August 02. 2015

Market Review

U.S. stocks finished the week with modest gains. The Dow Jones Industrial Average gained 0.7 percent for the week to finish at 17,690.66. The blue-chip index booked a 0.4 percent gain over the month. The S&P 500 added 1.2 percent for the week to close at 2,103.90. The broad index booked a 2 percent gain over the month. The Nasdaq advanced 0.8 percent for the week to end at 5,218.28. The technology-laden index recorded a monthly gain of 2.9 percent. Among the key S&P sectors, utilities were the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.5.

Short-Term Technical Condition

Not surprisingly, the short-term trend of the market slightly turned bullish biased last week. This is mainly due to the fact that the S&P 500 managed to close within the neutral territory of the Trend Trader Index on Friday. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2,085 (bearish threshold from the Trend Trader Index). On top of that, the Modified MACD also managed to flash a very weak but bullish crossover signal on Friday, indicating that the overall trend structure of the market turned slightly positive. Nevertheless, both signals are a way too weak to take them too seriously at the moment, as any stronger down-day could easily produce a sell signal again. This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator which has not turned bullish so far, although the market showed solid gains last week. So from a pure trend point of view, last week’s move can be still categorized as bounce rather than the start of a new sustainable uptrend.

This view is broadly being confirmed by short-term oriented market breadth. Despite the fact that the market finished the week with solid gains, the readings within our short-term breadth indicators have been developing moderately so far. As a matter of fact, all of them are showing a huge bearish divergence if we consider the current levels from the S&P 500! Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily remain quite bearish and have additionally formed a huge bearish divergence if we consider their absolute levels! This is signaling that the overall breadth momentum of the market remains outright weak although the market is trading near record levels. Above all, the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) have not managed to close above their 50 percent bullish threshold so far. This indicates that only heavy weighted stocks are pushing major averages higher, whereas the broad market is still lagging behind strongly! Another interesting fact is that we only saw a strong decrease in the total amount of new yearly lows, whereas the total amount of new highs remained depressed. This is telling us that last week’s move was mainly triggered by short-covering and was, therefore, not driven by bargain hunters. This can be also seen if we have a closer look at the High-/Low Index Daily, as its bullish gauge has not shown any signs of major strength yet!

As we mentioned already in our last week’s report, the main reason why we have not seen a major pullback so far is due to the fact that the market still has to work off the current predominant bearish sentiment first. In fact, this process is already going on as the readings of our option based contrarian indicators almost got back to normal levels (WallStreetCourier Index, WallStreetCourier Index Oscillator, OEX Options Call-/Put Ratio Oscillator, Global Futures Put/Volume Ratio and the Equity Options Call-/Put Ratio Oscillator). Nevertheless, the overall bearish market sentiment remains persistence and, therefore, further back and filling cannot be ruled out on a very short time frame. On the other hand we can see that the Smart Money Flow Index is still far away from confirming the current levels from the Dow, whereas the WSC Capitulation Index is still indicating a risk-off scenario. So from a pure contrarian point of view, any upcoming strength should be, therefore, limited in price and time as the current technical picture of the market looks quite damaged at the moment.

Mid-Term Technical Condition

Another main reason why we remain outright cautious at the moment is the fact that the mid-term oriented condition of the market continued to deteriorate significantly last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped deeper into its bearish trading range area last week and is, therefore, definitely not confirming the current levels from the S&P 500! In such a scenario, the risk of a fast paced correction remains outright high, especially in combination with weak mid-term market breadth. On the other hand, we would be quite surprised to see sustainable gains ahead, as long as the gauge of this reliable indicator remains depressed. Only, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator has not turned bearish so far. Nevertheless, we can see that its gauge dropped to the lowest level since 2011. This is due to the fact that the gap between the relative strength score from riskless money market and the S&P 500 decreased within our Sector Heat Map. This is another indication that the current rally is running out of steam!

Above all, mid-term oriented market breadth did not show any signs of recovery last week and is, therefore, still confirming the bearish biased mid-term oriented trend of the market. The Modified McClellan Oscillator Weekly dropped to a new low last week, signaling that the overall breadth momentum remains outright bearish at the moment. This can be also seen if we focus on the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150). Both gauges remain quite bearish, although the market gained 1.2 percent for the week. Furthermore, this bearish divergence becomes quite obvious if we compare their absolute readings with the current levels from the S&P 500! Unchanged compared to last week, the bearish gauges from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly kept trading near correction levels and, therefore, we would be quite surprised to see sustainable gains ahead. On top of that, we can see that the bearish divergences within our advance-decline indicators (Advance-/Decline Volume Line Percent, Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line Weekly) got even stronger last week and, therefore, the market remains extremely vulnerable at the moment!

Long-Term Technical Condition

As per last week’s report, the long-term condition of the market continued to show major signs of exhaustion. This is in line with our short- to mid-term oriented bearish outlook. Despite the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, we can see that its gauge continued to deteriorate for the week. This is another indication that the current bull-market (in the US) is showing strong signs of exhaustion. This can be also seen if we focus on the WSC Global Momentum Indicator as only 28 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 our suggested summer top is already in place. More importantly, long-term oriented market breadth has also not shown any signs of recovery yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground, whereas the percentage of stocks which are trading above their long-term simple moving averages and the High-/Low Index Weekly remain quite bearish, which is another serious long-term tape signal.

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 top building process and, 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, 2,044/2,050 represents an important key support level. A break below that numbers would be immediately bearish as further down-testing towards 2,014 and 1,980 can be expected. On the other hand, we think the market looks quite capped on the upside as any upcoming strength should be limited in price and time. As a matter of fact, aggressive traders should sell into strength rather than chasing the market too aggressively on the upside. Stay tuned!