April 1st 2018

Market Review

In line with our recent outlook, all three major U.S. averages finished the holiday-shortened week with solid gains. The Dow Jones Industrial Average added 2.7 percent to close the week at 24,143. The S&P 500 increased 2.1 percent for the week to end at 2,642. The Nasdaq gained 1.0 percent from the week ago close to finish at 7,063. For the quarter, the Dow was down 2.3 percent, the S&P 500 down 1.2 percent, the while the Nasdaq was up 2.3 percent. Of the S&P sectors, consumer staples led advancers, while technology led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 20.

Strategy Review

In our last week’s comment, we highlighted the fact that our indicator framework was telling us that the market had seen the worst already – at least on an intermediate basis. To be more precise, we believed that the S&P 500 had hit an important intermediate low at 2,585 as this move was accompanied by quite positive divergences within our short-term oriented indicator framework. Early this year we already predicted that the market would enter a complex top-building process in early Q2. Therefore, the latest development of the market was just in line with our strategic outlook, which was also strongly supported from a pure cyclical point of view (Presidential Cycle). Normally, a typical top building process starts with a sharp correction which is then followed by a low quality rally. As such a rally is in general not accompanied by improved readings within short-term market breadth, the result is another waterfall decline. After that, we often see a last V-shaped oversold bounce (slightly lower than the previous all-time high) before a cyclical bear market (decline until minus 20 percent) can be expected. According to our analysis and after the strong rally from last week, the market has now entered its penultimate stage in that process. After we had predicted each steps of that process right on time our members successfully sidestepped the first correction in February and managed to participate in the low quality rally. Afterwards they avoided the second correction-leg and they were finally not surprised by the bounce from last week. According to our cyclical roadmap, the current bounce could push the S&P 500 even above the latest bull-market high, before the grizzlies could spoil the party. However, we should not forget that those historical patterns should just be seen as a rough guideline instead of a precise trading plan. As a matter of fact, our indicator framework will give us further guidance where the market is heading.

Short-Term Technical Condition

Despite the fact that the market finished the week with solid gains, the readings within our short-term oriented trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market remains quite bearish, as the S&P 500 closed 46 points below the bearish threshold from the Trend Trader Index. This indicates that the latest gains of the market can be still categorized as bounce rather than a new up-trend. This view is widely confirmed by the Modified MACD which continued its bearish ride and even dropped to the lowest level for months last week. The only positive signal is coming from the Advance-/Decline 20 Day Momentum Indicator which has shown a strong recovery recently and managed, therefore, to close strongly above its bearish threshold. This indicator often begins to turn before prices do, thereby making it a leading indicator. As a matter of fact, it was good to see that the indicator has formed some kind of bullish divergence recently. In such a situation short-term market breadth is key area of focus as it tells us if the current bearish-biased trend is losing stream or if it is driven by a strong majority and will, therefore, highly likely continue.

If we focus on the readings from short-term oriented market indicators, we can see that they hardly improved last week. This applies in particular to the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Although we have seen a small recovery on quite low levels recently, we can see that both gauges (20/50) closed in deep bearish territory last week. To be more precise, only 25 percent of all NYSE listed stocks managed to close above their 20 days moving average, whereas there were only 41 percent on a 50 day basis. This indicates that only a handful of large caps participated in the rally from last week and, therefore, the current bounce is still quite fragile in its nature. Another concerning fact is that the momentum of advancing stocks (Modified McClellan Oscillator Daily) and advancing volume (Modified McClellan Volume Oscillator Daily) remains outright negative and did also not show any signs of recovery last week. The only positive signal is coming from the NYSE New HighsNew Lows Indicator, as we have seen a strong reduction in new lows. As a matter of fact, the bearish gauge from High-/Low-Index Daily lost has some momentum recently. Despite the fact that our cyclical roadmap is suggesting a bounce above the latest bull-market high into mid-April, short-term market breadth remains too weak to justify such a move at the moment. However, as long as we do not see a new spike in new lows or at least a continuous reduction, the overall tone should be supportive (for now).

On the contrarian side, we can see that the fear among investors remains persistent. This is due to the fact that the put-/call ratio within the option market grew into outright bullish territory. As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market traded higher/or at least was holding up until April 20th, when the option expiring date is due. Interestingly, this time perspective would be totally in-line with our cyclical roadmap as the bounce reaches its climax within that time period. 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.

Mid-Term Technical Condition

This view is also confirmed by the current mid-term oriented condition of the market, as it has absolutely not shown any bullish signs recently. To be more precise, the gauge from the Global Futures Trend Index decreased significantly last week and is now trading shy above (only 1 percentage point) its bearish 20 percent threshold. As already mentioned in our previous market comments, as long as we do not see any stronger upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming gains will definitely be of a corrective nature rather than the start of a new sustainable uptrend. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains far below its bearish 60 percent threshold. Consequently, the current bounce will definitely run out of fuel very soon. On top of that we can see that the WSC Sector Momentum Indicator also dropped to the lowest level for months. This is telling us that the momentum score of more and more sectors within the S&P 500 are starting to underperform the momentum score of riskless money market. This fact is also confirmed by our Sector Heat Map, as currently 5 sectors are underperforming the momentum score of riskless money market (36.8 percent). This is another strong piece of evidence that the market will face a cyclical bear market soon.

Another concerning fact is that the current mid-term oriented bearish trend is also widely confirmed by mid-term oriented market breadth. Our entire mid-term oriented tape indicators remain bearish or have not shown any signs of recovery yet. Especially, the short-term oriented gauge from the Modified McClellan Oscillator Weekly dropped to the lowest level for months, signaling that the overall mid-term oriented tape momentum of the market remains outright weak. This can be also observed if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Despite the fact that both indicators did not drop towards a new significant low last week, they are also telling us that there has been no major recovery within the broad market so far. Consequently, most NYSE listed stocks remain in a strong mid-term oriented down-trend at the moment. Also our Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly have not shown any signs of a solid recovery so far and finished the week on quite bearish levels. In such a scenario, the market remains extremely vulnerable for further disappointments and, thus, we think it is just time until we see further negative surprises ahead.

Long-Term Technical Condition

The long-term oriented uptrend of the market remains unchanged but we can also see it is has started to run out of steam recently. The WSC Global Momentum Indicator dropped significantly by 10 percentage points last week. This indicates that a lot of local equity markets around the world have dropped below their long-term trend-lines recently. Despite the fact that the majority of those markets (which are covered from our Global ETF Momentum Heat Map) remain in a long-term oriented up-trend at the moment, the message remains the same. The current bull-run is slightly fading out.  Basically, the same is true if we focus on the Global Futures Long Term Trend Index, which started to lose some steam at quite bullish levels. Also our Global Relative Strength Index reveals that the relative strength of all risky markets turned negative although they keep trading far above the one from U.S. Treasuries. However, we can also observe some exhaustion in long-term market breadth – as we did last week. The readings from 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) continued to weaken or have not shown any significant moves recently. As already pointed out in our previous comment, this might be another piece of evidence that the market looks vulnerable on a mid- to long-term time horizon.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the relative strength score from the FTSE China 25 dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the MSCI Chile is added to the portfolio. The allocation advice from the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

The current technical condition of the market looks extremely grim and it is telling us that it is just a matter of days/weeks until further waterfall declines can be expected. However, to fulfill a textbook like top building process one more corrective bounce into mid-April looks quite likely. In our opinion, this bounce started last week and already two weeks before we had advised our aggressive traders as well as our conservative members to get back into the market. Despite the fact that this bounce scenario is well supported by outright bearish readings within the option market and from a pure cyclical point of view, we do not think that it will lift the market towards new record highs. In the best case we see a rally towards 2,700/2,750 or maximum 2,800 (if we see stronger improvements within market breadth) before major troubles might be due.  As a matter of fact, we advise our aggressive traders as well as conservative members keep their long positions as long as we do not see a stronger spike in new lows (below the readings from the previous day). Additionally, a stop-loss limit at 2,595 would make sense – just in case we see a sharp decline. Members with the primary goal of capital appreciation and for those where transaction costs matter should still stay at the sideline until the overall market environment turns bullish again.

Stay tuned!!!