September 01. 2013

Market Review

Right in line, with our recent call, U.S. stocks closed in negative territory for the week. For Last week, the Dow Jones Industrial Average slipped 1.3 percent to finish at 14,810.31. The blue-chip benchmark is down 4.5 percent for the month. The S&P 500 dipped 1.8 percent in five trading days to end at 1,632.97. The benchmark gauge for American equities is off 3.1 percent for the month. Both the Dow and the S&P 500 posted their worst monthly declines since May 2012. The Nasdaq slumped 1.9 percent for the week to close at 3,589.87. It slid 1 percent for the month. Most key S&P sectors finished higher, led by materials, while consumer staples ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 17.

Short-Term Technical Condition

As per last week’s report, the short-term down-trend of the market remains well intact, since our entire short-term trend indicators remain bearish at the moment (Trend Trader Index, Modified MACD and the Advance-/Decline 20 Day Momentum). If we have a closer look at the envelope lines of the Trend Trader Index, we can see that they are definitely drifting lower, indicating that the resistance/support levels for the S&P 500 are decreasing as well. In other words, as long as the market is not able to break through this strong support lines, we will see lower highs and lower lows, which is a typical pattern for a short-term down-trend. The readings of the Modified MACD have been pushed to a new low last week, whereas the gauge of Advance-/Decline 20 Day Momentum Indicator is trading well below its bullish threshold, indicating more troubles ahead on a short-term time frame.

More importantly, short-term market breadth does not look rosy at all, since the Modified McClellan Oscillator Daily has continued to gain more bearish ground last week, whereas the percentage of NYSE-listed stocks which are trading above their short-term oriented simple moving averages (20/50) remain bearish (20), or have been pushed below their bullish threshold last week (50). In addition, the readings of the High-/Low Index Daily still remain bearish from a pure signal point of view, plus short-term down-volume is trading well above short-term up-volume, which is another indication for a weakening market breadth structure

Moreover, we can see that Smart Money is still selling heavily into the market and our reliable WSC Capitulation Index has not dropped by half of its rise yet, indicating that it is too early to call for a sustainable bottom yet. Despite the fact that our entire short-term oriented trend- as well as -breadth indicators are quite bearish from a pure signal point of view, we can see some small bullish divergences in some of them. Especially the gauge of the Advance-/Decline 20 Day Momentum Indicator refused to drop to a new low, although the market did. Furthermore, there had been a significant reduction in the number of stockss which are hitting a fresh yearly low, although we have seen a 9-to-1 down-day last week, indicating that large institutional investors have reduced their equity position significantly. Normally, after such a capitulation event, the market is running into a minor low, which could be the basis for a short-lived counter-trend rally. Since the market is quite oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily), in combination with fresh buy signals from some of our contrarian indicators (Market Timer Index, Trin Daily and the Global Futures Trading Index) we think such a scenario might be possible. Nevertheless, as long as our short-term oriented trend- as well as breadth-indicators remains weak, we think it is too early to get bullish from a strategic point of view.

Mid-Term Technical Condition

Although the WSC Sector Momentum Indicator has not dropped below its bullish threshold yet, the mid-term oriented trend of the market is quite damaged at the moment. The main reason for that is clearly the fact that the gauge of the leading Global Futures Trend Index is still trading within its bearish biased trading range brackets even though we have seen some stabilization at quite low levels. Normally, as long as we do not see any upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, we think that any upcoming volatile bounce should be limited in price and time.

More importantly, mid-term oriented market breadth looks outright fragile at the moment, since the Modified McClellan Oscillator Weekly has been pushed to a new low last week and the percentage of NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150) have decreased significantly for the week. More importantly, the gauges from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly remain quite depressed, indicating that the market internals are extremely weak at the moment. Normally, as long as both, advancing issues as well as up-volume are not clearly trading above their bearish counterparts, nasty waterfall declines are highly likely and, therefore, we remain extremely cautious at the moment.

Long-Term Technical Condition

The long-term uptrend of the market remains intact for now, as most of our long-term trend indicators are bullish at the moment (Global Futures Long Term Trend Index and the WSC Global Relative Strengths). The long-term relative strength score of U.S. equities is trading well above its bearish zero percent threshold, while the Global Futures Long Term Trend Index is still indicating a technical bull market. According to the WSC Global Momentum Indicator, we can see that the global bull market is slightly running out of steam as only 45 percent out of 36 global stock market ETFs (all denominated in USD) are still in a long-term up-trend. Right now it is a bit too early to get concerned about those readings, since long-term oriented market breadth is still kind of bullish biased, as the High-/Low Index Weekly as well as the percentage of stockss which are trading above their 200 day simple moving averages have not turned bearish yet. Only the Modified McClellan Volume Oscillator Weekly has continued to decrease for the week, indicating that the overall strength has started lagging behind. Anyhow, right now it is a bit too early to get concerned about those readings, but if we see further bearish crossovers within our long-term tape indicators, we think it is possible to see a cyclical bear market ahead!

Bottom Line

The bottom line: since the market remains quite bearish (biased) for the short- to mid-term time horizon, we strongly believe that any upcoming bounce will be limited in price and time. Nevertheless, it could be possible to see a stronger volatile bounce towards 1,655 as the market is quite oversold at the moment. Therefore, short-sellers should take some profits if we see the first meaningful bullish reversal candle before selling into strengths again, if we do not see any significant drop in our WSC Capitulation Index or a bearish trend break in our short-term oriented trend-indicators. More conservative investors should stay at the sideline, since the current technical condition of the market remains outright weak at the moment. Stay tuned!