October 30. 2016

Market Review

Last week, all three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average managed to eke out a weekly gain, less than 0.1 percent, to close at 18,161.19. The S&P 500 decreased 0.7 percent for the week to close at 2,126.41. The Nasdaq fell 1.3 percent for the week to end at 5,190.10. Most key S&P sectors finished lower, dragged by health care. Consumer staples, utilities and financials were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded about 5 percent higher, near 16.1.

Short-Term Technical Condition

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 11 points below the bullish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting lower. 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, which continued to gain more negative ground last week. Another reason why it might be too early to call for a sustainable trend reversal is the fact that the gauge from the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of major bullish divergences yet and has reached its lowest level for months. As this indicator tends to be a leading one, its non-confirmation to the current levels of the S&P 500 is another indication that major troubles might be due soon.

Another concerning fact is that this short-term oriented down-trend is widely confirmed by short-term market breadth. If we have a closer look at those reliable tape indicators we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued their bearish rides. This indicates that the overall breadth momentum of the market remains outright negative at the moment. The same is true if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both indicators (20/50) continued to deteriorate for the week and are, therefore, trading far below their 50 percent bullish threshold. This is telling us that the majority of all NYSE listed stocks still remain in a short-term oriented down-trend. Basically, we get the same picture if we look at the number of stockss hitting a fresh yearly high or low. Especially the number of stockss hitting a fresh yearly high decreased, while the number of stockss dropping to a fresh yearly low has started to increase on a quite fast pace (especially on Friday). This is telling us that the current sideways trading is definitely not constructive in its nature as the market internals continued to deteriorate significantly. As a matter of fact, the High-/Low Index Daily is also about to flash a bearish cross over signal soon, which is another proof of evidence for our pullback scenario. So the main reason why we have not seen a stronger pullback yet, is due to the fact that large caps are still holding up quite well. However, such a situation can never be sustainable in the long run and, therefore, we remain outright cautious.

From a pure contrarian point of view, the overall technical picture of the market is also getting increasingly bearish on a very short-time frame. That is mainly due to the fact that the gauge from the OEX Options Call-/Put Ratio Oscillator Weekly flashed a bearish signal last week. This indicates that the optimism within the crowd has started to increase recently. This can be also seen if we focus on the Global Futures Dumb Money Indicator as its gauge spiked significantly last week. Moreover, we can see that the WSC Capitulation Index remains quite bearish, whereas the Smart Money Flow Index has definitely not confirmed the latest gains from the Dow Jones Industrial Average. As a matter of fact only the WallStreetCourier Index is giving some support at the moment.

Mid-Term Technical Condition

Another main reason why we believe that the market is at risk for a stronger correction is clearly the fact that the mid-term oriented condition of the market also continued to deteriorate significantly last week. This is mainly because the gauge from the Global Futures Trend Index closed again in the lower part of its bullish consolidation area and has not shown any signs of improvements. If this trend continues it is just a question of time until we see a drop (of this indicator) below 60 percent. In such a case, the risk of a fast paced correction is extremely high, as already pointed out in our last week’s comment. However, from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator keeps trading in bullish territory. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. This can be also seen if we focus on our Sector Heat Map as the momentum score from the S&P 500 remains weak but still keeps trading above the one from riskless money market. Nevertheless, we can see that the momentum score of riskless money market keeps trading at quite elevated levels, which is another major red flag at the horizon.

As per last week?s report, another major threat remains the current condition of mid-term oriented market breadth. There we can see that the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) dropped significantly for the week. Consequently, both gauges have clearly turned bearish (100) or are about to do so soon (150). On top of that we can see that the Modified McClellan Oscillator Weekly also widened its bearish gap last week, which is another indication for an outright weak tape momentum at the moment. In such a situation, we would be extremely surprised to see stronger (sustainable) gains ahead. Another outright concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals strengthened for the week. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60 percent) have mostly been a reliable predictor for a stronger correction. So all in all, we have again a deteriorating tape structure all across the board and, therefore, we received further evidences that the market has hit an important top recently. So even if we do not see a stronger pullback immediately, with such weak readings all across the board, there is absolutely no upside potential left as well. As a matter of fact we remain extremely cautious!

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. Nevertheless, we can see that the readings from the WSC Global Momentum dropped significantly. Thus, only 62 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. Also the WSC Global Relative Strength Index again showed a negative picture last week, as the relative strength of all risky markets continued to drop. In our opinion, those movements are definitely reflecting the fact that the market looks extremely vulnerable at the moment. This fact is also confirmed if we have closer look at long-term oriented market breadth. Despite the fact that the percentage of stockss which are trading above their long-term oriented moving average (200) and the High-/Low Index Weekly remain bullish from a pure signal point of view, their readings continued to deteriorate last week. Above all, we can see that the Modified McClellan Volume Oscillator Weekly remains quite bearish and, therefore, we think that the current upside potential of the market looks extremely capped at the moment.

Bottom Line

Our key call remains unchanged compared to last week. Although the market only trades a few percentages below its all-time high, we remain outright cautious! This is due to the fact that the technical condition of the market looks extremely damaged at the moment. With such weak readings all across the board the market is outright vulnerable and, therefore, the risk of a stronger correction remains outright high. Nevertheless, we would like to see some stronger negative price action below 2,095 first, before we advise our members to take any actions (This is due to the fact that the Global Futures Trend Index is still somehow supportive and, therefore, another ? not sustainable ? large-cap driven rally attempt cannot be ruled out at the moment). As a matter of fact, we would advise our conservative members to adjust their stop-loss limit towards 2,095. This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 2,095 and should increase their exposure if we see further down testing below 2,075/2,050. Stay tuned!