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July 12. 2015

Market Review

Trading was full of ups and downs last week. The Dow opened the week on Monday at 17,728.08, fell by over 200 points on Wednesday, and recovered on Friday to close the week up 41.33 points to 17,760.41. The Nasdaq and S&P 500 indices followed a similar trend, although neither market could match the Dow’s gains. The Nasdaq opened the week at 5,024.30 and closed it at 4,997.70, with a big plunge on Wednesday and steady recovery during the later part of the week. The S&P 500 opened at 2,073.94 and closed at 2,076.62 on Friday, for a gain of 2.68 points. In end the, the Dow Jones Industrial Average eked out a weekly gain of 0.2 percent, the S&P 500 ended virtually flat, whereas the Nasdaq declined 0.2 percent last week. Among the key S&P sectors, consumer staples were the best weekly performer, while materials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell below 17.

Short-Term Technical Condition

Despite the fact that the market finished nearly flat for the week, the short-term down-trend of the market remains well intact. This is mainly due to the fact that the S&P 500 closed 23 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 2,099. Furthermore, we can see that both envelope lines of this reliable indicator continued to decrease significantly, which is another strong bearish sign from a pure structural point of view. The same is true if we focus on the readings from the Modified MACD, as they both trend lines have not shown any signs of stabilization yet. Therefore, it might be still a bit too early to take the current bounce on Friday too seriously. This view is also confirmed by the bearish gauge from the Advance-/Decline 20 Day Momentum Indicator, which has not shown any signs of bullish divergences yet and which would be the first indication for a stronger trend reversal.

More importantly, the current short-term oriented down-trend of the market is widely confirmed by our entire short-term oriented breadth indicators! Especially, the percentage of stockss which are trading above their short-term oriented moving averages (20/50) dropped further into deep bearish territory, indicating an outright damaged trend-structure at the moment. To be more precise, only 37/41 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average, the lowest numbers we have seen for months. Above all, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily remain in an outright bearish freefall. Apart from the fact that both indicators are definitely far away from confirming the current levels from the S&P 500, they also tell us that the underlying breadth momentum of the market is extremely damaged at the moment. With such weak readings, it is quite unlikely that any upcoming bounce would lead to a sustainable trend-reversal. Another concerning fact is that the recent bounce on Friday was mostly driven by short-covering (which is not a big surprise as most traders wanted to log in their profits before the weekend), as we have only seen a strong reduction in the number of stockss hitting a fresh 52 weeks low, rather than a strong increase of those stocks which hit a new 52 week high. As a matter of fact, the High-/Low Index Daily remains outright bearish at the moment and is, therefore, additionally not confirming the current levels from the S&P 500.

Last week, we mentioned the fact that from a pure contrarian point of view a minor low looked possible. In fact, after we had seen stronger signs of capitulation within our fear indicators on Wednesday (9-to-1 down-day, spiking Trin Daily and soaring Daily Put-/Call Ratio All CBOE Options), the market hit a minor low on that day. By the end of the week, the readings within our option based indicators continued to strengthened (Daily Put-/Call Ratio All CBOE Options, Equity Options Call-/Put Ratio Oscillator, WallStreetCourier Index and the Global Futures Put/Volume Ratio), indicating that the crowd is heavily searching for protection. As approximately more than 90 percent of all options being bought expire worthless, it could easily be possible to see further bouncing/sideways trading until next Friday (as the option expiration date is due on that day) before further losses can be expected. This view would be in line with our Smart Money Flow Index, which is far away from confirming the current levels from the Dow, indicating further troubles ahead on a mid-term time horizon. Above all, we can see that the WSC Capitulation Index has not dropped half of its rise yet and is, therefore, still indicating an extremely risk-off market environment.

Mid-Term Technical Condition

As per last week’s report, the mid-term oriented technical condition of the market continued to weaken significantly and, therefore, we still remain outright cautious at the moment. The most concerning point is definitely the fact that the gauge from the Global Futures Trend Index dropped notably for the week and just closed slightly above the extremely bearish 20 percent threshold! With such weak readings, the market is highly at risk for a significant sell-off and, therefore, the current risk-/reward ratio is extremely depressed at the moment. Moreover, in such a situation, stronger gains tend to have a corrective character rather than being the start of a new sustainable breakout! However, from a pure price point of view the mid-term oriented up-trend of the market still remains intact. This is mainly due to the fact that the WSC Sector Momentum Indicator has not turned bearish yet, although its gauge dropped to the lowest level for months. This was caused by the fact that the spread between the relative strength score of riskless money market and the S&P 500 within our Sector Heat Map kept narrowing. Moreover, there we can see that already 4 out of 9 sectors have started to underperform risk-less money market, which can be seen as another red flag on the horizon.

More importantly, the current bearish biased mid-term oriented trend is also strongly confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to show an outright widening bearish gap, whereas the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) turned obviously bearish last week. This tells us that the market internals are outright weak at the moment and, therefore, we would be surprised to see a major trend-reversal ahead. On top of that, we can see that the bearish readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly continued to strengthen last week. Therefore, the market remains extremely vulnerable at the moment as the underlying demand is diminishing. This can be also observed if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), which are far away from confirming the current levels from the S&P 500!

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. 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 most local market indexes around the world are in the middle of a correction at the moment. This is mainly due to the fact that the WSC Global Momentum Indicator continued to drop 500 basis points to 30 percent last week. This indicates that only 30 percent of all global markets which are covered by our Global ETF Momentum Heat Map remain within a long-term oriented up-trend for the time being. As global equity markets tend to be quite connected to each other, this can be seen as another warning sign on the horizon. More importantly, the bearish readings within our long-term oriented market breadth remain quite unchanged compared to last week. The Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly continued to strengthen their bearish signal last week, whereas the percentage of stockss which are trading above their long-term simple moving averages clearly dropped below their bullish threshold on Monday.

Bottom Line

The bottom line: the situation remains unchanged compared to last week. After the market had dropped below 2,067 two weeks ago, we received the final confirmation that a major summer top is in place! As a matter of fact, we would advise our conservative members to stay at the sideline as the current risk-reward ratio is too low at the moment! Although we cannot rule out further strength into next week, we think that any upcoming bounce should be limited in price and time. As a matter of fact, aggressive traders should focus on selling into strength as long as our entire short-term oriented indicator framework remains bearish. Stay tuned!