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December 23th 2018

Market Review

U.S. stocks plunged for the week, sending the major indexes to their worst week for years. The Dow Jones Industrial Average recorded a weekly loss of 6.9 percent to finish at 22,445.37. It was its worst percentage drop since October 2008. The S&P 500 finished at 2,416.58 and plunged 7.1 percent for the week. Its worst weekly showing since 2011. The Nasdaq lost 8.4 percent for the week to close at 6,332.99. Its worst percentage drop since October 2008. The Dow Jones Industrial Average and S&P 500 are on track for their worst December performance since the Great Depression in 1931. All key S&P sectors finished in the red for the week, dragged by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 30.1.

Strategy Review

The market is moving right in line with our strategic outlook! Worth mentioning is the fact, that we have been able to predict every major market turn this year. Therefore, our members were once more able to sidestep the latest carnage which has been already going on for a couple of week’s right now. More importantly, last week we saw a strong waterfall decline which is a typical pattern at the early stage of a bear market. Normally, after such a strong decline the market often tends to show some form of stabilization (driven by short-covering), which is then followed by another significant decline. In such a period, it is absolutely essential not to get nervous if the market bounces a couple of percent! Such a bounce is mostly the time, when dumb money goes in big as it believes that the worst is already over. Such huge bull-traps are quite easy to identify since a real recovery is always accompanied by a broader based recovery/confirmation within our indicator framework!

Short-Term Technical Condition

Anyhow, 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 197 points (!!!) below the bearish threshold from the Trend Trader Index. In this context, the S&P 500 is extremely far away from getting back into a short-term oriented uptrend (which is a quite typical pattern during a bear-market). Also our Modified MACD remains in a bearish free fall and reached the lowest level for months. Additionally, its gauge shows a widening bearish gap. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which also remains in a bearish free fall and reached the lowest level for months. As a matter of fact, our entire short-term oriented indicators have confirmed the latest sell-off from last week.

Basically the same is true if we focus on our short-term oriented market breadth indicators (as all of them had to take a hard hit during the last couple of trading sessions). Particularly, the short-term oriented gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show major signs of exhaustion and plummeted significantly to their lowest levels for months. This indicates that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. This view is absolutely confirmed by the NYSE New HighsNew Lows Indicator. The number of new lows showed the strongest peaks (for months) during the whole week while the number of new yearly highs was nearly zero! Therefore, the bearish gauge from the High-/Low-Index Daily rocketed into record bearish levels and has, therefore, fully confirmed the latest sell-off from last week. More importantly, both indicators showed that the latest sell-off was driven by the broad market and not only by a few heavy weighted stocks in the index. This fact is also supported by the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges dropped to their lowest levels for years. As pointed out in our latest outlook, this is an outright bearish signal as it indicates that the market will not have enough power to initiate a sustainable trend-reversal for the time being. As a matter of fact, any upcoming short-covering bounce should be limited in price and time!

On the contrarian side, we can see that the market is extremely oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) at the moment. Another interesting fact is that there was a tremendous spike in NYSE volume last week. Such a spike often indicates a short-term oriented trend-reversal. This signal is in line with the fact that most of our option based indicators grew significantly into bullish territory last week (Global Futures Put/Volume Ratio Weekly and the All CBOE Options Put-/Call Ratio Daily). As approximately 90 percent of all uncovered options are an also-ran, there is a small chance to see some form of stabilization until 20th of January (when the option expiring date is due). However, apart from that fact the remaining contrarian indicators still look quite grim. Especially, the Smart Money Flow Index dropped to a new low, indicating major troubles ahead very soon. Moreover, we can see that the WSC Capitulation Index is still indicating a risk-off market environment at the moment. Consequently, it is a way too early to call for a sustainable bottom at the moment.

Mid-Term Technical Condition

Another reason why we believe that the market is at risk for further disappointments is due to the fact that the mid-term oriented condition of the market also deteriorated significantly last week. Mainly because the gauge from the Global Futures Trend Index dropped to 5 percent! This is at the lower part of the bearish area and very far below the very important threshold of 60 percent. Also, our WSC Sector Momentum Indicator continued its bearish ride and indicates that most sectors within the S&P 500 are underperforming riskless money market on a relative basis. A fact which is also supported by the readings of our Sector Heat Map as the momentum score of riskless money market strengthened again (by 10.5 percentage points) and jumped to 70.5 percent. Moreover, already seven sectors are trading below the one from riskless money market. In our opinion this is just another indication for our preferred scenario that the any recovery will just turn out to be a bear-market rally instead of a broader-based recovery.

Another reason why we believe that the market is in the middle of a bear-market is due to the fact that also our entire mid-term oriented breadth indicators remain outright bearish. In this context, the most concerning signals are coming from our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) which started a free fall and plunged to their lowest levels for months. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped to their lowest levels for months. In addition, our Modified McClellan Oscillator Weekly also dropped to its lowest level for months and widened its bearish gap, indicating an outright weak tape momentum at the moment. Another outright weak mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals strengthened significantly last week. As a consequence, the overall mid-term oriented tape condition of the market has clearly confirmed the sell-off from last week.

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market also continued to weaken (which is in-line with our strategic outlook). Although our WSC Global Momentum Indicator increased a bit, it is still trading at its lowest levels for years. This is signaling that nearly zero percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. This is a clear signal that the bear market is fully in force on a global perspective. In addition, also our Global Futures Long Term Trend Index also gained more bearish ground and dropped again to the lowest level for weeks. Our WSC Global Relative Strength Index, in contrast, showed again some small improvements, but still the relative strength of all risky markets is trading well below the one from U.S. Treasuries. This is another indication for a risk-off market environment. Also our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) had to take again a hard hit last week and reached their worst levels for months. This is another piece of evidence that the market looks vulnerable for further (and stronger) disappointments on a mid- to long-term time horizon.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model.

Bottom Line

Our outlook remains unchanged compared to last week. In our opinion, the market is just in the middle of a new bear market and, therefore, any upcoming gains should turn out to be limited in price and time. This scenario will be unchanged as long as we do not see a significant recovery within our mid-term oriented indicator framework (which looks quite unlikely for the next couple of months). Consequently, we remain outright bearish from a pure strategic point of view. On a very short-time frame, there is a small chance to see some form of stabilization/bouncing in the next couple of trading sessions. Nevertheless, even if we see some form of stabilization, we think that any upcoming gains will be limited in price and time (and do, therefore, not represent a great opportunity for bottom fishing). As a matter of fact, we would advise our conservative members to stay on the side-line, whereas our aggressive members should remain bearish as long as we do not see a significant recovery within our short-term oriented indicator framework.

Stay tuned!