Market Regime Outlook

… is quite bearish at the moment. As you probably know by now, short-term oriented trend indicators are quite reactive. Therefore, it is quite common that they turn negative after strong wash-out days. To identify if this trend will continue or if it was just a flash in the pan, the underlying quality of this trend (aka market breadth) will give further guidance.

The quality of the current down-trend continued to intensify last week. Thus, further selling pressure can be expected. Especially, the short-term gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to weaken significantly (since both plummeted to their lowest levels for more than one year). This indicates that the momentum and volume of advancing stocks on NYSE literally collapsed. This picture is also strongly confirmed by the NYSE New Highs – New Lows Indicator since the number of stocks hitting a fresh yearly low outpaced the new highs significantly during the whole week. Consequently, the High-/Low-Index Daily widened its bearish gap. As long as we do not see a recovery here, it is too early to bet for a sustainable trend reversal. More importantly, it also tells us that the latest decline was driven by the whole market and was not only caused by a few heavy weighted stocks within the S&P 500! As a matter of fact, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) slumped deeper into bearish territory. On Friday, only 11/27% of all NYSE listed stocks were still in a short-term oriented uptrend. Hence, the quality of the current short-term oriented down-trend is extremely high at the moment. In such an environment, stronger up-days are normally just oversold bounces rather than the beginning of a new recovery rally.

The market is quite oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio), whereas the recent volatility started to have its designated impact on market sentiment. The amount of bulls plummeted 22 percentage points to 26%, whereas the signals of our option based indicators (WSC Dumb Money Indicator, Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator, z-score of the AII CBOE Put-/Call Ratio and the WSC Put-/Volume Ratio Oscillator) turned from bearish to neutral last week. Although this shows that increasingly negative news are expected, market sentiment is still far away from being fearful. This shows that there is still enough room for negative surprises. Additionally, we can see that the gauge of the Smart Money Flow Index dropped to the lowest level since February, which is another significant warning signal at the moment. Moreover, we can see that WSC Capitulation Index is still showing a risk-off market environment. The only small positive sign is coming from a cyclical point of view. Historically, the market faces some tailwinds in the second week of December before further selling pressure can be expected. Putting that into context, the chances for a stronger oversold but corrective bounce are still around on a very short-time frame.

Mid-Term Technical Condition

This view is also confirmed by the fact that the mid-term oriented trend of the S&P 500 also deteriorated significantly last week. Thus, the risk that the current pullback transforms into a correction is outright high at the moment. For the week, the gauge of the Global Futures Trend Index dropped by almost 35 percentage points to close just shy above its bearish threshold (levels we have not seen since March 2020). This is an outright negative trend signal since it is additionally accompanied by a high bearish mid-term oriented trend quality. So even if we do not see stronger declines immediately, with such weak readings the upside potential of the market should also be quite capped. The only positive signal is coming from the WSC Sector Momentum Indicator, which shows that the mid-term oriented price trend of the S&P 500 still remains intact (this is not a big surprise since we have not seen a stronger sell-off yet). This can also be seen if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading above the one from riskless money market (currently at 0%).

As mentioned above, the quality of the bearish biased mid-term oriented trend continued to strengthen considerably. Currently, less that 40 percent of all Russell 3000 stocks are still trading above their mid-term oriented simple moving average (100/150). Conversely, this means that the majority of all U.S. stocks is per definition already in a mid-term oriented price driven down-trend (although major indexes keep holding up quite well). On top of that we can see that the Modified McClellan Oscillator Weekly continued to decline, showing that the momentum of declining stocks remains strong. Another concerning fact are the bearish signals from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly.  In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) have been in most cases the vanguard of a stronger correction. Further headwinds are based on the facts that our entire advance-/decline indicators weakened last week (Advance-/Decline Line Weekly, Advance-/Decline Line Daily and the Advance-/Decline Volume Line). So, all in all the bearish mid-term oriented trend quality is outright high, leaving enough room for further negative surprises. Even if we do not see stronger selling pressure immediately, with such weak readings across the board the upside potential of the S&P 500 should also remain extremely capped.

Long-Term Technical Condition

Further negative signals across the board can also be seen on a long-term time perspective. The WSC Global Momentum shows that now only  26% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are trading above their 200 day moving average. Thus, the current global bull market has more or less come to an end last week. This weakness in global risky assets is also supported by the signals of our WSC Global Relative Strength Index (since the relative strengths of all risky markets dropped below U.S. Treasuries). Thus, safe haven assets continued to outperform risky ones. Also, the Global Futures Long Term Trend Index continued to decrease (although it still remains bullish from a purely signal point of view). More importantly, the trend quality of this bearish biased long-term trend also started to increase last week (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the SMA 200). As already pointed out in our last week’s Market Timing Forecast, this is another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

There is absolutely no fundamental reason to change our cautious strategic view. Given the fact that literally all signals continued to deteriorate all across the board, further stronger selling pressure can be expected. Thus, the current risk-/reward ratio does not justify a strategical or even small tactical long position (even though bottom fishing may look appealing in some cases). This is based on the fact that we have not seen any signs of stabilization within our trend quality indicators yet. Therefore, stronger up-days are most likely just the result of short-covering (oversold bounces). Thus, such moves should be corrective in their nature, rather than being the start of a new short-term oriented uptrend. A fact, which can also be seen if we focus on our Big Picture Indicator, which moved into its bearish quadrant on Friday. As long as this is the case, our strategic cautious outlook remains unchanged.