August 28. 2016

Market Review

U.S. stocks finished the week with losses. For the week, the Dow Jones Industrial Average slid 0.9 percent to 18,395.40. The S&P 500 finished at 2,169.04 and posted a weekly drop of 0.7 percent. Nasdaq declined 0.4 percent from the week-ago close to 5,218.92, snapping its eight-week winning streak. Most key S&P sectors finished in the red for the week, led by utilities. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, finished near 13.65.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the market looked vulnerable for further consolidation and, therefore, it was not a big surprise at all that stocks ended down for the week. Obviously, the recent consolidation period caused a further deterioration of the short-term oriented uptrend of the market. This is because the S&P 500 dropped slightly below the bearish threshold from the Trend Trader Index on Friday. As a matter of fact, the pure price driven short-term oriented trend of the market has now turned slightly bearish. Moreover, we can see that our reliable Modified MACD continued to show a widening bearish gap, indicating that the underlying trend-momentum of the market remains quite weak at the moment. Nevertheless, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish as both envelope lines of the Trend Trader Index are still holding up quite well and, therefore, they appear to be quite flattish at the moment. Basically, the same is true if we focus on the Advance-/Decline 20 Days Momentum Indicator as its gauge looks quite supportive but not confirmative (given the current levels from the S&P 500), which is another typical sign for a continuation of the status quo. During a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is no specific trend to measure (which is quite obvious when the market keeps trading in a quite narrow range). From a pure technical point of view, a trading range is always a fork in the road. As a consequence, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period is just part of a healthy breather or the beginning of a more significant correction.

In normal circumstances, a consolidation period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, it is highly likely that such a consolidation period is just a harbinger of a more significant pullback/correction. Right now, short-term market breadth still looks quite constructive, although the impact of the recent consolidation has definitely left its mark on the readings of our tape indicators. This becomes quite obvious if we focus on the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily as both indicators slightly strengthened their bearish signal. This is telling us that the underlying breadth momentum of the market remains outright weak at the moment. On the other hand, we still can see that the remaining market internals remain quite robust. This is mostly due to the fact that the total number of stockss which are hitting a fresh yearly high remains at quite encouraging levels (also on Friday), whereas the number of stockss which have been pushed to a new yearly low have not shown any negative spikes so far. Consequently, it was not a big surprise at all that the High-/Low Index Daily was holding up quite well last week. Basically, the same is true if we focus on the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50). So all in all, it might be still a bit too early for any counter trend activities (massive profit taking or even short-selling) as the current consolidation period still looks constructive by its nature (at least for the time being).

The overall situation on the contrarian side is also suggesting a continuation of the current trading range. This results from the fact that market sentiment remains quite neutral at the moment, the Smart Money Flow Index continued to be quite flattish last week, whereas the WSC Capitulation Index closed in cautious territory on Friday. Only the OEX Call-/Put Ratio Oscillator Weekly is giving some bullish impulse. Therefore, from a pure contrarian point of view, further bullish biased sideways trading looks quite likely.

Mid-Term Technical Condition

If we analyze the mid-term oriented technical condition of the market, the thread of a stronger correction can be definitely ignored at the moment. Mainly because the Global Futures Trend Index is still trading far above its extremely bullish 90 percent threshold and, therefore, it is a way too early to issue a strategic sell signal at the moment. We would get quite cautious if the recent consolidation period pushes the gauge below 60 percent (in combination with weakening market breadth), as it would be an indication that a stronger correction lies ahead. Therefore, the current short-term oriented deterioration still looks quite healthy for the time being. In addition, we can see that the WSC Sector Momentum Indicator is trading at a very high level, indicating that all sectors of the S&P 500 remain in a strong mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors remains above the momentum score from riskless money market and the S&P 500.

Another main reason why we believe that the downside potential of the market remains quite capped is due to the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to increase last week, indicating that the overall tape momentum remains quite positive for the time being. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators were holding up quite well and, therefore, they are trading at quite encouraging bullish levels. This indicates that the total upside participation within the market still looks quite broad based, which is another indication that it might be a bit too early to take the chips from the table.

Long-Term Technical Condition

Right now, the long-term uptrend of the market has not been broken yet and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 82 percent of all global markets have not broken below their long-term uptrend yet. Additionally, we can see that the relative strength of most risky markets keeps trading above the one from U.S. Treasuries, another indication for a risk-on market environment. Especially our long-term oriented High-/Low Index Weekly is still trading at 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

Our outlook remains unchanged compared to last week. On a very short time frame, the market looks quite vulnerable for further bullish biased consolidation or for a sentiment driven washout day. Nevertheless, with quite supportive/bullish indicators (especially on a mid- to long-term time horizon) all across the board, we have not seen any typical signs for a major top-building process yet. As a consequence, our bullish outlook has not been changed so far. Therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should definitely remain in the bullish camp. Stay tuned!