October 05. 2014

Market Review

Last week all three major U.S. averages ended in negative territory. For the week the Dow Jones Industrial Average dropped 0.6 percent to 17,009.69. The S&P 500 dropped 0.8 percent to 1,967.90 during the week. The Nasdaq declined 0.8 percent from the week-ago close, ending at 4,475.62. Most key S&P sectors ended in red for the week, led by energy. Consumer staples and utilities were the only gainers. The Chicago Board Options Exchange Volatility Index (VIX), the gauge of S&P 500 options known as the VIX, dropped to 14.55.

Short-Term Technical Condition

Until Thursday, the S&P 500 tumbled almost 40 points towards 1,946, before finishing the last day of the week on a higher note. Not surprisingly, the short-term oriented down-trend of the market gained even more bearish ground last week. This is mainly due to the fact that the S&P 500 closed 27 points below the bullish threshold from the Trend Trader Index. In addition, both envelope lines of this reliable indicator continued to drift lower, indicating that we saw lower lows and lower highs within the past 20 days, which is a typical pattern for a negative trend structure. So even if the S&P 500 managed to close above the bullish threshold from the Trend Trader Index, the market would remain per definition in a bounce mode as long as we do not see rising envelope lines again. The current bearish trend structure can be also seen if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator as both indicators reached a new low last week, indicating more troubles ahead on a short-term time frame.

More importantly, short-term market breadth does not look rosy at all and, therefore, we think any upcoming volatile bounce should be limited in price and time. Especially, the readings from the Modified McClellan Oscillator Daily continued to gain more bearish ground last week, indicating that the underlying breadth momentum of the market is outright bearish at the moment. We did not even see small signs of strength within that indicator on Friday, where the S&P 500 recovered almost 30 points. This is telling us that Friday’s bounce was mostly driven by short-covering instead of a significant improvement within the tape structure. This picture is widely confirmed by the NYSE New Highs minus New Lows Indicator, as we have only seen a reduction in the amount of new yearly lows instead of an increase in new yearly highs. As a matter of fact, the High-/Low Index Weekly continued to gain more bearish ground and, therefore, the market is still showing a quite negative divergence to the current readings of that indicator. Furthermore, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) are trading far below their 50 percent bullish threshold and did not show any signs of strong recovery on Friday, indicating more troubles on the horizon.

From a pure contrarian point of view, we cannot rule out further bouncing towards 1,980 as the gauge from the Daily Put/Call Ratio All CBOE Options Indicator reached contrarian territory last week. Moreover, the market is quite oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and in combination with a spike in the Trin (Daily), the oversold bounce might continue on a very short time frame. Nevertheless, given the current negative readings all across the board, we think that any upcoming bounce should be limited in price and time before renewed strong losses can be expected.

Mid-Term Technical Condition

If we have a closer look at our mid-term oriented indicators, we have received even more confirmation that the down-leg from last week is just the beginning of a stronger correction instead of a healthy breather! This is mainly due to the fact that the gauge from the Global Future Trend Index continued to deteriorate and dropped, therefore, into bearish territory last week! In such a scenario, the risk of a fast paced waterfall decline remains outright high, especially if we consider the massive bearish divergence between the market and that indicator! The last time we saw such low readings within the Global Future Trend Index was in August 2011, where the S&P 500 faced its deepest correction within the current bull-market. As a matter of fact, we think that any upcoming bounce should be limited in price and time as long as we do not see a strong recovery in the readings of that indicator. Only, from a pure price point of view, the mid-term oriented uptrend of the market has not been broken yet as the WSC Sector Momentum Indicator is still holding up quite well. This indicates that most sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we focus on our Sector Heat Map, as the relative strengths score of riskless money market remains at zero percent.

More importantly, the current bearish biased mid-term oriented trend is strongly confirmed by mid-term oriented market breadth. This is mainly due to the fact that our entire mid-term oriented tape indicators remain or turned bearish last week and are, therefore, showing a huge bearish divergence to the S&P 500 right now. 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 percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators have been pushed to their lowest levels since months 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 turned already short, whereas only some large caps are supporting major indexes! As already mentioned last week, such a situation can never be sustainable over the long run. It was also interesting to see that the Advance-/Decline Volume Line dropped to a new low last week, predicting more dark clouds on the horizon. 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. This is another important ingredient for a stronger correction as both indicators normally turn bearish before major troubles are due!

Long-Term Technical Condition

If we focus on the long-term condition of the market we can see already some major signs of exhaustion, which is in line with our short- to mid-term oriented bearish outlook. Apart from the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, most global market indexes have already broken below their long-term oriented trend-lines. Therefore, the WSC Global Momentum Indicator flashed a bearish signal last week, whereas the overall relative strength from most risky markets remains outright weak at the moment. This is another indication for a mature bull market. This can be also seen if we focus on long-term market breadth. Last week, the Modified McClellan Volume Oscillator Weekly dropped to a new low, indicating that the underlying tape momentum of the market is outright bearish at the moment. Moreover, most NYSE listed stocks have broken below their long-term oriented trend-lines, whereas the High-/Low Index Weekly is about to flash a bearish crossover signal soon. So all in all, we have received even more confirmation that the current bull market is running out of steam!

Bottom Line

The overall outlook remains almost unchanged compared to last week. The market is at the brink of a correction and, therefore, we remain quite cautious at the moment. As capital appreciation is the most important driver for long-term success, we would advise our conservative members to stay at the sideline as the current risk-/reward ratio is too low at the moment. As some of our contrarian indicators flashed a buy signal last week, we cannot rule out an oversold bounce towards 1,980. Nevertheless, we think that any upcoming bounce should be limited in price and time before further strong losses can be expected! From a trading perspective, aggressive traders should close their profitable short positions if the market closes above 1,980 and should reopen them again, if we see the first meaningful bearish reversal candle. On the other hand, they should increase exposure if the market drops below 1,948 as further overshooting towards 1,900/1,890 can be expected. Stay tuned!