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February 27th 2022  |

Key Takeaways

  • No fundamental reason to change our cautious strategic outlook
  • Latest bounce still looks quite corrective in its nature
  • Stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment

Market Review |

After dropping to new lows, major indexes strongly bounced at the end of the week. In the end, U.S. stocks finished a volatile week with a mixed performance. For the week, the Dow Jones Industrial Average lost 0.1% to close at 34,058.7. The blue-chip index posted its third-straight losing week despite the two-day surge, however. The S&P 500 advanced 0.8% in the same time period to finish at 4,384.65. The Nasdaq increased 1.1% to close at 13,694.62. Most key S&P sectors finished higher, led by health care. The discretionary sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower, near 27.6.

Short-Term Technical Condition

Although the S&P 500 managed to pull out a gain for the week, the short-term-oriented down-trend of the market remains well in force. From a purely price point of view, we can see that the S&P 500 closed 6 points below the bearish threshold from the Trend Trader Index, whereas both envelope lines of this reliable price driven trend indicator are still decreasing. This is telling us that within the past 20 days we saw lower lows and lower highs, which is a typical pattern for a strong short-term-oriented down-trend. Thus, the recent recovery can be still classified as bounce rather than the beginning of a sustainable uptrend. A fact which can be observed if we focus on the Modified MACD, which is still far away from flashing a bullish crossover signal. Another interesting point is that the Modified MACD refused to confirm the bounce at the end of the week (as both trend-lines have not shown any signs of major strength yet). This is another piece of evidence that the up-days on Thursday and Friday were just an oversold bounce rather than being the start of a major trend-reversal – at least from the current point of view. The case is slightly different if we focus on the Advance-/Decline 20 Day Momentum Indicator as it has shown stronger signs of positive momentum recently.  Although this signal can be interpreted as first green shoots of recovery, we should not forget that the indicator still remains bearish from a purely signal point of view. Thus, it might be a bit too early to bet on a major trend-reversal.

This view is also confirmed by the fact that the quality of this (down)trend still remains high. The Modified McClellan Oscillator Daily widened its bearish gap, whereas the  Modified McClellan Volume Oscillator Daily has not fully confirmed the bounce at the end of the week. These signals are telling us that the underlying momentum of advancing stocks and advancing volume still remains weak-kneed. In more detail this means that the declining issues on NYSE are still outpacing their bullish counterparts (Modified McClellan Oscillator Daily) while the declining volume is more or less equal to the advancing volume (Modified McClellan Volume Oscillator Daily). Not even the bounces on Thursday and Friday caused any recovery in the gauge of the Modified McClellan Oscillator Daily, while the recovery of the Modified McClellan Volume Oscillator Daily was also not very significant. Hence, the recent up-days were mainly driven by short-covering rather than being the result of a broad-based demand. This picture is also fully confirmed by the NYSE New HighsNew Lows Indicator. At the end of the week, we only saw a reduction in the new lows, whereas the number of new highs remains depressed. During the week, we additionally saw a quite confirmative spike in new lows (which is another quite negative tape signal). As a matter of fact, the High-/Low-Index Daily widened its bearish gap from last week’s close. This is another piece of evidence that it might be a bit too early to bet on a sustainable trend reversal – at least from the current point of view. The same is true if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both indicators (20/50) increased during the week, they still remain bearish from a purely signal point of view. Consequently, the bounce at the end of the week was not able to push the majority of all NYSE listed stocks back to confirmative levels. A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily.

Analyzing market sentiment also shows that the recent bounce could still have some legs. Although we saw a reducing in the hedging activity, most of our option based indicators remain bullish (Daily Put-/Call Raito All CBOE Options, WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). Moreover, we can see that the number of bears spiked back to 53.7%, whereas the Smart Money Flow Index has shown some positive divergences recently. Thus, the chances for further bouncing into early March looks quite likely. As already mentioned in our latest market timing forecast, historically the market often faced some tailwinds up until March before further heading into further troubles (Presidential Cycle and Decennial Cycle). Thus, the recent gains can be still classified as bounce. That might be also the reason, why the WSC Capitulation Index is still indicating a risk-off market environment.

Mid-Term Technical Condition

Another reason why we remain strategically cautious is based on the fact that the mid-term-oriented condition of the market also continued to weaken last week. The most important signal is coming from the Global Futures Trend Index. Its gauge plummeted deeply into the bearish area and has additionally, reached the lowest level for month. As long as we do not see stronger signs of positive momentum here, any upcoming gains should be limited in price and time. This view is also confirmed by the fact that the WSC Sector Momentum Indicator continued to weaken significantly for the week. Thus, it might be just a question of time until this indicator drops below its bearish threshold. This is another confirmation for our cautious strategic view, since more and more sectors within the S&P 500 continued to underperforming riskless money market on a relative basis. This view is also supported by examining our Sector Heat Map as the momentum score of riskless money market trades at 22.7%.

Analyzing the mid-term-oriented down-side participation (trend quality) reveals an intermingled picture at the moment. On the one hand side we can see that our entire advance-/decline indicators were holing up very well (Advance-/Decline Line Weekly) or even improved for the week (Advance-/Decline Line Daily the Advance-/Decline Volume Line Daily). Thus, they have fully confirmed the latest advance of the market. A fact, which is also true if we focus on the  Upside-/Downside Volume Index Weekly, which succeeded to flash a tiny bullish crossover signal last week. Thus, it might be possible to see further bouncing down the road. On the other hand, we can see that the Advance-/Decline Index Weekly remains quite bearish, whereas the Modified McClellan Oscillator Weekly has not shown any signs of stabilization yet. Hence, it might be a bit too early to bet on a sustainable trend-reversal – at least for the time being. A fact, which is also confirmed by the weak readings of the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150). As long as we do not see a significant recovery here, the upside participation remains too weak-kneed to initialize a sustainable trend reversal.

Long-Term Technical Condition

The long-term-oriented technical picture of the market continued to deteriorate. Unchanged compared to last week, the Global Futures Long Term Trend Index continued to decrease (although is has not turned bearish yet). This is indicating that the long-term-oriented up-trend of U.S. equities is running out of steam. A fact, which also holds globally. The WSC Global Momentum Indicator shows that now only 26% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading still trading above their 200 day moving average. This is a quite serious signal, as it shows that the recent correction cycle is quite global in scope. According to the WSC Global Relative Strength Index, all major asset classes (apart from commodities) are underperforming riskless money market. This is another indication that the chances for a fast paced V-shaped recovery remain quite low. Examining our long-term oriented tape indicators reveals that the High-/Low Index Weekly weakened significantly, while the SMA 200 and Modified McClellan Volume Oscillator Weekly succeeded to show some improvements for the week although both indicators remain bearish.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Thus, the WSC Model Portfolio Composite is also changing most of its positions. The allocation of the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Given the quite weak-kneed readings all across the board, there is no fundamental reason to change our cautious outlook yet. On a very short-time frame further strength into early March cannot be ruled out. However, given the quite weak-kneed readings all across the board, any upcoming gains can be still classified as oversold bounce rather than the beginning of a new and sustainable uptrend. This view remains unchanged, as long as we do not see a stronger recovery in our indicator framework. A fact, which can also be observed within our Big Picture Indicator (as its gauge kept jumping around within its bearish consolidation quadrant last week). That being said, we think conservative members should stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of strategical bargain hunt at the moment.

Stay tuned!