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June 14. 2015

Market Review

U.S. stocks finished the week nearly unchanged. For the week, the Dow Jones Industrial Average eked out a small gain 0.3 percent to close at 17,898.84. The S&P 500 finished at 2,094.11 and ended the week up 0.06 percent for the longest streak of sub-1 percent weekly moves since 1993. The Nasdaq lost 0.3 percent for the week to end at 5,051.10. Among the key S&P sectors, financials were the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), a measure of investor uncertainty, fell to 13.78.

Short-Term Technical Condition

Despite the fact that the S&P 500 finished the week literally unchanged, the technical picture of the market continued to deteriorate. The short-term down-trend of the market remains well intact, as the S&P 500 closed 24 points below the bullish envelope line of the Trend Trader Index. This indicates that the underlying bearish trend of the market remains intact as long as the broad equity benchmark does not close above 2,118. Furthermore, we can see that both envelope lines of this reliable indicator have slightly started to drift lower as well. This is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical pattern for a strong short-term oriented down-trend. The same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of a bullish crossover signal yet. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator dropped to the lowest level this year, indicating further troubles ahead!

More importantly, our entire short-term oriented breadth indicators are also confirming the current short-term oriented down-trend of the market. Therefore, the current consolidation period looks quite corrective in its nature! The current trend participation of all NYSE listed stocks remains quite weak, as the percentage of stockss which are trading above their short-term oriented moving averages (20/50) keep trading around their bearish 50 percent threshold. In addition, we can see that the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are strongly trending lower, indicating that the underlying breadth momentum of the broad market remains outright bearish at the moment. The same is true, if we focus on the High-/Low Index Daily as its bearish gauge is still trading above its bullish counterpart. This is mainly due to the fact that the total amount of all NYSE-listed stocks, which reached a fresh 52 weeks low, has increased significantly during the last two weeks. Above all, our entire short-term oriented breadth indicators have additionally formed a huge bearish divergence, if we consider the current levels from the S&P 500!

The picture from a pure contrarian point of view remains also quite bearish. Apart from the fact that the Program Trading Buy-/Sell Spread Indicator flashed a bullish signal last week, most of our contrarian indicators are drawing a quite bearish picture of the market. If we focus on the AII Bulls & Bears survey, we can see that the bears on Wall Street started to overtake the amount of bulls. This indicates that a lot of investors are starting to sell their positions and, therefore, the diminishing demand is likely and put even more pressure on current prices (on a mid-term time horizon). In addition, we can see that the Smart Money Flow Index is far away from confirming the recent high from the Dow Jones Industrial Average, whereas the WSC Capitulation Index is still indicating an extremely vulnerable market environment. As a matter of fact, the current risk-reward ratio is outright low at the moment.

Mid-Term Technical Condition

More importantly, the mid-term oriented trend of the market continued to deteriorate significantly last week, as the gauge of our reliable Global Futures Trend Index decreased by 400 basis points to 44 percent. As already mentioned a couple of times, as long as its gauge remains well below 60 percent, the risk for a stronger pullback remains outright high. So even if we do not see a stronger correction immediately, as long as the gauge of this indicator remains below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well! Above all, the indicator is also showing a huge bearish divergence, as its gauge is far away from confirming the current levels from the S&P 500! This can be seen as a huge red flag on the horizon as such a bearish divergence can never be retained over a longer time horizon. If we have a closer look at the current trend participation, we can see that most key sectors within the S&P 500 still remain within a mid-term oriented trend as the WSC Sector Momentum is trading well above its bearish threshold. Nevertheless, we can see that the momentum score of riskless money market increased significantly over the past three weeks within our Sector Momentum Heat Map. This is just another piece of evidence that the current rally is running out of fuel!

This picture is also strongly confirmed by most of our mid-term oriented breadth indicators which remain quite bearish and/or have formed additionally a huge bearish divergence. In particular, the bearish readings from the Advance-/Decline Index Weekly continued to strengthen last week, whereas the Upside-/Downside Volume Index Weekly flashed a small bearish crossover signal last week. This indicates an extremely fragile tape structure at the moment and, therefore, the risk of a fast paced pullback is increasing. Moreover, we would be quite surprised to see further strong sustainable gains ahead as long as both gauges remain depressed! Another concern is the fact that nearly all advance decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not confirmed the latest high from the S&P 500. This indicates that only heavy weighted stocks are pushing major averages higher. This fact can be observed if we have a closer look at the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Despite the fact that both gauges remain bullish from a pure signal point of view, their readings are showing a huge non-confirmation at the moment. Above all, the overall breadth momentum is also extremely weak as the Modified McClellan Oscillator Weekly has not shown any signs of strength yet! All in all, this is telling us that the market internals are extremely weak at the moment, which is another piece of evidence that the market is approaching an important summer top!

Long-Term Technical Condition

The long-term oriented picture of the market has also started to deteriorate, which is in line with our summer top scenario. This is mainly due to the fact that the gauge of the WSC Global Momentum Indicator dropped significantly last week and, therefore, flashed a bearish signal last week. This is telling us that the global bull market is showing major signs of fatigue as most local equity markets around the world broke below their long-term oriented trend lines. This can be also seen if we focus on the Global Relative Strength Index, which indicates that the relative strengths of most risky asset classes/markets continued to lose momentum versus riskless money market. Only the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 as we have not seen any stronger pullback so far. Moreover, long-term oriented market breadth looks also quite weak at the moment. 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 did not turn bearish so far. So all in all, we received even more confirmation that the market is on the way towards an important summer top, if it we do not see a stronger improvements within our tape indicators!

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 on the way towards an important summer top. As a matter of fact, we think the chances are quite high that the recent consolidation period turns out to be corrective. Consequently, we would like to remind our conservative members once more to place a stop-loss limit around 2,055 as the risk of fast paced down-leg remains quite high at the moment. Moreover, a drop below that critical support level would give us the ultimate confirmation for our summer top scenario! Aggressive traders should sell into any upcoming bounces as long as our short-term oriented indicators remain bearish. Stay tuned!