October 16. 2016

Market Review

U.S. stocks finished the week with losses. For the week, the Dow Jones Industrial Average slid 0.6 percent to 18,138.38. The S&P 500 finished at 2,132.98 and posted a weekly drop of 1.0 percent. The Nasdaq declined 1.5 percent from the week-ago close to 5,214.16. Most key S&P sectors finished in the red for the week, led by health care. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.12.

Short-Term Technical Condition

Although the recent price action has put the S&P 500 only slightly above the lower boundary of its trading range, the short-term oriented trend structure of the market continued to deteriorate significantly last week. This is mainly due to the fact that the gauges of our entire short-term trend indicators turned or strengthened their bearish signals. To be more precise, we can see that the S&P 500 closed 30 points below the bullish threshold from the Trend Trader Index. In addition, we can see that both envelope lines of that reliable indicator are trading well below their high in mid-September. Therefore, we have received even more confirmation that the current weakness is definitely part of a bigger top building process (into fall) rather than being a short-lived (and healthy) consolidation period. The same is true if we focus on the Modified MACD, as its short-term oriented gauge dropped towards a new low and has, therefore, clearly formed an outright bearish divergence to the current levels from S&P 500. Another concerning fact is that the gauge from the Advance-/Decline 20 Day Momentum Indicator just dropped slightly below its bullish threshold on Friday. As this indicator tends to be a leading one, we would not be surprised to see further (stronger) down-testing ahead. Consequently, it is a way too early to bet for a sustainable trend reversal at the moment.

The picture is also widely confirmed by short-term market breadth. Our Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bearish ground last week and also the number of stockss which are hitting a fresh yearly high again decreased significantly during the last week. As a matter of fact, it looks like that the High-/Low Index Daily is about to flash a bearish signal soon and is, therefore, also showing major signs of non-confirmation at the moment. Additionally, also the percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped significantly into bearish territory. This indicates an extremely weakening upside participation at the moment as the majority of stocks on NYSE clearly turned bearish last week. Moreover, if we consider the current levels from the S&P 500 in combination with such weak readings within our breadth indicators, it is quite obvious that only large cap stocks are holding up quite well at the moment (whereas the broad market is already faltering)! This is just another piece of evidence (for our recent call) that the current consolidation period looks outright corrective in its nature.

The situation on the contrarian remains literally unchanged compared to last week. Apart from the fact that the WallStreetCourier Index is still giving some support, we can see that the big guys on Wall Street continued to into strength as the Smart Money Flow Index continued to widen its bearish divergence to the Dow Jones Industrial Average. Above all, we can see that the WSC Capitulation Index is still indicating a risk-off scenario which is in line with our overall outlook and, therefore, we would not be surprised to see further selling pressure ahead.

Mid-Term Technical Condition

Another main reason why we believe that a correction might be at hand soon is due to the fact that the mid-term oriented condition of the market also continued to deteriorate significantly last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped significantly for the week and has, therefore, closed in the middle of its bullish consolidation area. If this trend continues it is just a question of time until we see a drop (of this indicator) below 60 percent. In the past, readings below that important threshold, in combination with weak or bearish readings in mid-term oriented market breadth were always a predictable signal for a stronger correction. Right now we are not completely there yet but if we consider the outright weak tape readings within our mid-term oriented tape indicators (see below), the ingredients for a correction are almost complete! However, from a pure price point of view, the mid-term oriented uptrend of the market still looks intact as the WSC Sector Momentum Indicator has not shown any signs of major weaknesses so far. 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 money market reached the highest level for month, which is another quite serious warning signal.

Another reason why we believe that the market is highly at risk to form an important top is due to the fact that our entire mid-term oriented tape indicators continued to deteriorate significantly last week. More accurately, the percentage of stockss which are trading above their mid-term oriented simple moving average (100/150) have come down substantially, and are, therefore, just shy trading above their bearish threshold. Consequently, they are forming a huge bearish divergence if we consider the current levels from the S&P 500. The most concerning signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators turned or strengthened their bearish signal last week. This indicates that a lot of purchasing power was pulled out of the market last week and, therefore, the overall market internals are extremely vulnerable at the moment. On top of that, the Modified McClellan Oscillator Weekly also flashed a bearish crossover signal last week, indicating an outright weak tape momentum on a mid-term oriented time frame. So all in all, we have again a deteriorating tape structure all across the board and, therefore, we received further evidences that the market hit an important top. So even if we do not see a stronger pullback immediately, with such weak readings the upside potential of the market should remain limited as well. As a matter of fact we remain extremely cautious at the moment.

Long-Term Technical Condition

Unchanged compared to last week, the long-term uptrend of the market remains intact and, therefore, our long-term bullish outlook has not been changed so far. Thus, we do not think that a correction should lead to a new bear market at the moment. To be more precise, the Global Futures Long Term Trend Index is still indicating a technical bull market whereas the WSC Global Momentum is telling us that 80 percent of 35 local equity markets all around the world (which are covered from our WSC Global ETF Momentum Heat Map) are still in a long-term oriented up-trend at the moment. If we focus on our Global Relative Strengths Index, we can see that the most risky markets have lost some steam recently which is another indication that the market looks quite vulnerable at the moment. However, this long-term oriented uptrend of the market is still widely confirmed by long-term market breadth. This is due to the fact that the readings from our entire long-term oriented tape indicators remain (somehow) supportive (High-/Low Index Weekly and the percentage of stockss which are trading above their 200 day moving average) although the Modified McClellan Volume Oscillator Weekly turned bearish last week.

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 we saw even more bearish crossover signals within our mid-term oriented indicators. Therefore, we received further evidences that the market is at the brink of a stronger correction. 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!