September 27. 2015

Market Review

U.S. stocks ended the week with losses. The Dow Jones Industrial Average fell 0.4 percent in five trading days to end at 16,314.67. The S&P 500 booked a 1.4 percent loss over the week and closed at 1,931.34. The Nasdaq dropped 2.9 percent for the week to 4,686.50. All three major averages are negative for 2015. Most key S&P sectors ended in negative territory for the week, led by health care. Financials, utilities and consumer staples were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 23.

Short-Term Technical Condition

In line with our recent outlook, the market strongly pulled back last week. Not surprisingly, the short-term oriented trend of the market deteriorated significantly last week. This is mainly due to the fact that the S&P 500 closed 41 points below the bullish threshold from the Trend Trader Index. So from a pure price point of view, the short-term oriented trend of the market remains bearish biased as long as the S&P 500 does not manage to close above 1,972 (upper envelope line from the Trend Trader Index). Above all we can see that both envelope lines of this reliable indicator have not shown any major signs of stabilization yet, which is another indication that it might be still a bit too early to call for a major trend reversal at this point in time. This can be also seen, if we have a closer look at the Modified MACD and at the Advance-/Decline 20 Day Momentum as both indicators picked up strong bearish momentum last week. As a matter of fact, the gauge from the Advance-/Decline 20 Day Momentum dropped into bearish territory, whereas the Modified MACD is about to follow soon and, therefore, further down-testing looks quite likely!

This view is strongly confirmed by short-term market breadth as our short-term oriented tape indicators had to take a hard hit during the last couple of trading session. As a consequence, most of them strengthened their bearish signal or even flashed a bearish crossover signal last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have shown major signs of exhaustion during the last couple of trading sessions, indicating that the underlying tape momentum of the market looks quite damaged at the moment. With such weak readings, we would be quite surprised to see sustainable gains ahead! On top of that, we can see that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped below their bullish threshold (20) or even continued to strengthen their bearish signals (50). To be more precise, only 31 and 23 percent of all NYSE listed stocks managed to close above their 20 day and 50 day moving averages, respectively. In our opinion, such numbers are a way too weak to act contrarian at this point in time. This picture is widely confirmed by the NYSE New Highs minus New Lows Indicator, as we have seen a quite strong increase in the amount of new lows, whereas the amount of new yearly highs remains quite depressed! As a matter of fact, the High-/Low Index Daily picked up even more bearish momentum last week! So all in all, the market internals are extremely damaged at the moment and, therefore, it might be just a question of time until further strong losses can be expected!

The situation from a pure contrarian point of view remains almost unchanged compared to last week.
The fear/uncertainty among the crowd remains persistent and, therefore, most of our contrarian indicators remain quite supportive (WallStreetCourier Index, Program Trading Buy/Sell Spread, Global Futures Put-/Volume Ratio, All CBOE Options Call-/Put Ratio and the Sentiment Market Vane). So from a pure contrarian point of view, a stronger counter-trend rally looks quite likely. Nevertheless, given the outright bearish readings within our short-term trend- as well as breadth indicators, any trend-breaking divergences should be ignored at the moment!

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented condition of the market. Especially, the readings of the Global Future Trend Index are telling us that it is still a bit too early to get back into the market as its gauge dropped back below its extremely bearish 20 percent threshold last week. 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 bearish 60 percent threshold! Unchanged compared to last week, 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 continued 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, the current bearish mid-term oriented trend is still strongly confirmed by mid-term oriented market breadth. This is mainly due to the fact that our entire mid-term oriented tape indicators remain outright bearish and have, 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 at the moment. 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 well below their bullish 50 percent threshold and are, therefore, far away from confirming the current levels from the S&P 500. In addition, these signals are telling us that the broad market is still quite damaged and, therefore, the recent recovery was mainly driven by short-covering so far. Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals slightly strengthened for the week and kept, therefore, trading at outright bearish levels. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, it is too early to call for a major bottom at the moment!

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, indicating that the US equities remain in an extremely risk-off environment at the moment. This can be also seen if we focus on the WSC Global Momentum Indicator as only 10 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 far below the one from U.S. Treasuries. Above all, we can see that 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 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. Furthermore, we have not seen any major positive signals/divergences within our short- to long-term indicator framework to call for an important bottom at the moment. This can be also seen if we focus on our core indicator dashboard (Charts of Interest), which will be published on a regular basis soon. As a matter of fact, we still expect to see a retest or at least a stronger down-leg towards the latest correction low. As the market finished the week below 1,935 such a scenario looks quite possible as break below 1,900 would pave the way towards 1,880 /1,865. Stay tuned!