June 07. 2015

Market Review

Last week all three major U.S. averages ended in negative territory. For the week the Dow Jones Industrial Average dropped 0.9 percent to 17,849.46. The S&P 500 dropped 0.7 percent to 2,092.83 during the week. The broad index stands at its lowest level since May 7 after falling for two weeks in a row. The benchmark index has trimmed its year-to-date gain to 1.7 percent. The Nasdaq Composite dipped less than 0.1 percent from last Friday’s close, ending at 5,068.46. Of the key S&P sectors, utilities led decliners, while financials led advancers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14. The index posted its second consecutive week of gains.

Short-Term Technical Condition

In last week’s comment we highlighted the fact that the market was on the way to form an important summer top! Consequently we remained outright cautious although it was still a bit too early to take the chips from the table as the market had to drop below critical support levels around 2,055 first. Although major U.S. benchmarks remained within 3 percent of their all-time highs, the technical picture of the market continued to deteriorate, especially on a mid-term time frame. Therefore, we think major troubles might be at hand soon!

The short-term oriented technical picture of the market turned quite bearish as the S&P 500 closed 29 points below the bullish threshold from the Trend Trader Index on Friday. This negative trend structure of the market is also confirmed by the Modified MACD, which continued to gain more negative ground last week. Above all, we can see that the bearish gauge from the Advance-/Decline 20 Days Momentum Indicator has not formed any signs of a major bullish divergence yet, which would be the first indication for a trend reversal. However, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish yet as both envelope lines of the Trend Trader Index were still holding up quite well. In addition, the gauge of the Advance-/Decline 20 Days Momentum Indicator keeps more or less trading sideways on low bearish levels, indicating a period of consolidation. In general, it is not unusual that our entire short-term trend indicators are trading in bearish territory, if the market is taking a healthy breather. As already mentioned a couple of times, a consolidation period is considered to be healthy one if it is being accompanied by an improvement in short- to mid-term market breadth, indicating that the market internals are strengthening.

Unfortunately, short-term oriented market breadth continued to deteriorate all across the board and, therefore, the current consolidation period could easily turn out to be corrective in its nature! The percentage of stockss which are trading above their short-term oriented moving averages (20/50) slightly dropped below their bullish 50 percent threshold on Friday, indicating a weakening up-trend participation at the moment. Although their absolute numbers still can be interpreted as supportive (as still 47/48 percent of all stocks remain in a short-term oriented up-trend), we should not forget that their readings are definitely not confirming the current levels from the S&P 500! The same is true if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, as both short-term oriented gauges reached a new yearly low last week! This is telling us that the underlying breadth momentum of the market remains outright bearish at the moment, although the market is trading only 3 percent below its all-time high! This can be also seen if we focus on the NYSE New Highs/New Lows Indicator, as the amount of yearly new lows dropped almost to the lowest level this year, although the S&P 500 only lost 0.7 percent for the week. As a matter of fact, the High-/Low Index Daily flashed a small bearish crossover signal on Friday and is, therefore, far away from confirming the current levels from the S&P 500! These are the lowest levels for months and, therefore, we received further confirmations for our summer-top scenario.

The situation from a pure contrarian point of view remains quite mixed and, therefore, further volatility can be expected on a very short time frame. The option market and the NYSE Members Debt in Margin Accounts Indicator are getting increasingly supportive, whereas Smart Money continued to sell into strength. As a matter of fact, the WSC Capitulation Index is now indicating a strong risk-off environment as it measures the momentum of the SMFI, which is definitely bearish at the moment. Normally, the CBOE Option Put-/Call Ratio Indicator tends to be more short-term oriented, whereas the SMFI tends to be quite correct on a mid-term time horizon! So from a pure contrarian point of view, it looks like that further volatile session might be possible, before bigger troubles might be due!

Mid-Term Technical Condition

More importantly, if we focus on our mid-term oriented indicators, we have even received a growing number of evidences that the market is running into an important summer top! The main rationale behind that is the fact that the gauge of our reliable Global Future Trend Index dropped significantly below its bullish 60 percent threshold and, therefore, the chances for a fast paced pullback/correction remain outright high at the moment! 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! Only, from a pure price point of view the mid-term oriented up-trend of the market remains intact. This is not a big surprise at all, as we have not seen any stronger pullback yet. As matter of fact, the WSC Sector Momentum Indicator still remains quite bullish for the time being. This can be also seen if we have a closer look at our Sector Heat Map, as the majority of sectors have a higher relative strength score than riskless money market. Nevertheless, the momentum score of money market increased strongly last week, which can be interpreted as another warning signal on the horizon!

Above all, mid-term oriented market breadth showed also major signs of exhaustion last week and is, therefore, hardly confirming the current mid-term oriented price driven uptrend of the market at the moment. Especially, the Modified McClellan Oscillator Weekly showed a widening bearish gap last week, indicating that the market internals are weakening. Such a broader non-confirmation can be also seen if we focus on the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly, which remain bearish or outright weak. This is telling us that a lot of purchasing power was pulled out of the market last week. This is another indication that the market remains extremely vulnerable at the moment. Basically, the same is true if we focus on the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). Both indicators continued to lose bullish ground last week and are, therefore, just trading shy above their 50 percent bullish threshold!

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 most of our bullish long-term trend indicators continued to deteriorate last week. This is mainly due to the fact that the WSC Global Momentum Indicator lost 800 basis points for the week, whereas the relative strength score of most risky markets look like they will drop below their bullish zero percent thresholds soon. As already mentioned last week, we think this is another indication for our major top-building scenario. Therefore, it was not a big surprise at all that most of our long-term oriented tape indicators continued to deteriorate (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stockss which are trading above their long-term oriented moving averages) although they still remain somehow supportive for the time being.

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, the current consolidation period could easily turn out to be corrective in its nature. 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 strength, if the S&P 500 drops below 2,075 and should increase their exposure if we see further down testing below 2,055. Stay tuned!