September 11. 2016

Market Review

U.S. stocks finished the holiday-shortened week with deep losses. The Dow Jones Industrial Average slumped 2.2 percent over the week to end at 18,085. The S&P 500 dropped 2.4 percent for the week to finish at 2,127. The Nasdaq lost 2.4 percent for the week to end at 5,125. For the month to date, the Dow is 1.7 percent lower, the S&P 500 is off 2 percent, and the Nasdaq down 1.7 percent. Among the key S&P sectors, utilities were the best weekly performer, while materials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded more than 30 percent higher, near 16.4.

Short-Term Technical Condition

U.S. stock indexes continued to trade in a very tight window until Friday, when they faced their biggest drop since June. Obviously, the recent pullback on Friday caused a deterioration of the short-term oriented trend structure of the market. So from a pure price point of view, the short-term trend of the market clearly turned bearish last week as the S&P 500 closed 42 points below the bullish threshold from the Trend Trader Index. Moreover, our reliable Modified MACD continued to gain more bearish ground last week, indicating that further down-testing is likely. 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 were still holding up quite well and, therefore, they appear to be quite flattish at the moment. The same is true if we focus on the Advance-/Decline 20 Days Momentum Indicator as its gauge remains bullish on low levels. Despite the fact that the recent pullback on Friday looked quite frightening (at least from a pure news-point of view), the underlying trend structure of the market still remains somehow supportive. As already mentioned a couple of times, in general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate or even turn completely bearish, when the market is trading sideways with increased volatility. In such a situation, short- to mid-term market breadth will give guidance if the recent sell-off on Friday will lead to further losses or if it was just typical sentiment driven washout (which often occurs at the end of a consolidation period before the market takes off again).

Right now, short-term market breadth still looks quite constructive, although the impact of the recent pullback has definitely left its mark on the readings of our tape indicators. This becomes quite obvious if we focus on the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) as both indicators dropped below their bullish threshold last week. Moreover, we can see that the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily have not managed to turn bullish yet. On the other hand, we still can see that the remaining market internals remain somehow 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. Thus, most of the selling pressure was driven by profit taking rather than by a structural change within the market internals. Additionally, we can see that the underlying breadth momentum is somehow regaining strength as the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily have somehow formed a bullish divergence if we consider the magnitude of the recent decline.

From a pure contrarian point of view, the sideways trading/down testing period is definitely not over yet. The Smart Money Flow Index has been holding up quite well recently, as it continued to trade more or less sideways last week. So in other words, the recent decline was not confirmed by the smart guys, although further bullish impulses are missing as well. On the other hand we can see that the OEX Call-/Put Ratio Oscillator Weekly and the WallStreetCourier Index remain supportive, whereas the WSC Capitulation Index is still signaling a risk-off market scenario. Moreover, we can see that September until October tends to be a quite challenging month from a pure seasonal point of view (Cycles).

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 strong reason why we believe that the chances for a stronger correction looks quite limited at the moment is due to the fact that the current mid-term oriented up-trend of the market is still strongly confirmed by mid-term oriented market breadth. To be more precise, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at quite solid levels, although the broad market closed sharply lower for the week. Furthermore, we can see that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are still trading strongly above their bearish 50 percent threshold, indicating that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. Above all, the Modified McClellan Oscillator Weekly has not shown any signs of weaknesses yet and, therefore, the current tape condition still remains constructive in its nature. As a matter of fact, we think that further gains can be expected on a mid-term time horizon (and, therefore, it is a way too early to take the chips from the table).

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact 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 for U.S. equities, whereas the WSC Global Momentum Indicator shows that 82 percent of all global markets remain within a long-term oriented uptrend. Unchanged compared to last week, we can see that the relative strengths of most risky markets remain positive, which is underlining our mid- to long-term oriented bullish view. On top of that, long-term market breadth is giving no reason to worry at the moment and, therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). 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

The bottom line: on a very short time frame and from a pure seasonal point of view, the market looks vulnerable for further down-testing and/or increased volatility into mid-/late September. However, with quite solid readings all across the board, we strongly believe that the down-side potential should be limited in price and time. As a consequence our strategic bullish outlook remains unchanged and, therefore, we would advise our conservative members to hold their equity position. From a trading perspective, a break below 2,119/2,113 would give way to 2,109/2,102 and if the S&P 500 will manage to close below that threshold, a retest of 2,087 looks quite possible. On the other side, if the S&P 500 climbs above 2,135 a move towards 2,157 can be expected. Despite the fact that the current trading-range might look attractive for aggressive traders to play, we would advise them to use close stop loss limits (if they do so). Stay tuned!