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June 28. 2015

Market Review

U.S. stocks finished the week in negative territory. For the week, the Dow Jones Industrial Average slid 0.4 percent to 17,947.48. The S&P 500 dropped 0.4 percent as well to finish at 2,101.50. The broad-index marked its longest streak since 1993 without posting a weekly move of more than 1 percent. The Nasdaq shed 0.7 percent from the week-ago close to 5,110. Among the key S&P sectors, financials were the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that we remained outright cautious at the moment as we had received a growing number of evidences that the market was in the middle of a corrective top-building process. Moreover we mentioned that as long as the market kept trading above 2,065 (latest pivotal support), it was too early to sell and too late to buy. Above all, we highlighted that with such weak readings within our indicator framework, stronger gains tended to have a corrective character rather than being the start of a new sustainable breakout. In fact, after the false break-out attempt towards new highs by the S&P 500 on Monday morning, the broad index ended down for the week.

Apparently, the short-term oriented trend of the market remains quite unchanged compared to last week as the S&P 500 dropped only 0.4 percent for the week. To be more precise, the Trend Trader Index flashed a neutral trend scenario on Friday after the S&P 500 had managed to close slightly above the bullish threshold until Tuesday. Moreover, the gauge from our Advance-/Decline 20 Day Momentum Indicator is still trading more or less sideways on quite bearish levels, indicating that further down-testing is quite likely! Only the Modified MACD remains bullish from a pure signal point of view, indicating some form of positive momentum. However, we should not forget that this signal is a way too weak to take it too seriously! As a matter of fact, any stronger down-day could easily lead to a bearish crossover within that indicator and, therefore, the overall trend-structure of the market looks quite weak at the moment. As already mentioned a couple of times, 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. In general, a consolidation period is considered to be a healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening. In such a case, the market tends to trade sideways for a couple of weeks, before renewed strengths can be expected.

Unfortunately, short-term market breadth did not improve at all and, therefore, the risk of a corrective consolidation period remains high! To be more precise, there were hardly any spikes in short-term oriented up-volume within the last couple of days, indicating a weak demand. Plus the percentage of stockss which are trading above their short-term oriented moving averages were almost pushed below their bullish threshold last week, indicating a weakening upside participation! In addition, the Modified McClellan Volume Oscillator Daily has not shown any signs of a bottom yet, whereas the Modified McClellan Oscillator Daily flashed a bearish crossover signal again last week. This is telling us that the underlying market breadth momentum remains outright weak at the moment. Above all, the number of stockss which are hitting a fresh yearly low soared to 202 on Friday, although the market lost about 4 percentage points on that day. Apart from the fact that this was the lowest number since early January, it is also telling us that the market internals are far away from being healthy! Worth mentioning is the fact that due to the strong surge in the amount of new lows, our reliable High-/Low Index Daily turned bearish last week and is, therefore, forming a huge bearish divergence if we consider the current levels from the S&P 500! With such weak readings within our tape indicators, we would be really surprised to see sustainable gains ahead!

From a pure contrarian point of view, the situation looks quite mixed at the moment. This is mainly due to the fact that the WSC Index, the WSC Index Oscillator Weekly and the ISEE Call-/Put Ratio flashed a bullish signal last week. Moreover, the WSC Capitulation Index dropped significantly for the week, indicting some form of short-term bottom. However, given the fact that the z-score of the WSC Capitulation Index has not dropped into bullish territory so far, in combination with outright bearish readings within our Smart Money Flow Index we think any upcoming bounce should be limited in price and time (from a pure contrarian point of view)!

Mid-Term Technical Condition

As per last week’s report, the most concerning fact is that the mid-term oriented trend of the market remains quite damaged at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index kept trading within the middle part of its bearish trading range area, although it gained some bullish ground last week! As a matter of fact, the indicator is far away from confirming the current levels from the S&P 500. Above all, as long as the gauge of this reliable indicator does not close above its 60 percent bullish threshold, the risk of a fast paced pullback remains quite high. In such a situation, stronger gains tend to have a corrective character rather than being the start of a new sustainable breakout! Consequently, we remain outright cautious as long as we do not see a strong recovery within that indicator. As we have not seen a stronger pullback yet, the pure price driven mid-term oriented trend of the market remains intact. Therefore, the WSC Sector Momentum Indicator still remains quite bullish for the time being, although we can see that it has lost some bullish ground recently. This is mainly due to the fact that the gap between the relative trend score of riskless money market and the one from the S&P 500 within our Sector Heat Map is narrowing. This is another indication that the current consolidation period does not look quite healthy at all at the moment.

A further concern regarding the current condition of the market is the fact that mid-term oriented market breadth has not shown any signs of recovery so far. This becomes quite obvious if we focus on the Modified McClellan Oscillator Weekly, which still indicates an outright negative tape momentum at the moment. On top of that, we can see that the bearish readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly remain unchanged compared to last week. This is telling us that the market remains extremely vulnerable towards negative driven news flow as the broad market is already faltering. This can be also observed if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), which have not confirmed the latest levels from the S&P 500! Only the the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) have not turned bearish so far, although their absolute readings are away too low to be confirmative. With such weak readings within both indicators, we would be surprised to see another sustainable break-out ahead and, therefore, the any upcoming bounce can be definitely categorized as oversold bounce!

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, whereas most local market indexes around the world have already started to top out. This is mainly due to the fact that the WSC Global Momentum Indicator continued to drop 700 basis points to 38 percent last week, indicating that less than 40 percent of all global markets which are covered by our Global ETF Momentum Heat Map remain within a long-term oriented up-trend for the time being. As global equity markets tend to be quite correlated to each other, this can be seen as another red flag on the horizon. Therefore, it is not a big surprise at all, the relative strength of most risky markets continued to decrease versus riskless money market. Moreover, long-term oriented market breadth does also not look that rosy at all. Especially, the Modified McClellan Volume Oscillator Weekly gained more bearish ground last week, whereas the percentage of stocks which are trading above their long-term simple moving averages as well as the High-/Low Index Weekly continued to deteriorate, although it has not turned bearish so far.

Bottom Line

The bottom line: the short-term situation remains almost unchanged compared to last week. With deteriorating indicators all across the board, we received further confirmation that the market is in the middle of an extremely dangerous consolidation period at the moment. Consequently, the risk of a fast paced down-leg remains quite high, if all those bearish divergences will not be sorted out soon. Consequently, it is a bit too early to sell but too late to buy. As a matter of fact we would advise our conservative members to place a stop-loss limit around 2,065 (new pivotal support level) as a drop below that critical support level would give us the ultimate confirmation that a very important top is in place. On a very short-time frame, a volatile bounce might be possible. However, given the outright weak readings within our indicator framework, we think that any upcoming break-out (attempt) might be limited in price and time. Stay tuned!