March 15th 2020

Market Review

Last week, one of the longest bull market in U.S. history came to a sudden end. That event was accompanied with a level of volatility that has not been seen in decades. For the first time since 1997, circuit breakers at the New York Stock Exchange were tripped not once but twice (on Monday and Thursday) since the S&P 500 fell by 7% in both days. Thursday was the worst day in more than three decades as the S&P 500 plummeted 9.5%, whereas the Dow Jones Industrial Average also suffered its biggest percentage decline since 1987. By jumping more than 9% on Friday, U.S. stocks recovered some of their losses, but in the end the Dow Jones Industrial Average slumped 10.4% to 23,185.62 for the week. The S&P 500 closed at 2,711.02 and lost 8.8% for the week. Closing at 7,874.88, the Nasdaq saw an 8.2% weekly plunge. All key S&P sectors ended in deep negative territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 58 after spiking to 77 earlier in the day.

Strategy Review

Over the past weeks, we received a growing number of evidences that the market was extremely at risk for a major disappointments. In fact, after we had seen the predicted bounce (after the initial sell-off) two weeks ago, we explicitly warned our members that the recovery rally from the S&P 500 to 3,120 looked outright corrective. The main rationale behind that call was the fact that the recovery rally had literally zero positive impact on our indicator board. Thus, we believed that the market was highly at risk for an outright strong correction. As a consequence, we advised our members to place a stop-loss limit at 2,890 (on an intra-day basis) since the risk-/reward ratio deteriorated significantly back then. In fact, the stop-loss limit was triggered on Monday and since then we had seen further selling pressure towards 2,478 before the S&P 500 managed to recoup some of its losses on Friday. After the S&P 500 dropped into bear-market territory last week, the big question is if it is time for bargain hunters or will the market face further declines? To answer that question, we analyze the market behavior quite closely within the next couple of days. Because, a typical stabilization process/bottom tends to occur as a process rather than as a V-shaped recovery. If the market hits an important bottom/low, we usually see a strong counter trend rally, which normally lasts about 5 to 10 or even 20 trading sessions. After that, the market tends to show renewed weaknesses, which could then lead to a retest or even a break of its previous low. If this weakness comes along with more positive divergences within our market breadth indicators (less new lows/increase in new highs, lower fear indicators, positive divergences in short-term market breadth …), we can be quite sure that the market hits rock bottom, otherwise further declines can be expected.

Short-Term Technical Condition

Not surprisingly, our entire short-term oriented trend indicators remain outright bearish since they even gained more negative ground last week. The S&P 500 closed 291 points (!) below the bearish threshold from the Trend Trader Index. Thus, the broad index is extremely far away from getting back into a short-term oriented uptrend. This fact is also confirmed by our Modified MACD, which continued its bearish free fall and once again reached the lowest level for months. Additionally, this reliable indicator refused to confirm the strong bounce on Friday. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. Although this indicator showed a small recovery on Friday, its recovery was too small to be significant (especially if we consider the fact that the gauge from this reliable indicator plummeted to the lowest level for months). So from a pure price point of view, the recovery on Friday can be still classified as (corrective) bounce rather than the beginning of a new and sustainable up-trend (at least for the time being).

More importantly, the current short-term oriented down-trend of the market is still widely confirmed by short-term market breadth. Consequently, the bounce on Friday had hardly any positive impact on our short-term oriented tape indicators. This becomes quite obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily since both indicators showed literally zero signs of recovery last week. As a matter of fact, the latest recovery can be still classified as stronger bounce rather than the beginning of a new and sustainable uptrend. This view is also confirmed by the percentage of stocks which are trading above their short-term oriented moving averages (20/50). There we can see that both gauges dropped to their lowest level for years and have, therefore, not shown any signs of recovery yet. These circumstances are an outright bearish signal as they indicate that the market will not have enough power to initiate a sustainable trend-reversal at the moment. Consequently, the current bounce still looks quite corrective in its nature and, therefore, another move towards the latest low at 2,478 looks quite likely. On the other hand, we also received some small indications that 2,478 represents an quite strong low since we saw an outright strong reduction in new lows on Friday. This was a quite confirmative signal, although it still remains a bit too weak-kneed at the moment. A fact, which can be also seen if we focus on High-/Low-Index Daily. So from a pure short-term tape perspective, another stronger sell-off towards the latest low looks quite likely. Nevertheless, if we consider the strong reduction in new lows it could be also possible that such a re-test/renewed selling pressure will come with less new lows and would be then a strong piece of evidence that 2,478 represents a major low.

According to our contrarian indicators, the current bounce might continue for a while since the fear within the market reached historical levels. Hedging costs exploded since the CBOE Volatility Index (VIX) spiked to 77, whereas the put-/call ratio soared to 1,75 on Thursday. Thus, the z-score from the Daily Put-/Call Ratio All CBOE Option closed more than 2 standard deviations above its mean, which is an outright bullish signal at the moment. Basically, the same is true if we focus on our other option based oscillators (AII CBOE Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio). On the other side, we can see that the market is still heavily oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily), whereas the WSC Capitulation Index did not confirm the latest low on Thursday. Another strong buy signal is coming from the Smart Money Flow Index, which has shown an outright positive divergence recently. As matter of fact, it could be possible that 2,478 represents an outright strong low (at least from a current point of view).

Mid-Term Technical Condition

Although we received a lot of positive signals from the contrarian side, we should not forget that the mid-term oriented (down-)trend of the market remains nearly unchanged compared to the previous week. As a matter of fact, we think that the market is still at risk for further disappointments (or we see at least some form of re-test of the previous low). The main rationale behind that call is the fact that the Global Futures Trend Index dropped once again and is now trading at 6% (and, therefore, far away from passing its 60% threshold). In addition, this gauge has not shown any bullish divergences or bullish momentum moves yet and did, therefore, confirm the bounce of the S&P 500 on Friday. Also from a pure price point of view, the mid-term oriented uptrend of the market is outright weak at the moment, as the WSC Sector Momentum Indicator dropped considerably last week and is now slightly trading above the bullish threshold. This signals that more and more sectors within the S&P 500 are underperforming riskless money market on a relative basis. This view is supported by examining our Sector Heat Map as the momentum score of riskless money market strengthened again and as it jumped to 54% last week. In addition, already five sectors are trading below the one from riskless money market. So as long as we do not see a significant drop in this number (or a recovery in our mid-term oriented trend indicators), we strongly believe that it is a way too early to get back into the market at the moment.

This view is also confirmed by mid-term market breadth. Once again our Modified McClellan Oscillator Weekly widened its bearish gap, which indicates an outright weak tape momentum at the moment. Another 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 tremendously. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for further major troubles down the road. In addition, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as well as the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped considerably. So all in all, the mid-term oriented tape condition of the market is confirming the mid-term oriented down-trend of the market. Consequently, we strongly believe that we will not see a V-shaped recovery and, therefore, it is just a question of time until we see another wave of selling pressure towards the latest correction low.

Long-Term Technical Condition

Once again, also the long-term oriented trend of the market continued to weaken last week. The WSC Global Momentum Indicator has finally reached 0%. This signals that the correction was global in scope as all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) dropped below their long-term oriented trend-lines. This global risk-of market environment is also supported by the WSC Global Relative Strength Index since all risky assets considerably lost momentum last week. As in the previous week, only the Global Futures Long Term Trend Index was holding up quite well, although it has also finally started its bearish ride. Another concerning fact is that our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) also weakened significantly last week. These facts support our view that the chances for a V-shaped recovery are literally zero at the moment.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the momentum score of consumer staples rose above average and above the one from the S&P 500 in our Sector Heat Map, we received a buy signal for that ETF in our WSC Sector Rotation Strategy.

Bottom Line

Given the fact that the latest bounce had almost zero positive impact on our indicator board (especially within short-term market breadth), we do not believe to see a sustainable V-shaped recovery (at least from the current point of view). Consequently, the recent bounce can be described as quite corrective rather than being the beginning of a new and sustainable uptrend at the moment. This fact can be also seen if we focus on our WSC Big Picture Indicator which is still showing a bearish consolidation scenario at the moment. Consequently, there is a quite big chance to see another move towards or even below the latest low at 2,478. As mentioned above, if such selling pressure comes with less new lows, a significant lower CBOE Volatility Index (VIX) and positive divergence within our tape indicators, we think it is time for bargain hunters to get back into the market. Right now, we are not there yet although we received some stronger indications on the contrarian side that 2,478 represents an outright strong low. Consequently, our strategic bearish view remains unchanged for now but we would advise our members to monitor our indicator framework quite closely within the next days.

Stay tuned!