March 30. 2014

Market Review

All three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average was the only major US index to end the week in positive territory. The blue-chip index eked out a small gain of 0.1 percent for the week to close at 16,323.06. The S&P 500 recorded a 0.5 percent loss for the week to finish at 1,857.62. The Nasdaq Composite dropped 2.8 percent from the week ago close to 4,155.76, its worst performance since October 2012. Among the key S&P sectors, energy and utilities were the best weekly performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, finished near 14.

Short-Term Technical Condition

From a pure price point of view, the short-term oriented trend of the market remains quite neutral as the S&P 500 finished the week within both envelope lines from the Trend Trader Index. Nevertheless, we can see that the short-term trend continued to deteriorate as our reliable Modified MACD picked up more bearish ground last week, indicating that more consolidation/down-testing is underway. Moreover, the reading of the Advance-/Decline 20 Day Momentum Indicator is trading at outright low levels and is, therefore, not confirming the recent level from the S&P 500, although its gauge still remains bullish from a pure signal point of view. All in all, the readings from our short-term trend indicators are telling us that the consolidation period which started six weeks ago is likely to continue. In general, a consolidation period is considered to be a healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening. In such a case, the market tends to trade sideways for a couple of weeks, before renewed strengths can be expected.

Unfortunately, short-term market breadth did not improve at all and, therefore, the risk of a second down-leg has increased significantly! To be more precise, overall short-term oriented volume looks quite weak if we consider the current level from the S&P 500. Plus the percentage of stockss which are trading above their short-term oriented moving averages have been pushed below their bullish threshold (20), or about to do so (50), indicating a weakening upside participation! In addition, the Modified McClellan Oscillator Daily continued to gain more bearish ground last week, plus the number of stockss which are hitting a fresh yearly high (Nyse New Highs minus new Lows and the High Low Index Daily) have decreased significantly during the last couple of weeks. Therefore, we would be really surprised to see sustainable gains ahead!

From a pure contrarian point of view, we even have received more confirmation for such a scenario as our reliable Smart Money Flow Index is showing a huge bearish divergence to the Dow, whereas Dumb Money is chasing the market aggressively higher! Furthermore, we can see that the WSC Capitulation Index continued to push higher for the week and as long as this indicator does not drop by half of its rise the overall short-term environment for equities remains quite instable! So all in all, we think that the chance for another down-leg remains extremely high and, therefore, we would not be surprised to see a sharp washout towards 1,815 and in extreme circumstances towards 1,795 if the S&P 500 breaks below 1,835!

Mid-Term Technical Condition

Despite the fact that the clouds are gathering for the short-term, the mid-term oriented uptrend of the market remains well intact. Especially the gauge of our reliable Global Futures Trend Index has slightly strengthened for the week and is, therefore, trading within the upper range of its bullish consolidation area, indicating that any short-term oriented pull-back should be limited in price and time. The same is true if we focus on the WSC Sector Momentum Indicator. Despite the fact that its gauge came down a bit recently, the indicator itself is far away from being bearish. This indicates that most sectors within the S&P 500 remain in a strong mid-term uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas health care and materials are the strongest sectors for the time being.

More importantly, mid-term oriented market breadth is still confirming the mid-term oriented up-trend and, therefore, it is too early to call for an important market top right now. Especially, the Modified McClellan Oscillator Weekly has shown a widening bullish gap in the last couple of trading sessions. Plus the amount of advancing issues and mid-term oriented up-volume are still trading above their bearish counterparts and, therefore, we have no reason to worry right now. The same is true, if we have a closer look at the percentage of stockss which are trading above their mid-term oriented moving averages (100/150), which have not turned bearish yet. Nevertheless, if we focus on the long-term readings of those market breadth indicators, we can see a lot of bearish divergences in their readings as most of them should be much stronger if we consider the current level from the S&P 500. Right now, we keep ignoring those facts since the overall picture of the market still remains quite bullish. But we would not be surprised if those negative divergences would start to mounting up within the next couple of months as we are still expecting a bear market later this year (Charts of Interest and Cycles). But for now, we stick to our recent call where we are expecting that the market is likely to rally towards 1,920/1,950 into summer, before the bears might spoil the party.

Long-Term Technical Condition

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 that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Nevertheless, the relative strength of most risky markets has slightly started to deteriorate which is another small long-term indication that equities could run into an important top within the next couple of months. Anyhow, right now it is too early to get concerned about those facts as the WSC Global Momentum Indicator still remains bullish, indicating that most risky markets remain in a long-term uptrend. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover, we can see that the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Plus the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, indicating a quite healthy tape structure at the moment.

Bottom Line

The bottom line: basically, the technical set-up slightly worsened during last week and, therefore, the risk of a second pull-back is outright high at the moment. All in all, we would not be surprised to see further declines until 1,815 (and in extreme circumstances 1,795), if we see a break below 1,835 from the S&P 500. Therefore, aggressive traders can take some profits if we see a break below 1,835 or start slightly buying into weaknesses if they want to act contrarian. Conservative members should hold their equity position as we still think that the S&P 500 could rally towards 1,950 into mid/late Q2 before a cyclical bear market might be due. Stay tuned!