March 08. 2015

Market Review

U.S. stocks recorded a second straight week of losses. The Dow Jones Industrial Average fell 1.5 percent in five trading days to end at 18,056.78. The S&P 500 recorded a 1.6 percent loss over the week and closed at 2,071.26. The broad index suffered its steepest decline in two months. The Nasdaq dropped 0.7 percent for the week to 4,927.47. All key S&P sectors ended in negative territory for the week led by utilities. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the market looked vulnerable for a stronger pullback and, therefore, it was not a big surprise at all that stocks ended down for the week. Obviously, the predicted consolidation period caused a deterioration of the short-term uptrend of the market, as the Modified MACD flashed a bearish crossover signal last week, plus the S&P 500 closed slightly below the bearish threshold from the Trend Trader Index. Nevertheless, both envelope lines of the Trend Trader Index are still rising, which indicates that the short-term uptrend of the market still remains intact from a structural point of view. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which has not turned bearish so far, although its gauge came down recently. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the market is entering a consolidation period or if the market is taking a breather. In such a situation, short- to mid-term market breadth will give guidance if further losses or if renewed strengths can be expected. Normally, a consolidation period is considered to be healthy one as long as short-term to mid-term market breadth does not completely turn bearish and as long as our mid-term oriented trend-indicators remain supportive!

Right now, short-term market breadth still looks quite constructive although the impact of the pullback from last week has definitely left its mark on our tape indicators. This is mainly due to the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal last week, indicating that the tape momentum of the market turned negative. Moreover, the percentage of stockss which are trading above their 20 day moving average have been pushed below their bullish threshold, indicating a weakening upside participation on a very short time frame! Nevertheless, the recent sell-off was mainly driven by profit taking so far, as only the number of stockss which are hitting a fresh yearly high have come down significantly, whereas there was hardly any increase in the amount of new yearly lows! Especially on Friday, there were only 66 stocks which were pushed to a new yearly low, although the market faced a stronger sell-off on that day! As a matter of fact, the reading of the High-/Low-Index Daily still remains quite bullish, plus the percentage of stockss which are trading above their 50 day moving average were holding up quite well for the week. Especially, if we consider the magnitude of Friday’s decline. And, therefore, the overall short-term oriented tape structure still looks somehow constructive for the time being.

From a pure contrarian point of view, the overall technical picture of the market is extremely mixed at the moment. This is mainly due to the fact that the WSC Index and the WSC Index Oscillator grew into supportive territory, whereas the gauge from the ISEE Call-/Put Ratio and from the All CBOE Daily Put-/Call Ratio Oscillator turned bullish last week. Above all the WSC Capitulation Index is still indicating a risk-on environment, plus the bullish 7-week cycle is due next week. On the other hand, we can see that the Global Futures Put-/Volume Ratio Oscillator flashed a cautious signal, as the Global Futures Trading Index dropped strongly into bearish territory. The same is true if we focus on the Equity Options Call-/Put Ratio Oscillator Daily and the OEX Call-/Put Ratio Oscillator Weekly, plus the 9-week crash cycle is also due next week! As a matter of fact, strong swings in both directions can be expected next week!

On a mid-term time horizon, those increased swings can be definitely ignored at the moment. This is mainly due to the fact that the Global Futures Trend Index is still trading far above its bearish 60 percent threshold. To be more precise, its gauge finished the week within the upper range of its bullish consolidation area and, therefore, it is too early to issue a strategic sell signal at the moment. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening market breadth), as it would be an indication that a stronger correction lies ahead. Therefore, it is a bit too early to panic right now. In addition, we can see that the WSC Sector Momentum Indicator gained even more bullish ground last week, indicating that most 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 relative strength score of most sectors remains above the one from riskless money market. Only energy has a lower scoring and, therefore, it is too early to bet on a sustainable trend-change in that sector.

Mid-Term Technical Condition

On a mid-term time horizon, those increased swings can be definitely ignored at the moment. This is mainly due to the fact that the Global Futures Trend Index is still trading far above its bearish 60 percent threshold. To be more precise, its gauge finished the week within the upper range of its bullish consolidation area and, therefore, it is too early to issue a strategic sell signal at the moment. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening market breadth), as it would be an indication that a stronger correction lies ahead. Therefore, it is a bit too early to panic right now. In addition, we can see that the WSC Sector Momentum Indicator gained even more bullish ground last week, indicating that most 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 relative strength score of most sectors remains above the one from riskless money market. Only energy has a lower scoring and, therefore, it is too early to bet on a sustainable trend-change in that sector.

Despite the fact that the recent sell-off has definitely caused further deterioration within our mid-term oriented tape indicators, their readings still remains supportive. Especially, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) kept trading far above their bearish threshold. This indicates that the current uptrend is still supported by the majority of stocks and, therefore, it is a bit too early to get concerned about the current sell-off. Moreover, we can see that the Modified McClellan Oscillator Weekly has not turned bearish yet and, therefore, the overall tape momentum remains supportive (at least on low levels). However, one of our biggest concerns at the moment is definitely the fact that mid-term oriented up-volume as well as mid-term oriented advancing issues decreased significantly last week. This was definitely a big surprise as the market only declined less that 2 percent for the week. This indicates that a lot of purchasing power has been pulled out of the market. So if this trend continues, it is just a question of time until the Advance-/Decline Index Weekly turns bearish too! Normally, bearish or extreme weak readings of those two indicators in combination with a mid-term oriented trend-break within the Global Futures Trend Index mostly led to a stronger correction in the past. For that reason, we keep a close eye those three indicators as we will issue a strategic sell signal immediately if this is the case! Right now, we can ignore the readings from those two indicators, since the remaining breadth indicators are still supportive and the Global Futures Trend Index still keeps trading at quite bullish levels.

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. From a regional point of view, we can see that the global bull market remains quite selective as only 45 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. From a pure asset allocation point of view, we can see that the relative trend score of all risky assets remain above their bearish zero percent thresholds. Nevertheless, we can see that commodities remain the weakest asset class and, therefore, it is still too early to bet on a recovery of that asset class. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stockss which are trading above their 200 day simple moving average remain quite bullish, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Above all, we can see that the Modified McClellan Volume Oscillator Weekly has not turn bearish yet, indicating that the overall breadth momentum still remains positive (at least on low levels).

Bottom Line

The bottom line: from a pure contrarian point of view, strong swings in both directions can be expected. Right now, the current consolidation period still looks quite healthy although we cannot rule out further down testing towards 2,064. A break of that level would imply further losses towards 2,000 whereas 1,980/1,972 would represent our worst case scenario (for the time being), if we see further deterioration within our short- to mid-term market breadth indicators. On the upside, the market looks quite capped at 2,130 to 2,145. Anyhow, as the mid- to long-term trend condition of the market looks outright bullish, any upcoming weaknesses just represent a normal pullback within an ongoing bull-market. As a matter of fact, we would advise our conservative members to hold their equity position as it is still too early to issue a strategic sell signal. Aggressive traders should monitor our short-term indicators closely in the next couple of trading sessions. Stay tuned!