May 18. 2014

Market Review

The three major U.S. averages finished another week with a mixed performance. The Dow Jones Industrial Average lost 0.6 percent during the week to finish at 16,491.31. The blue-chip index notched a new record during the week. The S&P 500 declined less than 0.1 percent from the week ago close to end at 1,877.86. It also touched record levels during the week. The Nasdaq gained 0.5 percent over the week and ended at 4,090.59. Among key S&P sectors, technology and health care led the gainers. The Chicago Board Options Exchange Volatility Index (VIX), a gauge for U.S. stock volatility known as the VIX, dropped 5.5 percent to 12.44. The measure lost 3.7 percent during the week.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that we expected to see either a short-term pullback or the market should be at least capped on the upside. In fact, after the false break-out above 1,900 by the S&P 500 on Tuesday, the broad benchmark index ended almost exactly where it started the week. Despite the fact that the market finished nearly unchanged for the week, the improvements in the readings of our short-term oriented trend indicators have been developing moderately so far. The short-term up-trend of the market continued to deteriorate as the readings from the Trend Trader Index switched from bullish into neutral territory, after the S&P 500 had lost nearly 1.2 percent from its latest reaction high on Tuesday. Moreover, our reliable Modified MACD flashed a small bearish crossover signal last week and is, therefore, showing a small negative gap, indicating that further consolidation/down-testing is likely. Despite the fact that the Advance-/Decline 20 Day Momentum Indicator still remains quite positive from a pure signal point of view, we can see that its gauge lost some bullish ground last week, indicating that the short-term momentum of the market is weakening. Furthermore we can see a lot of bearish divergences in the readings of our short-term oriented trend indicators, although the short-term up-trend of the market has not been completely broken yet. The readings from the Modified MACD and from the Advance-/Decline 20 Day Momentum Indicator should be much higher, given the fact that the S&P 500 is trading close below its multi-year high!

The same is true if we focus on short-term oriented market breadth. The Modified McClellan Oscillator Daily flashed a small bearish crossover signal last week, which indicates a weakening tape structure at the moment. Above all, both trend lines of this reliable indicator have not shown any signs of strength yet. More importantly, the percentages of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) have been pulled back below their bullish threshold (20) or remain bearish (50), although the S&P 500 is trading near record levels. This indicates that only heavy weighted stocks are driving major indexes higher, although the broad market is already faltering! This can be also seen if we have a closer look at the High-/Low Index Daily. Despite the fact that this indicator still remains bullish from a pure signal point of view, we can see that the amount of new highs have decreased significantly (especially in comparison to early April where we saw the last break-out attempt by the S&P 500), indicating a mature rally.

From a pure contrarian point of view, the situation has slightly changed compared to last week. Especially the fact that dumb money (ISEE Call-/Put Ratio and the Global Futures Dumb Money Indicator) is chasing the market aggressively higher can be seen as a strong warning sign for contrarians. The current levels from the VIX are indicating complacent among investors, plus the WSC Capitulation Index has shown some strong momentum on low levels and, therefore, further consolidation/down-testing might be possible. Only the Daily Put/Call Ratio All CBOE Options Indicator is still trading in quite bullish territory, which is another indication for a continuation of the back and filling scenario at the moment. The current readings from our short-term indicator frame-work is telling us that the market looks vulnerable for further down-testing or it should be at least capped on the upside. Anyhow, as long as not our entire short-term trend- as well as -breadth indicators do not turn bearish, it looks like the market will stick within its unbreakable trading range between 1,815/1,849 and 1,896. Nevertheless, it would make sense to place a stop-loss limit around 1,849/1,851 as the current trend of the market looks extremely weak-kneed at the moment!

Mid-Term Technical Condition

From a pure signal point of view, the mid-term oriented up-trend of the market remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend and according to our Sector Heat Map, materials and industrials are the strongest industries for the time being. Nevertheless, we can already see some signs of exhaustion, as the Global Futures Trend Index lost some ground last week. Despite the fact that this indicator has not turned bearish yet, it formed a huge bearish divergence last week, if we consider the current levels from the S&P 500. In such a scenario, the upside potential of the market remains capped. Therefore, we would be quite surprised to see further sustainable/strong gains ahead, as long as the gauge of this reliable indicator remains depressed. Moreover, as long as its gauge keeps trading within its bullish consolidation area, the sideway trend of the market is likely to continue. On the other hand, if we see a break below 60 percent, we will have further confirmation for our cyclical roadmap (Charts of Interest and cycles), where we are expecting to see a cyclical bear market within Q2. For that reason, we will monitor this indicator closely over the next couple of days/weeks!

Mid-term oriented market breadth remains quite bullish biased, as most of our mid-term oriented tape indicators have not turned bearish yet. Nevertheless, apart from the Modified McClellan Oscillator Weekly most of our mid-term oriented tape indicators continued to deteriorate last week. Especially the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) remain outright weak, indicating that the current rally is running out of fuel. The same is true if we have a look at the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly. Both indicators remain bullish from a pure signal point of view, but if their recent development continues, it is just a question of time until they turn bearish! Normally, bearish or extreme weak readings of those two indicators in combination with a mid-term oriented trend-break mostly led to a stronger correction or a cyclical bear market in the past. For that reason, we keep a close eye those two indicators as we will issue a strategic sell signal immediately if this is the case! Right now we are not there yet although the bearish divergences are increasing fast.

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 well in-force. Therefore, our long-term bullish outlook has not been changed so far. The WSC Global Momentum Indicator slightly increased last week, indicating that 82 percent of all global market ETFs, which are covered by the WSC Global Tactical ETF Portfolio, are still in a long-term uptrend. If we have a closer look at the global relative strength scores, we can see that Emerging Markets are picking up momentum fast, which is another indication that the risk appetite among investors remains high. Furthermore, the Global Futures Long Term Trend Index is still indicating a technical bull market and, therefore, our long-term bullish outlook has not changed so far. More importantly, mid-term oriented market breadth still looks constructive, although they have also started to deteriorate significantly. Especially, the percentage of stockss which are trading above their 200 day simple moving average still remain bullish from a pure signal point of view, but their readings have reached the lowest level for months, indicating a weak demand. Basically, the same is true if we focus on the High-/Low Index Weekly. As already mentioned a couple of times this year, we are still expecting to see a cyclical bear market in Q2 and, therefore, we think those bearish divergences will increase over the next couple of weeks!

Bottom Line

The bottom line: All in all, we received more confirmation for our cyclical roadmap (Charts of Interest and cycles) and, therefore, it is highly likely that the market has entered the final stage of its bull run, which started in 2009. Nevertheless, it is too early to issue a strategic sell signal as we would like to see further trend-breaks/more bearish crossover signals within our mid-term oriented indicator frame work to get the final confirmation. Another important fact why we remain cautiously bullish is that large caps are strongly outperforming small caps at the moment, which is another late-stage phenomenon (Charts of Interest). In such a scenario, the market could easily overshoot to a new high, as a few heavy weighted stocks are pulling major indexes higher. For that reason, we do also need to see a clear price/momentum break, before we would advise our conservative members to get rid of their whole equity exposure. Nevertheless, it would make sense for conservative members to place a stop-loss order around 1,817 and/or to start taking slightly some profits. Stay tuned!