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December 20. 2015

Market Review

U.S. stocks ended the week with losses. The Dow Jones Industrial Average lost 0.8 percent over the week to close at 17,128.45. The S&P 500 lost 0.3 percent for the week to finish at 2,005.52. The Nasdaq slid 0.2 percent for the week to end at 4,923.08. Among the 10 key S&P sectors, materials were the worst performer and utilities the best. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held above 20.

Short-Term Technical Condition

In our last week?s comment, we highlighted the fact that we remained outright cautious as we had received a growing number of evidences that the overall technical market condition looked outright corrective. Moreover, we mentioned that as long as the S&P 500 kept trading above 2,000, it was a bit too early to sell, as we needed to see some negative down-testing first. Above all, we said that even if we did not see further strong selling pressure afterwards/immediately, any upcoming rebound should turn out to be corrective (as the tape was too damaged to trigger a sustainable trend-reversal)!
Anyhow, on Monday the S&P 500 dropped below 2,000 on an intraday basis and, therefore, our strategic outlook clearly turned bearish on that day. As a matter of fact it was not a big surprise at all, that the following (strong) rebound turned out to be a major bull-trap! To be more precise, after the broad market had dipped below 2,000 for the first time since mid-October, the S&P 500 rallied almost 4 percent until Wednesday, before the major sell-off on Thursday and Friday wiped out all the gains for the week. In the end, the S&P 500 closed lower for the week.

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 55 points below the bullish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines of this reliable indicator have started to drift lower and also 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 below zero and has, therefore, clearly confirmed the recent sell-off from the S&P 500. Another reason why further selling pressure might be due is the fact that the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of 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. Unfortunately this is not the case right now and, therefore, further down-testing is highly likely!

More importantly, this negative 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 25/31 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average and, therefore, the broad market is far away from being supportive. 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 4 percent until Wednesday. Therefore, the recent sell-off on Thursday and Friday was quite obvious too. Anyhow, a small bullish divergence is coming from the NYSE New Highs minus New Lows Index. Despite the fact that the S&P 500 closed slightly lower on Friday, there where (only) 228 stocks which reached a new low, compared to more than 500 on Monday. Despite the fact that this can be interpreted as a small bullish divergence on the horizon it might be a bit too early to get too excited about that fact. This is mainly due to the fact that there are absolutely no new highs around and, therefore, the upside potential of the market is extremely limited at the moment. This becomes also quite obvious if we focus on the bullish gauge from the High-/Low Index Daily!

On the contrarian side, there are not enough strong impulses around to trigger a stronger counter-trend rally at the moment. The readings from most of our option based indicators remain quite neutral at the moment, whereas the Smart Money Flow Index has more or less confirmed the sell-off from last week. Above all, we can see that the gauge from the WSC Capitulation Index is still indicating a risk-off scenario. Only market sentiment is a bit stretched at the moment, but still too less to be taken too seriously at the moment! So all in all, we definitely believe to see further troubles ahead, as the short-term technical condition of the market looks outright damaged at the moment.

Mid-Term Technical Condition

Unfortunately, the same is true if we focus on the mid-term technical condition of the market as the gauge from the Global Futures Trend Index continued to deteriorate significantly for the week. To be more precise, the gauge from that reliable indicator dropped into bearish territory last week and is, therefore, definitely not confirming the current levels from the S&P 500! So, the last time this happened, was during the big correction in August, where the S&P 500 closed below 1,900! As a matter of fact, the recent sell-off might be just the starting point for further troubles (even if we do not see further selling pressure immediately) and, therefore, the correction risk remains persistence. As already mentioned a couple of times, as long as we do not see any 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 risk will be definitely not over as long as its gauge remains below its outright bearish 60 percent threshold (in combination with weak mid-term tape signals)!
However, from a pure price point of view, the mid-term oriented trend of the market still remains intact as the WSC Sector Momentum Indicator still managed to close above its bearish threshold. This indicates that the momentum score from the S&P 500 remains above the momentum score of riskless money market within our Sector Heat Map. Nevertheless we can see that the momentum score of riskless money market jumped to almost 50 percent last week! This can be definitely seen as another super red flag on the horizon!

This becomes quite obvious if we focus on our mid-term oriented tape indicators, which continued to deteriorate significantly last week. Especially, the Modified McClellan Oscillator Weekly showed a widening bearish gap, indicating that the overall mid-term oriented tape momentum remains outright damaged 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 signaling that there is not any recovery within the broad market right now. 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 now trading at outright bearish levels! Normally, in such a scenario, the market remains extremely vulnerable for further disappointments and, thus, remains at risk for a correction or at least for further fast paced pullbacks. Even though we might not see further selling pressure immediately, we would be outright surprised to see sustainable gains ahead! So all in all, the current technical set-up is telling us that the current risk-/reward ratio remains outright depressed at the moment. As a matter of fact, conservative members should stay at the sideline until we see at least some bullish divergences around.

Long-Term Technical Condition

On a long-term horizon, the situation remains almost unchanged compared to last week. The Global Futures Long Term Trend Index remains outright bearish, indicating that the U.S. 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, we, therefore, received further confirmation that global equity markets remain at risk for further disappointments! 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 overall outlook remains unchanged compared to last week. In line with our recent outlook, the market is in the middle of a corrective consolidation process. Therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. Consequently, it is just a matter of time until we expect to see further sharp losses. From a pure trading point of view, 2,000/1,980 represents an important key support level. A break below that numbers would indicate that further down-testing towards 1,948 and 1,920 can be expected. On the other hand, we think the market looks quite capped on the upside as any upcoming bounce towards the recent May top should be limited in price and time. As a matter of fact, any upcoming bounce without corresponding improvements within our core-indicator dashboard should be limited in price and time. Stay tuned!