September 20. 2015

Market Review

After rallying from Monday to Thursday, U.S. stocks finally ended the week with a mixed performance.
The Dow Jones Industrial Average fell 0.3 percent for the week to close at 16,384.79. The S&P 500 recorded a weekly loss of 0.2 percent and closed at 1,958.08. The broad-index erased its gain for the week on Friday, after rallying as much as 1.5 percent. The Nasdaq eked out a small weekly gain of 0.1 percent to end at 4,827.23. Among the key S&P sectors, utilities and consumer staples was the best weekly performer, while financials and materials dragged. The CBOE Volatility index (VIX) considered the best gauge of fear in the market, held above 22.5.

Short-Term Technical Condition

The week started quite encouraging as the S&P 500 rallied towards 2,020 until Thursday before Friday’s sell-off wiped out its weekly gain. Despite the fact that the market finished nearly flat for the week, the short-term trend structure of the market slightly improved last week. This is mainly due to the fact that the S&P 500 closed within both envelope lines of the Trend Trader Index, indicating a neutral trend-scenario from a pure price point of view. Furthermore, we can see that the Modified MACD also continued to strengthen its bullish signal, indicating that the underlying short-term oriented trend momentum of the market slightly turned positive (albeit on quite low levels). Basically, the same is true if we have a closer look at the gauge from the Advance-/Decline 20 Day Momentum Indicator, which managed to close shy above its bearish threshold last week. Although those signals look quite encouraging, we should not forget that the gauge from the Advance-/Decline 20 Day Momentum Indicator is a way too weak to be taken so seriously at the moment. Above all, we still can see that both envelope lines of the Trend Trader Index still keep drifting lower on a very fast pace, indicating that the latest recovery can be still categorized as a bounce rather than a start of a new sustainable short-term oriented up-trend. During a volatile bouncing process it is not unusual to see a lot of changing signals within short-term oriented trend indicators. Therefore, our tape indicators will give us guidance if the recent gains will turn out to be corrective or eventually even the start of a new sustainable up-trend!

Despite the fact that the S&P 500 rallied to a new recovery high on Thursday, the readings within our short-term breadth indicators have been developing moderately so far. Apart from the fact that the readings from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily remain quite bullish, the overall short-term oriented tape structure of the market still looks quite shallow at the moment. This is mainly due to the fact that the recent recovery is still mostly driven by heavy weighted stocks within in the S&P 500, whereas the broad market still remains quite weak-kneed. This becomes quite obvious if we focus on the NYSE New Highs-/New Lows Indicator, as only the total amount of new lows has decreased significantly over the past weeks, whereas the total amount of new highs remains outright depressed. As a matter of fact, the High-/Low Index Daily has not turned bullish so far and is, therefore, additionally not confirming the latest recovery process from the S&P 500. Basically, the same is true if we have a closer look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Despite the fact that we saw an encouraging bullish surge on a 20 days’ time frame, both gauges should be much stronger, especially if we compare them with the levels we saw in the recovery process in late November 2014 (where the S&P 500 was trading at similar levels)!

The situation from a pure contrarian point of view remains almost unchanged. In our last week’s comment, we highlighted the fact that stronger gains into expiration could not be ruled out as we had received a growing number of evidence within our contrarian indicators that short-term pessimism among the crowd had been too extreme. Such a move normally relieves oversold conditions (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and dampens short-term pessimism before further losses can be expected. In fact, the recent bounce until Thursday has slightly started to have its designated impact on short-term pessimism, which is a typical pattern if the market remains in a bounce mode. Especially, the Daily Put-/Call Ratio All CBOE Options Indicator slightly started to decrease from its extreme high levels, plus the All CBOE Options Call-/Put Ratio Oscillator and market sentiment also improved last week. Nevertheless, the readings within our contrarian indicators (Trin Daily, the Daily Put-/Call Ratio All CBOE Options Indicator, the ISEE Call-/Put Ratio and the Global Futures Put/Volume Ratio) still remain quite supportive and, therefore, further volatile sideways trading/bouncing cannot be ruled out from a pure contrarian point of view.

Mid-Term Technical Condition

Anyhow, despite the fact that we saw some marginal improvements on a very short-time frame, it is a way too early to call for a sustainable bottom at the moment. This is mainly due to the fact that the mid-term oriented technical condition of the market remains outright damaged at the moment! This becomes quite obvious if we focus on the Global Futures Trend Index, which keeps trading far below its bullish 60 percent threshold and is, therefore, definitely not confirming the latest recovery from the S&P 500. As already mentioned in our previous market comments, as long as we do not see any stronger upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming bounce should be limited in price and time. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains below its outright bearish 60 percent threshold! Above all we can see that the WSC Sector Momentum Indicator continued to strengthen its bearish signal! This is telling us that the relative strength score of most sectors within the S&P 500 have started to underperform the relative strength score of riskless money market within our Sector Heat Map. In such a scenario, most sectors tend to perform negative on an absolute basis!

More importantly, mid-term oriented market breadth continued to gain more bearish ground last week and has, therefore, not shown any signs of bullish divergences yet. Especially, the Modified McClellan Oscillator Weekly dropped to a new low last week and is, therefore, signaling that the overall mid-term oriented tape momentum remains outright weak. This can be also observed if we focus on the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators kept trading at outright low levels and are, therefore, far away from confirming the current levels from the S&P 500. Above all, these signals are also telling us that the latest recovery was not supported by a broad basis and, therefore, further down-testing on a mid-term time horizon looks quite likely. This view is strongly in line with the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators kept trading at outright bearish levels and have not formed any signs of bullish divergences yet. In such a situation, we would be outright surprised to see sustainable gains ahead!

Long-Term Technical Condition

The long-term condition of the market continued to deteriorate and, therefore, our bearish outlook has not been changed so far. The Global Futures Long Term Trend Index continued to strengthen its bearish signal and is, therefore, telling us that the current bull-market (in the US) is showing major signs of exhaustion. This can be also seen if we focus on the WSC Global Momentum Indicator as only 13 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. In a global context, we, therefore, received further confirmation that the current bull market has come to an end! Therefore, it is not a big surprise that the relative strength of all risky markets kept trading well below the one from U.S. Treasuries. More importantly, long-term oriented market breadth has also not shown any signs of bullish divergences yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground, whereas the percentage of stockss which are trading above their long-term simple moving averages and the High-/Low Index Weekly are far away from being supportive.

Bottom Line

The overall outlook remains almost unchanged compared to last week. In line with our recent outlook, the market is in the middle of a correction and, therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. On a very short-time frame further bouncing/sideways trading cannot be ruled out. But given the outright weak tape structure the market we still expect to see a retest or at least a stronger down-leg towards the latest correction low within the next couple of days/weeks. From a trading perspective, a break above 1,980 would give way to 2,000 and if the S&P 500 will manage to close above this threshold, a move towards 2,020 can be expected (quite unlikely). On the other hand, a break below 1,935 would call for further down-testing towards 1,900, whereas a break of those levels would give way towards the latest correction low. Stay tuned!