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April 5th 2020

Market Review

Mainly due a weak Friday, U.S. stocks ended the week with relatively moderate declines (considering the “new normal” of high volatility on most days). For the week, the Dow Jones Industrial Average declined 2.7%, to finish at 21,052.53. The blue-chip index is down 28.8% from its closing high on Feb. 12 and down 26.2% so far in 2020. The S&P 500 recorded a weekly loss of 2.1 percent and closed at 2,488.65. The benchmark index has now fallen 26.5% from its closing high on Feb. 19 and is down 23% so far in 2020. The Nasdaq fell 1.7 percent for the week to close at 7,373.08. The tech-heavy index is down 24.9% from its record close on Feb. 19 and down 17.8% so far in 2020. Three key S&P sectors succeeded to close in positive territory for the week, led by the energy sector. Utilities was the biggest decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 47.

Short-Term Technical Condition

Despite the fact that the market finished in negative territory for the week, the short-term oriented trend condition improved compared to last week. This is mainly due to the fact that the pure price driven short-term oriented trend of the market turned neutral as the S&P 500 managed to close 27 points above the bearish threshold from the Trend Trader Index last week. Hence, this trend remains neutral as long a as the broad index stays within the two envelope lines of the Trend Trader Index. Nevertheless, we should not forget that this signal was triggered by the fact that both envelope lines of this reliable indicator are still decreasing. So from a strict technical point of view, the current recovery can be still classified as bounce rather than the beginning of a new sustainable uptrend. However, the situation looks quite different if we focus on the Modified MACD. There we can see that the underlying trend momentum of the market continued to strengthen, although the S&P 500 lost more than 2 percent for the week. As a matter of fact, the Modified MACD has not confirmed the pullback on Friday. Moreover, this indicator is telling us that we might have seen the worst already, since heavy losses would be necessary to bring this short-term oriented gauge back to its former low! Another small positive signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that this indicator still remains bearish from a pure signal point of view, we can also see that it did not confirm the latest weaknesses on Friday. So all in all, the positive divergences within our short-term oriented trend indicators are increasing, although the overall short-term trend structure of the market remains quite weak kneed at the moment. As a matter of fact, we received further signals for our base case scenario, that the market has now entered a bottom building/stabilization process.

Basically, the same is true if we focus on our short-term oriented tape indicators. Given the fact that the market finished the week in negative territory, the readings of our short-term oriented breadth indicators were holding up relatively well. Especially, the underlying momentum of advancing issues and advancing volume remains quite bullish since the bullish readings of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to strengthen for the week. This is telling us that the latest weaknesses was mainly driven by heavy weighted stocks in the index, rather than being the result of broad based selling. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both indicators succeeded not to decrease last week (while the SMA 20 even managed to finish the week on a higher note). Another positive sign is coming from the NYSE New HighsNew Lows Indicator, as there were only 180 new lows on Friday (this is a relatively good number considering the volatility on most days). Above all, we can see that the total number of new highs has also started to show some (very small) strengths recently. Consequently, the High-/Low Index Daily continued to narrow its bearish gap, which can be also seen as quite positive signal (given the current circumstances). So all in all, we received further evidence for our base case scenario that we have seen the worst already, since the market has now entered a bottom building/stabilization process. Nevertheless, we can also see that the ingredients for a sustainable uptrend are also missing at the moment, since our tape indicators have not turned bullish yet. Thus, further stabilization/range bound trading with a bullish tilt looks quite likely (at least from the current point of view).

On the contrarian side, we can see that the market has priced in a lot of bad news already, leaving the market extremely well positioned to react on small positive news. According to the AII bulls & bears survey, we can see that the majority of market participants (dumb money) has sold already or remains extremely bearish at the moment, whereas Smart Money is constantly building up exposure. On top of that, we can see that the majority of market participants is betting on further strong declines since the option market remains outright bearish at the moment (Daily Put-/Call Ratio All CBOE Options Indicator, AII CBOE Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator). As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market is trading much lower in mid-April, when the option expiring date is due. This picture is also confirmed by the WSC Capitulation Index, which continued to decrease (indicating that the market is getting back into a risk-on market environment).

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market still looks quite vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index is very far away from passing its bullish 60 percent threshold! As already mentioned a couple of times, from a formal point of view, the current correction cycle will not be over as long as its gauge keeps trading below that important threshold! Nevertheless, we can see that its gauge has shown some very small signs of momentum recently, which is another confirmation for out bottom-building scenario. Nonetheless, from a pure price point of view, the market still remains in a mid-term oriented down-trend as the WSC Sector Momentum Indicator dropped once again last week. This indicates that the momentum score of all sectors within the S&P 500 (except technology at 100%) keeps trading below the momentum score of riskless money market (at 93%) within our Sector Heat Map. In such a scenario, most sectors tend to underperform riskless money market. As a matter of fact, it was good to see that the indictor showed some signs of stabilization last week (compared to the high growth rate of the previous weeks), although the market dropped.

Despite the fact that the positive divergences are increasing, we can see that mid-term oriented market breadth remains quite weak-kneed at the moment. This is mainly due to the fact that our entire mid-term oriented tape indicators remain bearish and have, therefore, not shown any signs of bullish divergences yet. This becomes obvious if we examine our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) or our Modified McClellan Oscillator Weekly. Especially the latter one dropped last week and widened its bearish gap, signaling that the overall mid-term oriented tape momentum remains outright weak at the moment. This can be also observed if we focus on the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators have not shown any bullish momentum recently. Another concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals remain quite persistence. So all in all, the mid-term tape condition still looks quite grim (which is not a big surprise if we consider the recent circumstances). Nevertheless, we would expect to see some stronger improvements within our mid-term oriented tape indicators soon, as long as the short-term oriented condition of the market continues to improve.

Long-Term Technical Condition

Like in the previous weeks, the long-term oriented trend of the market has not shown any significant signs of recovery so far. The WSC Global Momentum Indicator remains at the absolute bottom of its scale and, thus, the lowest level for years. This means that 0% 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. In other words that the market remains in a technical bear market for now. Also our Global Futures Long Term Trend Index continued its bearish ride and has finally entered the bearish territory, indicating a difficult environment for US equities. And like in the previous week, we can observe some small signs of recovery in the relative strength score of all risky markets. Still all of them are trading below the one from U.S. Treasuries (which is another indication for a risk-off market environment). Once again, our long-term oriented tape indicators are showing an intermingled picture. The Modified McClellan Volume Oscillator Weekly weakened once again, while the High-/Low Index Weekly showed some bullish divergences and the SMA 200 remained unchanged.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Dynamic Variance Portfolio and the WSC Sector Rotation Strategy.

Bottom Line

The market is following our projected path, since we received further confirmation for (bottom building) base case scenario. So even if we see another period of weaknesses towards 2,191, we strongly believe that it will be just part of a typical stabilization/bottom building process. Thus, we strongly believe that we have seen the worst already (at least from a current point of view). However, that does not necessarily mean that the market will take off immediately, since the overall short-term tape condition is still a bit too weak-kneed at the moment to justify a V-shaped recovery. Consequently, further volatile sideways trading with a bullish tilt looks quite likely. Our approach right now is to watch the quality of the bottom building process/sideways trading quite carefully. Whether the sideways-trading will be of high quality in its nature (our preferred view) or if it will be accompanied by a stronger deterioration within our indicator framework, which will then be definitely a deal-breaker for our base case scenario. Right now, there is no piece of evidence in our indicator framework visible for such a deal-breaker scenario. Consequently, the risk-/reward ratio of getting back in the market remains attractive. Accordingly, we think it would  make sense for conservative members to get back into the market or for those who bought in last week to remain invested. Moreover, we think an additionally safety net in form of a stop-loss limit (closing price) at 2,150 would make sense. Outright conservative investors could also wait until we receive further confirmation within our mid-term oriented indicator framework (e.g. Global Futures Trend Index).

Stay tuned!