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February 01. 2015

Market Review

U.S. stocks ended the week with deep losses. The Dow Jones Industrial Average lost 2.9 percent during the week and closed at 17,164.95. The S&P 500 dropped 2.8 percent from last Friday’s close to 1,994.99. The Nasdaq lost 2.6 percent over the week to 4,635.24. The Dow finished January down 3.7 percent while the S&P dropped 3.1 percent and the Nasdaq 2.1 percent. All key S&P sectors finished in red, led by technology. The Chicago Board Options Exchange Volatility Index ended at 20.97.

Short-Term Technical Condition

Although the recent decline has put the S&P 500 only slightly above the lower boundary of the current trading range, the short-term oriented trend turned clearly bearish last week. This is mainly due to the fact that the S&P 500 closed 49 points below the bullish threshold from the Trend Trader Index. Moreover, we can see that both envelope lines of this reliable indicator have started to drift lower, indicating that the resistance/support levels for the S&P 500 are decreasing as well. This can be seen as a quite bearish biased technical signal as lower highs and lower lows are a typical pattern for a bearish biased trend structure. This can be also seen, if we have a closer look at the Modified MACD and at the Advance-/Decline 20 Day Momentum. Both indicators flashed a bearish signal last week, signaling an outright weak trend condition at the moment. Another concern is the fact that we have not seen any bullish divergences in their readings so far. As already mentioned in our last week’s report, during a consolidation period it is not quite unusual to see a lot of changing signals within short-term oriented trend indicators as there is no specific trend within a broad based trading range. Therefore, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period should be considered as healthy or if it will turn out to be more corrective in its nature.

Right now, short-term market breadth still looks quite weak and, therefore, we think that any possible oversold bounce should not lead to a major trend reversal at this point in time. Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) remain clearly below their bullish 50 percent threshold, indicating that the underlying trend structure of the market still remains quite bearish biased. Moreover, we can see that the Modified McClellan Volume Oscillator Daily remains quite weak, plus the Modified McClellan Oscillator Daily flashed a bearish crossover signal last week. This indicates that the broad market is still deteriorating and, therefore, the current sideways trading does not look healthy at all. The case is slightly different if we focus on the number of stockss hitting a fresh yearly high or low. Although we can see that the broad market is deteriorating all across the board, we can see that the number of stockss hitting a fresh yearly high remains at quite bullish levels. Especially, if we consider the fact that the amounts of stocks hitting a fresh yearly low have not spiked at all, although we saw a 9-to-1 down-day on Friday. This indicates an increased selectivity within the market, which is not a big surprise at all if we consider that we are in the middle of an earnings season. So all in all, short-term market breadth does not look rosy at all, although not our entire short-term oriented tape indicators have turned bearish yet!

From a pure contrarian point of view, the overall technical picture of the market is a bit intermingled at the moment. This is mainly due to the fact that the market flashed a 9-to-1 down-day on Friday, indicating a selling climax. After such an event, the market tends to rebound or languish for a couple of days before further losses can be expected. Moreover, the Trin Daily showed some strength recently, plus the WSC Index Oscillator and the All CBOE Options Put/Call Ratio Z-Score turned or remain supportive, which is also confirming the rebound scenario on a very short time frame. On the other hand, we can see that the Smart Money Flow Index is still showing a huge divergence to the Dow, whereas the WSC Capitulation Index has not dropped by half of its rise yet and, therefore, further troubles might be due soon.

Mid-Term Technical Condition

After having a look at our mid-term oriented trend indicators, apparently the technical picture of the market remains quite much the same as last week. The WSC Sector Momentum Indicator remains bullish, although it has obviously lost momentum over the last couple of weeks. This is mainly due to the fact that some sectors have started to lose momentum versus riskless money market. 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 is above energy and materials. If the trend score of further sectors are starting to lose momentum versus money market it might be just a question of time until the WSC Sector Momentum Indicator turns bearish and then strong losses are highly likely. Anyhow, the recent development of this indicator is just another indication that the market remains within a top building process. This can be also observed if we focus on the Global Futures Trend Index, as it indicates that the market is consolidating. Normally, readings below 60 percent (together with bearish mid-term market breadth) are an early indication for a major market top. Therefore, it was good to see that its gauge has shown some strength recently.
After having a look at our mid-term oriented trend indicators, apparently the technical picture of the market remains quite much the same as last week. The WSC Sector Momentum Indicator remains bullish, although it has obviously lost momentum over the last couple of weeks. This is mainly due to the fact that some sectors have started to lose momentum versus riskless money market. 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 is above energy and materials. If the trend score of further sectors are starting to lose momentum versus money market it might be just a question of time until the WSC Sector Momentum Indicator turns bearish and then strong losses are highly likely. Anyhow, the recent development of this indicator is just another indication that the market remains within a top building process. This can be also observed if we focus on the Global Futures Trend Index, as it indicates that the market is consolidating. Normally, readings below 60 percent (together with bearish mid-term market breadth) are an early indication for a major market top. Therefore, it was good to see that its gauge has shown some strength recently.

However, what worries the most is the fact that mid-term oriented market breadth does not look rosy at all! Therefore, the recent consolidation period could easily turn out to be corrective in its nature. Especially mid-term oriented up-volume dropped significantly last week and is, therefore, just trading slightly below mid-term oriented down-volume, indicating that a lot of purchasing power has been pulled out of the market. The same is true if we have a look at the Advance-/Decline Index Weekly, which shows that the amount of advancing issues on Nyse have also decreased fairly and, therefore, this reliable indicator flashed nearly a bearish crossover signal. On top of that, the Modified McClellan Oscillator Weekly showed a widening bearish gap, indicating an outright weak tape momentum on a mid-term oriented time frame. Another concerning fact is that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) turned bearish last week. All in all, we have a deteriorating tape structure all across the board the risk of a stronger correction is increasing.

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. Nevertheless, we can see that the global bull market remains quite selective as only 32 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. If we focus on the Global Relative Strength Indicator, we can see that the relative strength score of most risky markets have started to top out. This is another indication for our short- to mid-term correction scenario. This view is widely in line with the recent developments within long-term market breadth, as apart from the High-/Low Index Weekly, our entire long-term tape indicators (Modified McClellan Volume Oscillator Weekly and percentage percentage of stockss which are trading above their long-term oriented moving averages) remain/turned bearish.

Bottom Line

On a very short-time frame the market is slightly oversold and in combination with fresh buy signals from some of our contrarian indicators, a volatile bounce might be possible. Nevertheless, even if we would see a stronger volatile bounce towards the upper range of the current trading area, we think the upside potential of the market is outright limited. This is mainly due to the fact that the current technical environment is telling us that the market remains within an important top building process. So as long as we do not see any improvements within our short- to mid-term oriented indicator framework, the upside potential of the market remains outright capped. Above all with such weak mid-term oriented readings, the market is getting increasingly vulnerable for a stronger correction and, therefore, we remain outright cautious at the moment. In this context we would advise our more conservative investors to reduce their equity exposure significantly (until we see a strong recovery in our short- to mid-term oriented trend- as well as -breadth indicators). Aggressive traders should sell into strength until our short-term oriented trend indicators remain bearish. Stay tuned!