March 16. 2014

Market Review

U.S. stocks ended the week with deep losses. The Dow Jones Industrial Average dropped 2.4 percent from the week-ago close to 16,065.67. The S&P 500 recorded a 2 percent loss over the week and finished at 1,790.29. Both the S&P 500 and the Dow Jones suffered their worst week since late January. The Nasdaq Composite shed 2.1 percent over the past week to 4,245.40, its first weekly decline in six and the worst since April 2013. Utilities and consumer staples led gainers among the S&P?s 10 major sectors. The Chicago Board Options Exchange Volatility Index, a gauge for U.S. stock volatility, rose 26 percent for the week to 17.82. The measure has advanced 30 percent this year.

Short-Term Technical Condition

Anyhow, 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 healthy breather. In such a situation, short- to mid-term market breadth will give guidance if any upcoming short-term bullish trend break will lead to stronger 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, indicating that the market internals remain quite healthy.

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. The Modified McClellan Oscillator Daily flashed a bearish crossover signal on high levels last week, plus most NYSE listed stocks closed below their 20 day simple moving average, indicating a weakening tape structure. Nevertheless, we can see that the current consolidation is mainly driven by profit taking so far, as the number of stockss which are hitting a fresh yearly high have come down significantly, whereas the increase in the amount of new lows has developed moderately so far. For that reason, the High-/Low Index Daily has not flashed a bearish crossover signal so far, as the smoothed new lows have not shown any signs of strength yet.

From a pure contrarian point of view, we think that the current consolidation is close to end, as the market is extremely oversold (Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily) and we additionally have received a fresh buy signal from the Global Futures Trading Index. Nevertheless we think there is a good chance for another strong down-leg as the Smart Money Flow Index is still showing a quite bearish divergence to the Dow, the option market has not thrown in the towel yet, plus the Capitulation Index has not dropped by half of its rise yet, indicating that further down-testing might be likely. So all in all, we think that a final washout towards 1,815 and worst case 1,795 might be possible if the S&P 500 breaks/closes below 1,830, before further gains into Q2 can be expected.

Mid-Term Technical Condition

Despite the fact that further down-testing is possible, any upcoming pullback should be limited in price and time as our entire mid-term oriented trend- as well as breadth indicators still remain quite bullish. The gauge of our reliable Global Futures Trend Index came down a bit recently, but is still trading at the upper range of the bullish consolidation period, indicating a healthy uptrend. The WSC Sector Momentum Indicator is far away from being bearish, telling us that most underlying sectors within the S&P 500 are still trending higher on a mid-term time horizon. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas health care and industrials remain the strongest sectors for the time being.

Moreover, the current mid-term oriented up-trend is still confirmed by mid-term market breadth, as our entire tape indicators still remain bullish from a pure signal point of view. Last week, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly did not turned bearish, although most major averages faced stronger declines 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 above their bearish 50 percent threshold, although their readings came down last week, indicating that most NYSE listed stocks are still per definition in a strong mid-term oriented up-trend. Moreover, 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. For that reason, we think that after the current consolidation period the market is highly likely to rally towards 1,920/1,950 into Q2, before a cyclical bear market might be due (Charts of Interest).

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains quite strong and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating that the current bull market still remains in force from a technical point of view, whereas the relative strengths from US equities is trading well above the bearish 50 percent threshold from the WSC Global Relative Strengths Indicator. Moreover, we can see that commodities are building up strong momentum, which is another indication that a cyclical bear market might be due in late Q2, as this asset class mostly rallies during the late stages of a bull market. Anyhow, another encouraging trend-signal is coming from the WSC Global Momentum Indicator, which turned bullish, indicating that most risky markets around the globe were pushed back into a long-term up-trend last week. More importantly, long-term oriented market breadth still looks quite constructive, as the percentage of stockss which are trading above their 200 day simple moving average are far away from being bearish, although the gauge from this reliable indicator came down a bit recently. Moreover, we can see that the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. In addition, the Modified McClellan Volume Oscillator Weekly has not turned bearish yet, indicating a quite healthy tape structure.

Bottom Line

The bottom line: as the evidences of more down-testing are increasing, we are quite cautious for the short-term. All in all, we would not be surprised to see further declines until 1,815 (and in extreme circumstances 1,795, if short-term market breadth continues to weaken), if we see a break below 1,830 from the S&P 500. Therefore, aggressive traders can take some profits if we see a break below 1,830 or start slightly buying into weaknesses if they want to act contrarian. Conservative members should hold/increase their equity position as we still think that the S&P 500 could rally towards 1,950 into mid/late Q2 before a cyclical bear market might be due. Stay tuned!