October 04. 2015

Market Review

Major US equity indexes ended higher in extremely volatile trading last week. To be more precise, stocks fell sharply at the start of the week, reaching back toward the lows they had established at the end of August. On Tuesday, the S&P 500 had dropped towards our preferred price target of 1,871.91, before a strong two-day rally on Wednesday and Thursday brought some relief. On Friday, the Dow and S&P 500 closed up more than 1 percent for their biggest intraday upside reversal since October 2011. In the end, all three U.S. major averages posted modest gains for the week. The Dow Jones Industrial Average gained 1.0 percent from the prior Friday’s close to end at 16,472.37. The S&P 500 also added 1.0 percent for the week to end at 1,951.36. The Nasdaq added 0.5 percent from the week-ago close to 4,707.78. Most key S&P sectors ended in positive territory for the week, led by materials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 21.

Short-Term Technical Condition

In our last week’s comment, we highlighted the fact that we still expected to see another significant down-leg towards 1,880 /1,865 as we had not received any signs for a sustainable bottom. Moreover, we mentioned that we would monitor such a renewed down-leg quite carefully as it would give us further guidance where the market is heading. To be more precise, if such a down-leg/retest is accompanied with positive divergences in market breadth (shrinking downside volume/declining issues, decreasing new lows, increased tape momentum and fewer stocks below their moving averages) in combination with persistent buy signals within our contrarian indicators, we have the final confirmation for an important bottom. As a matter of fact, our short- to mid-term oriented breadth indicators are key area of focus right now.

Despite the fact that the market finished the week with solid gains, the readings within our short-term trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market still remains quite bearish biased at the moment. Despite the fact that the Trend Trader Index flashed a neutral trend-scenario on Friday, we can see that both envelope lines from that reliable indicator are still drifting lower on a very fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical pattern if the market remains short-biased. This can be also observed if we focus on the Advance-/Decline 20 Day Momentum, which remains quite bearish and has, therefore, refused to confirm the latest bounce at the end of the week. The case is slightly different if we focus on the Modified MACD as the indicator flashed a very weak but bullish crossover signal on Friday. Despite the fact that this can be interpreted as some form of positive divergence, the signal is still a way too weak to be taken too seriously at the moment!

From a pure signal point of view, the current short-term oriented bearish biased trend is widely confirmed by short-term market breadth. This is mainly due to the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily turned or just remained bearish, although the market finished the week on a higher note. This indicates that the recent rally was mostly driven by heavy weighted stocks within in the S&P 500, whereas the broad market still remains quite weak-kneed. This becomes quite obvious if we focus on the NYSE New Highs-/New Lows Indicator, as only the total amount of new lows has decreased significantly over the past weeks, whereas the total amount of new highs remains outright depressed. As a matter of fact, the High-/Low Index Daily has not managed to flash a bullish crossover signal yet as the bullish gauge of this reliable indicator remains outright depressed! Basically, the same is true if we have a closer look at the percentage of stockss which are trading above their short-term oriented moving averages (20/50) as both gauges are far away from being bullish. This is telling us that the underlying tape structure of the market still remains outright damaged at the moment and, therefore, it is still a bit too early to bet on a strong counter-trend rally at the moment! Nevertheless, we have seen some encouraging signs of a bottom building process recently. This was mainly due to the fact that the decline from the S&P 500 on Tuesday (towards the recent correction low in August) was definitely accompanied with a lower VIX, less down-volume, fewer stocks hitting a fresh yearly low and some small positive divergences in the percentage of stockss which are trading above their short-term oriented moving averages (20/50)!

Above all, the bullish signals within our contrarian indicators remain persistent. Due to the increased hedging activity among the crowd, the signals within the WSC Index, the Program Trading Buy/Sell Spread, the Global Futures Put-/Volume Ratio and the All CBOE Options Put-/Call Ratio Daily remain outright bullish. Moreover, we can see that overall market sentiment is quite negative at the moment, whereas the Smart Money Flow Index has started to form a huge bullish divergence. In addition, we can see that the gauge from the WSC Capitulation Index is indicating a bullish biased environment for equities. So in the end, we received a lot of necessary ingredients that that the market has now entered an important bottom building process! Nevertheless, we should not forget that we need to see some encouraging bullish crossover signals within our short term oriented tape indicators first to receive the final confirmation. Above all, we also need to see at least some improvements within our mid-term oriented framework, before we would issue a strategic buy signal for our conservative members.

Mid-Term Technical Condition

Unfortunately, on a mid-term time horizon we have not seen any signs of major improvements/bullish divergences yet! This becomes quite obvious if we focus on the Global Futures Trend Index, which kept trading below its extremely bearish 20 percent threshold and is, therefore, definitely not confirming the latest recovery from the S&P 500. 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 far below its outright bearish 60 percent threshold! As a matter of fact, it still can be possible to see at least another strong down-day which pushes the market back to the lower end of its current trading range. Above all 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 have started 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!

Above all, mid-term oriented market breadth continued to gain more bearish ground last week and has, 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. 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 at outright low levels and are, therefore, far away from confirming the current levels from the S&P 500. Above all, these signals are also telling us that the latest recovery on Friday was not supported by a broad basis! This can be also seen if we focus on our advance-/decline lines as they have not shown any signs of bullish divergences yet and, therefore, it might be a bit too early to think that the market will take off again. This view is strongly in line with the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators kept trading at outright bearish levels and have not formed any signs of bullish divergences yet. In such a situation, we would be outright surprised to see sustainable gains ahead and, therefore, a trading range might be the best outcome possible.

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 13 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.
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 13 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 bottom line: 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. Despite the fact that we have seen typical patterns for a major bottom last week, we think it is still too early for conservative investors to get back into the market. This is mainly due to the fact that the impulses for a significant rally are still missing! As a matter of fact, the opportunity costs of not being invested remain extremely low (given the fact that the risk for another sell-off is still given). Given the current readings, the best case is a broader based trading range around 1,865/1,890 and 1,960/1,980. Stay tuned!