September 06. 2015

Market Review

U.S. stocks finished another week with deep losses and with the main benchmarks recording weekly losses of more than 3 percent. For the week, the Dow Jones Industrial Average dropped 3.3 percent to 16,102.38. Among the blue-chip stocks, 29 out of 30 posted weekly losses. The Dow lost more than 1,550 points over the past two weeks. The S&P 500 fell 3.4 percent during the week to 1,921.22. The second-biggest retreat since December behind the 5.8 percent plunge it suffered in the five days through Aug. 21. The Nasdaq posted a 3.0 percent weekly loss and finished at 4,683.92. Among the S&P sectors, the biggest decliners this week were utilities stocks, which shed 5.2 percent since, while health-care and financials stocks lost 4.4 percent and 4.3 percent respectively. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.5.

Short-Term Technical Condition

In our last week’s comment, we highlighted the fact that the six percent rally should only be seen as a stronger bounce rather than the start of a new significant up-trend as we had not received any signs for a sustainable bottom. Consequently, we advised our members not to buy into the rebound as we expected to see at least another significant down-leg (that could push the market even back towards the latest correction low). Moreover, we mentioned that we would monitor such a renewed down-leg quite carefully as it would give us further guidance where the market is heading. To be more precise, if such a down-leg/retest is accompanied with positive divergences in market breadth (shrinking downside volume/declining issues, decreasing new lows, increased tape momentum and fewer stocks below their moving averages) in combination with persistent buy signals within our contrarian indicators, we have the final confirmation for an important bottom. According to our cyclical roadmap (presidential cycle) such a bottom could only act as basis for another stronger rebound (even towards new marginal highs), before further troubles might be due. Anyhow, as our cyclical roadmap should only be seen as a general guideline instead of a precise trading plan, our indicators remain key area of focus!

According to our short-term oriented trend indicators, the short-term oriented down-trend of the market remains well in force and gained even more bearish ground last week! From a pure price point of view, we can see that the S&P 500 closed 107 points below the bullish threshold from the Trend Trader Index. Not surprisingly we can also see that both envelope lines of this reliable indicator also kept drifting lower on a very fast pace, indicating an outright underlying bearish trend-structure at the moment. The same is true if we focus on the Modified MACD, as its short-term oriented gauge dropped to a new low last week and has, therefore, definitely not confirmed the current levels from the S&P 500. Above all, the Advance-/Decline 20 Day Momentum Indicator remains quite bearish, although its gauge refused to confirm the latest low on Friday. Despite the fact that this indicates some form of positive divergence, this signal is a way too weak to be taken too seriously at the moment.

This view is also strongly confirmed by short-term oriented market breadth. This is due to the fact that we have not seen any bullish divergences/crossover signals so far, which would be the first indication for a short-term oriented trend reversal. Despite the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have shown some small signs of recovery recently, their readings remain bearish. On top of that, we can see that their signal strength is a way too weak to be taken too seriously for the time being. Another concerning fact is that the underlying trend structure of the market remains outright damaged at the moment. This is mainly due to the fact that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) are still trading far below their 50 percent bullish threshold. To be more precise, only 23 and 18 percent of all NYSE listed stocks managed to close above their 20 day and 50 day moving averages, respectively. Such numbers are a way too weak to act contrarian for that point in time. Nevertheless, last week’s move has produced some form of bullish divergence within our NYSE New Highs Minus New Lows Indicator. This is mainly due to the fact that there were hardly any new stocks which dropped to a new yearly low last week and, therefore, the bearish gauge from High-/Low Index Daily decreased significantly (although the S&P 500 is trading at outright low levels). Despite the fact that such a signal can be interpreted as a small silver lining on the horizon, it is a bit too early to act contrarian as we need to see more positive divergences within our short-term oriented tape indicators first!

The situation on the contrarian side is almost unchanged compared to last week. Despite the fact that the Smart Money Flow Index and the WSC Capitulation Index are still indicating further troubles ahead, the signals of most of our contrarian indicators (the WallStreetCourier Index, the Program Trading Buy Sell Spread, Global Futures Put-/Volume Ratio, Global Futures Put-/Volume Ratio Oscillator, All CBOE Options Call-/Put Ratio, All CBOE Options Call-/Put Ratio Oscillator, Sentiment Market Vane and the Global Futures Sentiment Index) remain outright bullish or at least supportive. Given the quite strong readings within our contrarian indicators, a strong and fast paced rebound could be possible, once short-term sentiment turns bullish again. As a matter of fact, aggressive short-sellers should use close stops. Furthermore, this is also telling us that any upcoming corrective bounce might have enough power to pull the market towards the old May top. Such a move would fit into our cyclical roadmap, where a stronger but corrective counter-trend rally looks quite likely, once the market will hit an intermediate bottom.

Mid-Term Technical Condition

However, right now it is a bit too early to call for such an event as the gauge from the Global Futures Trend Index continued to deteriorate for the week. As a matter of fact this reliable indicator dropped deeper into bearish territory, indicting further troubles ahead. As already mentioned in our previous market comments, as long as we do not see any 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 further down-testing looks quite likely. Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals strengthened last week. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, further troubles are quite likely.

Long-Term Technical Condition

As per last week’s report, the long-term condition of the market continued to show major signs of exhaustion and, therefore, our bearish outlook has not been changed so far. Especially, the Global Futures Long Term Trend Index continued to deteriorate significantly for the week and, therefore, almost flashed a bearish signal last week. This is another indication that the current bull market (in the US) is showing strong 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. As we have not seen any major positive signals/divergences within our short- to mid-term indicator framework yet, further down-testing towards the latest reaction low looks quite likely. As a matter of fact, our approach is to watch the down-testing process quite closely as it will give us further guidance where the market is heading. So if the S&P 500 drops to new lows without bearish confirmation, a stronger recovery is imminent, whereas confirmative bearish tape signals would give way to new record lows! Right now our best guess is that the market will follow our cyclical roadmap but we need to see further confirmation first. Stay tuned!