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May 31. 2015

Market Review

U.S. stocks closed the week with stronger losses. The Dow Jones Industrial Average lost 1.2 percent over the week to close at 18,010.68. The S&P 500 shed 0.9 percent for the week to finish at 2,107.39. The Nasdaq slid 0.4 percent for the week to end at 5,032. The tech-heavy index gained 2.6% over the month, however. All 10 key S&P sectors ended lower for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

Short-Term Technical Condition

Last week, the market was in a consolidation mode after it had hit a fresh multi-year high two weeks ago. Anyhow, the recent consolidation caused a small deterioration in the readings of our short-term oriented trend indicators. To be more precise, the Modified MACD flashed a very small bearish crossover signal last week, indicating that the overall short-term oriented trend momentum of the market turned negative. This can be also seen if we focus on the Advance-/Decline 20 Day Momentum Indicator, which kept trading below its bullish threshold last week. However, from a pure price point of view, the short-term oriented trend of the market looks quite neutral at the moment as the S&P 500 closed within both envelope lines of the Trend Trader Index on Friday. As already mentioned a couple of times, during a consolidation period or in times where the market is slowly crawling higher accompanied by increased volatility, it is not quite unusual to see a lot of changing signals within short-term oriented trend indicators. As a matter of fact, short- to mid-term market breadth will give us more guidance.

Unfortunately, the recent consolidation period has clearly left its mark on our short-term oriented tape indicators and, therefore, further consolidation can be expected. Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily turned bearish or continued to show a widening bearish gap, after they had shown some encouraging strength two weeks ago. This indicates that the overall breadth momentum of the market remains weak. The same is true if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Although both indicators (20/50) turned bearish from a pure signal point of view, their absolute levels are just shy trading below their bullish 50 percent threshold. This is telling us that the underlying trend structure of the market still remains weak, but somehow still supportive. Basically, the same is true if we focus on the number of stockss hitting a fresh yearly high or low. Although we can see that the number of stockss hitting a fresh yearly low increased for the week, their absolute levels remain too weak to be taken too seriously at the moment. As a matter of fact, the High-/Low Index Daily remains bullish on very low levels, which is another indication for further sideways trading/consolidation.

The situation on the contrarian side remains almost unchanged compared to last week. The bullish biased sideway trading is still causing a lot of uncertainty among investors as the amount of bulls and bears remain almost equal. This is another indication that further bullish biased sideways trading can be expected as this indicator should only be seen as a contrarian one if it reaches extreme readings. Otherwise, it has more confirmative character. This can be also seen if we focus on the WSC Capitulation Index, which keeps trading sideways since early March. Above all, we can see that the NYSE Members Debt in Margin Accounts still remains outright supportive and, therefore, we think it is still a bit too early to call for a major top, although the signs for such an event are already gathering if we consider the long-term bearish divergences within our bread indicators. Anyhow, on a very short-time frame, the market is slightly oversold (Advance-/Decline Ratio), whereas the option market is getting increasingly supportive. On the other hand, we can see that the Global Futures Trading Index flashed a sell signal last week, whereas the Smart Money Flow Index has shown a bearish divergence recently. As a matter of fact, further consolidation on a very short-time frame looks quite likely from a pure contrarian point of view.

Mid-Term Technical Condition

Despite the fact that the clouds are slightly gathering for the short-term, the mid-term uptrend of the market remains intact for the time being and, therefore, it is still a bit too early to issue a strategic sell signal at the moment. This is mainly due to the fact that the reading from the Global Futures Trend Index remains quite bullish, although it slightly lost some momentum for the week. Right now the indicator keeps almost trading within the middle part of its bullish consolidation area. As long as this is the case, further consolidation is quite likely, whereas any upcoming pullback (in combination with bullish mid-term market breadth) should only turn out as a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped 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, but we will monitor the development of this indictor quite closely within the couple of trading sessions! However, from a pure price point of view, the mid-term oriented up-trend of the market remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength of riskless money market keeps trading at quite low levels although it picked up some strength recently.

However, what worries the most is the fact that mid-term oriented market breadth does not look rosy at all and, therefore, the evidences for a major summer top are increasing. The percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain bullish from a pure signal point of view, but their absolute readings are quite low at the moment. This indicates a supportive but outright weak trend-participation at the moment. The most concerning signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators turned bearish last week. This indicates that a lot of purchasing power was pulled out of the market last week and, therefore, the overall market internals are extremely vulnerable at the moment. On top of that, the Modified McClellan Oscillator Weekly showed a widening bearish gap, indicating an outright weak tape momentum on a mid-term oriented time frame. So all in all, we have again a deteriorating tape structure all across the board and, therefore, we received further evidences that the market is approaching an important summer top. Right now, it is a bit too early to issue a strategic sell signal as the mid-term oriented trend (bullish Global Futures Trend Index) of the market remains intact for the time being and, therefore, further top-building into June can be possible. Nevertheless, we think it is time to monitor that indicator quite closely, as the market looks extremely vulnerable at the moment.

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. Moreover, we can see that the global bull market remains intact as 68 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. If we focus on the Global Relative Strength Indicator, we can see that the relative strength score of most risky markets continued to deteriorate against riskless money market. In our opinion, this is another indication for our major top-building scenario. Therefore, it was not a big surprise at all that most of our long-term oriented tape indicators continued to deteriorate (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stockss which are trading above their long-term oriented moving averages) although they still remain somehow supportive for the time being.

Bottom Line

The bottom line: If we consider all those long-term bearish divergences within our indicators (especially short- to mid-term breadth), we think the market is on the way towards an important summer top! However, right now the Global Futures Trend Index has not turned bearish yet (below 60 percent) and, therefore, we think it is still a bit too early to take the chips from the table as further top-building into June can be likely. Nevertheless, the market is getting increasingly vulnerable for a stronger fast paced pullback and, therefore, we would advise our members to monitor our indicators quite closely over the next couple of trading sessions (especially the Global Futures Trend Index). Although we still expect a marginal high into June (2,160 and best case 2,200), we would advise our conservative members to place a stop-loss order around 2,055 as a break below that level would give us the final confirmation that a quite important price top is in place. Stay tuned!