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January 17. 2016

Market Review

As highlighted in our latest call, U.S. stocks finished another week with deep losses. The Dow Jones Industrial Average slumped 2.2 percent over the week to 15,988.08. The blue-chip average is down 8.3 percent for the year so far. The S&P 500 dropped also 2.2 percent for the week to finish at 1,880.29. The broad index is down 8 percent for the year so far. The Nasdaq lost 3.4 percent for the week to end at 4,488.42. The technology-laden index is down 10.4 percent year-to-date. All three major U.S. averages are more than 10 percent below their 52-week intraday highs, in correction territory. Among the key S&P sectors, materials were the worst performer and utilities the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, briefly topped 30 for the first time since Sept. 1.

Short-Term Technical Condition

In our last week’s comment, we highlighted the fact that any upcoming strength should only be seen as a corrective bounce (bull-trap) rather than the start of a new sustainable uptrend as we had not received any signs for a typical bottom building process. Consequently, we advised our aggressive traders not to buy any upcoming rebound (or to remain short) as we expected to see further strong selling pressure ahead. In fact, after the S&P 500 had bounced towards 1,949 until Wednesday morning, further significant downswings dominated the rest of the week. More importantly, after the S&P 500 fell below 1,900, it has exactly reached our suggested price target of 1,881 (whereas most of the so-called financial/fundamental experts were asking themselves, why the heck the markets are tanking?). Anyhow, after the S&P 500 reached our suggested price target, the big question is if we have seen the worst already or if further down-testing can be expected?

Not surprisingly, the short-term down-trend of the market remains well in force and even gained more bearish ground last week. From a pure price point of view, we can see that the S&P 500 closed 134 points below the bullish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines of this 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 technical pattern for a strong short-term oriented down-trend. The same is true if we focus on the Modified MACD, as its short-term oriented gauge dropped towards a new low and has, therefore, clearly confirmed the current correction from S&P 500. Another reason why it might be too early to call for a bottom is the fact that the gauge from the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of major bullish divergences yet. As this indicator tends to be a leading one, its non-confirmation would be the first indication that a major trend-reversal might be due.

More importantly, this view is also strongly confirmed by short-term market breadth, as we have not seen any major bullish crossover signals or even some small signs of positive divergences yet. Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped further into deep bearish territory, indicating an outright damaged trend-structure at the moment. To be more precise, only 6/9 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average. Therefore, the broad market is far away from being on a recovery path. Above all, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily remain in an outright bearish freefall, indicating that the underlying breadth momentum of the market is outright bearish at the moment. With such weak readings, it is quite unlikely that any upcoming bounce would lead to a sustainable trend-reversal. Another interesting fact is that we did not see any signs of a stronger recovery within those two indicators at the beginning of the week, although the S&P 500 managed to rally almost 1.5 percent until Wednesday. Therefore, the recent sell-off on Thursday and Friday was quite obvious too. In addition, the number of stockss hitting a fresh yearly low soared to 938 on Friday, which is another strong confirmation for the recent sell-off. This can be also seen if we focus on the High-/Low-Index Daily, as its bearish gauge rose to the highest level for years and, therefore, it looks like that the current correction could turn out to be much stronger in its nature compared to the latest ones we saw.

The situation from a pure contrarian point of view remains almost unchanged compared to last week. The market is still quite oversold (Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily) and, therefore, the pace within the first or one or two trading days of the week is likely to slow down. Moreover, we can see that the fear among the crowd remains persistent as the bullish signals from our last week’s market comment got even stronger (Daily Put/Call Ratio All CBOE Options, Global Futures Put/Volume Ratio, WallStreetCourier Index, WallStreetCourier Index Oscillator, Bottom Indicator and the ISE Equity Options Call/Put Ratio). Consequently, the chances for another oversold rebound at the beginning of the week are increasing. Given the quite bullish readings, such a rebound could potentially force some market participants to cover their short positions, which would then result in a stronger counter-trend move. However, even if we see such an event we think that any upcoming strength will be still limited in price and time. Apart from the fact that the WSC Capitulation Index is still indicating a risk-off market environment, we have not seen the typical ingredients for an important bottom at the moment.

Normally, a typical bottom tends to occur as a process rather than as a V-shaped recovery. If the market hits an important bottom, we usually see a strong counter trend rally, which normally lasts about 5 to 10 trading sessions. After that, the market tends to show renewed weaknesses, which could then lead to a retest or even a break of its previous low. If this weakness comes along with more positive divergences within our market breadth indicators (especially within the NYSE New HighsNew Lows, a lower CBOE Volatility Index and further tape strengthening signals), we can be quite sure that the market hits rock bottom. However, right now our indicator framework is far away for showing that such a process is in place at the moment.

Mid-Term Technical Condition

Moreover, the mid-term oriented trend-condition of the market is also far away from showing any signs of bullish divergences at the moment and, therefore, we remain outright bearish for the time being. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped below its extremely bearish 20 percent threshold last week. 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 gains will definitely be corrective nature rather than the start of a new sustainable uptrend. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains far below its bearish 60 percent threshold. Above all we can see that the WSC Sector Momentum Indicator continued to strengthen its bearish signal. This is telling us that the momentum score of most sectors within the S&P 500 are still underperforming the momentum score of riskless money market within our Sector Heat Map. In such a scenario, most sectors tend to perform negative on an absolute basis.

More importantly, the current bearish mid-term oriented trend is still strongly confirmed by mid-term oriented market breadth. This is mainly due to the fact that our entire mid-term oriented tape indicators remain outright bearish and have, therefore, not shown any signs of bullish divergences yet. Especially, the short-term oriented gauge from the Modified McClellan Oscillator Weekly dropped to a new low, signaling that the overall mid-term oriented tape momentum of the market remains outright bearish at the moment. 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 are telling us that there was no recovery within the broad market so far as most NYSE listed stocks remain in a strong mid-term oriented down-trend at the moment. This broad based non-confirmation can also be seen within our advance-decline indicators (Advance-/Decline Line in Percent, Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly). Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals slightly strengthened for the week. As a matter of fact both indicators are almost trading at bear-market levels. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, we think the current risk-/reward ratio is too low to act contrarian at the moment.

Long-Term Technical Condition

The long-term condition of the market also continued to deteriorate and, therefore, our bearish outlook has not been changed so far. The Global Futures Long Term Trend Index closed far below its bullish threshold, 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 8 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. In a global context, this is indicating that the current global 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 also continued to strengthen its bearish signal last week. Especially, 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 overall outlook remains almost unchanged compared to last week. In line with our recent call, the market is in the middle of a correction. Therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment to act contrarian. This is mainly due to the fact that we have not seen any major positive signals/divergences within our indicator framework yet to call for an important bottom at the moment. Nevertheless, from a pure contrarian point of view an oversold but corrective bounce looks quite possible, before further down-testing can be expected. As a matter of fact, aggressive traders should sell into strength rather than chasing the market too aggressively on the upside. From a pure trading point of view, a break below 1,867 would call for further down-testing towards 1,845/1,815 and then 1,880/1,741, whereas a break above 1,920 would indicate further bouncing towards 1,950. Stay tuned!