July 26. 2015

Market Review

U.S. stocks finished the week with deep losses. The Dow Jones Industrial Average slumped 2.9 percent over the week to 17,568.53. The S&P 500 dropped 2.2 percent for the week to finish at 2,079.65. The weekly decline for the benchmark was the steepest since March. The Nasdaq lost 2.3 percent for the week to end at 5,088.63. Among the key S&P sectors, all sectors ended lower for the week, with materials plunging nearly 5.5 percent as the worst performer for the 5-day period. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, traded near 14.

Short-Term Technical Condition

Over the past couple of weeks, we highlighted the fact that we remained outright cautious as we had received a growing number of evidences that the market was forming a major summer top. In fact, after the market had dropped below our critical key-support level in early July, we received the final confirmation that the latest reaction high from the S&P 500 in mid-May represented an important market top. Additionally, the summer top scenario was even supported from a cyclical point of view (Presidential Cycle)! As a result, we have advised our conservative members to stay at the sideline since then as the risk/reward ratio looked outright depressed. In such a weak breadth environment, stronger gains tend to be corrective in their nature and, therefore, it was not a big surprise at all that the market plunged last week.

Not surprisingly, the short-term oriented trend of the market turned quite bearish last week. The S&P 500 closed slightly below the bearish threshold from the Trend Trader Index, whereas both envelope lines also started to drift lower again, indicating a stronger trend-reversal. Above all, the gauge from the leading Advance-/Decline 20 Day Momentum Indicator kept trading well below its bullish threshold and has, therefore, clearly confirmed the pullback from last week. Only the Modified MACD remains bullish from a pure signal point of view but its signal is a bit too weak-kneed to be taken too seriously at the moment. This is mainly due to the fact that any stronger down-day could easily produce a bearish crossover signal within that indicator.

More importantly, our entire short-term market breadth indicators continued to strengthen their bearish signals last week and, therefore, further major troubles can be expected! The percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped far below their 50 percent bullish threshold, indicating that the underlying trend structure of the market remains outright damaged. To be more precise, about 70 percent of all NYSE listed stocks are now trading well below their 20 and 50 day moving averages and are, therefore, clearly in a short-term oriented down-trend at the moment. Another concerning point is that despite the fact that the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily flashed a strong bearish crossover signal last week, both indicators are still showing a huge bearish divergence to the current levels from the S&P 500! On top of that we can see that the number of stockss hitting a fresh yearly low soared to 432 on Friday, the highest level since 2014! This number is quite concerning, especially if we compare the current levels from the S&P 500 with its latest pre-correction low in mid-October 2014, where we have seen a similar amount of new lows. This bearish divergence can be also monitored if we focus on the High-/Low Index Daily, as its bearish gauge surged to the highest level this year. So all in all, the market internals are extremely damaged at the moment and, therefore, it might be just a question of time until further strong losses can be expected!

As already mentioned last week, the main reason why we have not seen a major carnage yet is the fact that the market still has to work off this predominant bearish sentiment. This becomes quite obvious if we focus on our option based contrarian indicators (WallStreetCourier Index, WallStreetCourier Index Oscillator, OEX Options Call-/Put Ratio Oscillator, Global Futures Put/Volume Ratio and the Equity Options Call-/Put Ratio Oscillator). Although this is signaling some form of minor low, it is a way too early to bet on a trend-reversal (from a pure contrarian point of view). This is mainly due to the fact that the Smart Money Flow Index dropped to a new low last week and, therefore, there is enough down-side potential for the Dow left until those bearish divergences have been sorted out. On top of that we can see that the WSC Capitulation Index is still showing a risk-off environment, indicating we are far away from a sustainable bottom.

Mid-Term Technical Condition

This view is also strongly confirmed by the current mid-term oriented condition of the market. Especially, the gauge from the Global Futures Trend Index remains in the middle of its bearish consolidation brackets and has, therefore, not shown any signs of strength yet. As already mentioned in our previous market comments, 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 cycle will be definitely not over as long as its gauge remains below its outright bearish 60 percent threshold! Moreover, from a pure price point of view, we can also see that the mid-term oriented uptrend of the market continued to deteriorate as the WSC Sector Momentum Indicator has lost some momentum recently. This is mainly due to the fact that the relative strength score from riskless money market within our Sector Heat Map surged to 34.8 percent and is, therefore, narrowing its gap to the relative strength score of the S&P 500.

More importantly, mid-term oriented market breadth continued to gain more bearish ground last week and has, therefore, not shown any signs of bullish divergences yet. Especially, the Modified McClellan Oscillator Weekly dropped to a new low last week and is, therefore, signaling that the overall mid-term oriented tape momentum remains outright grim. This can be also observed if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators have been pushed almost to their lowest levels for months, whereas the S&P 500 is still trading at quite confident levels. As a matter of fact both indicators are, therefore, still showing a huge bearish divergence to the current levels from the S&P 500. In addition, the bearish gauges from the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly surged to their highest level for years, whereas nearly all advance-/decline indicators are showing a huge bearish divergence at the moment (Advance-/Decline Volume Line Percent, Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line Weekly)! In such a scenario the market is extremely vulnerable for a fast paced correction!

Long-Term Technical Condition

As per last week’s report, the long-term condition of the market continued to show major signs of exhaustion, which is in line with our short- to mid-term oriented bearish outlook. Apart from the fact that the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, most global market indexes are facing stronger corrections at the moment. Therefore, the WSC Global Momentum Indicator continued to gain more bearish ground last week, plus the relative strength from most risky markets is trading below the relative strength from U.S. Treasuries. This is another indication for a mature bull market. This can be also seen if we focus on long-term market breadth. Last week, the Modified McClellan Volume Oscillator Weekly dropped to a new low, indicating that the underlying tape momentum of the market is outright bearish at the moment. Moreover, the majority of all NYSE listed stocks dropped well below their long-term oriented trend-lines, whereas the High-/Low Index Weekly continued to strengthen its bearish signal last week. So all in all, we have received even more confirmation that the current bull market is running out of steam!

Bottom Line

The overall outlook remains almost 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 of 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!