most of our mid-term oriented tape indicators also deteriorated significantly last week. Especially, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) have come down substantially, and are, therefore, just shy trading above their bearish threshold. Consequently, they are forming a huge bearish divergence if we consider the current levels from the S&P 500. The same is true if we have a look at the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly. Despite the fact that both indicators still remain supportive from a pure signal point of view, their bullish gauge dropped significantly for the week. In the past, bearish readings within those indicators (in combination with a bearish Global Futures Trend Index) mostly led to a stronger correction. Consequently, we remain quite cautious at the moment.

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market remains quite bullish at the moment and, therefore, we do not think that a correction should lead to a new bear market at the moment. This is mainly due to the fact that the WSC Global Momentum indicates that 80 percent of 35 local equity markets all around the world (which are covered from our WSC Global ETF Momentum Heat Map) are still in a long-term oriented up-trend at the moment. Moreover, it was good to see that the readings from the Global Futures Long Term Trend Index also showed some signs of improvements last week. On the other hand we can see that the relative strength of most risky assets have shown some signs of weaknesses recently. Moreover, it was also good to see that long-term market breadth also continued to brighten up as the bullish signals from the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly did not show any weaknesses last week. On top of that, we can see that the percentage of stockss which are trading above their 200 day moving average are still above the 50 percent bullish threshold.

Bottom Line

Our outlook remains quite unchanged compared to last week. Given the fact that our tape indicators continued to deteriorate significantly all across the board, in combination with quite typical top bulling patterns, we received further evidences for our summer top scenario. As a matter of fact, the current consolidation period transformed into a corrective top building process. As we have not seen further bearish crossover signals within our mid-term oriented indicators yet, in combination with quite bullish readings on the contrarian side, an oversold bounce could not be ruled out at the moment. Nevertheless, we think upside potential of such a move should be limited in price and time. Consequently, we also think that the chances for a fast paced correction are also increasing on very fast pace (especially if we consider developments within our mid-term oriented tape structure). Consequently, we think it is time for our conservative members to place a stop loss limit around 1,995. This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 2,020 and should increase their exposure if we see further down testing below 1,995. Stay tuned!