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February 6th 2022  |

Market Review |

All three major U.S. averages finished the week with gains. For the week, the Dow Jones Industrial Average ended the week up 1.1% finishing at 35,089.74. The S&P 500 closed at 4,500.53 and booked a weekly gain of 1.5%. Closing at 14,098.01, the tech-heavy Nasdaq gained 2.4% this week. Energy led gainers among the S&P’s 10 major sectors; real estate and comm. services were the only negative sectors for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 23.2.

Short-Term Technical Condition

Although markets strongly bounced last week, the short-term-oriented trend of the S&P 500 still remains quite short-biased. Even though the Trend Trader Index flashed a neutral trend scenario at the end of the trading week, we can see that both envelope lines of this reliable indicator are still drifting lower on a very fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows. Hence, the neutral price trend signal was mostly driven by declining envelope lines of the Trend Trader Index rather than a stronger move by the market. This view is confirmed by the fact that the gauge of the Advance-/Decline 20 Day Momentum keeps trading in deep bearish territories and did, therefore, refuse to confirm the latest bounce at the end of the week. The case is slightly differently if we analyze the current short-term-oriented momentum of the market. There we can see that the Modified MACD managed to flash a weak bullish crossover signal on Friday. Even though this can be interpreted as some form of positive divergences, the signal is still a way too weak to be taken too seriously at the moment! During a volatile bouncing process, it is not unusual to see a lot of changing signals within our short-term-oriented trend indicators. Consequently, analyzing the quality of the current short-term-oriented trend (aka market breadth) will give us more guidance if the recent bounce will turn out to be corrective or more sustainable in its nature.

Analyzing the current upside participation (trend quality) shows that the latest gains can still be classified as bounce rather than being the beginning of a new sustainable uptrend. In other words, even though the S&P 500 finished the week with gains, most of our short-term-oriented breadth indicators have not shown any improvements yet or even weakened last week. The only positive signal is coming from the Modified McClellan Volume Oscillator Daily as it succeeded to flash a small bullish crossover signal. Its counterpart, the Modified McClellan Oscillator Daily, in contrast even weakened on Friday. This shows that the momentum of declining stocks still remains strong, although the underlying volume in these stocks has weakened recently. Nevertheless, total volume still remains quite negative since the Upside-/Downside Volume Index Daily has not succeeded to turn bullish yet. These are quite concerning signals, since a healthy uptrend should always be accompanied by strong up-volume together with an increasing number of advancing stocks. Currently, this is not the case, which is another indication that the recent rally was mainly driven by a few heavy weighted stocks (large techs, especially Amazon and Google) in the index rather than being the result from a strong demand all across the board. This view is also supported by the percentage of stocks which are trading above their short-term-oriented simple moving averages (20/50). Although both gauges slightly increased for the week, they are still trading in deep bearish territory. This is an outright negative signal as it shows that the latest upside participation was extremely narrow based. Another bearish signal is coming from the NYSE New Highs minus New Lows Indicator. There we can see that during the whole week the number of new highs (67 on Friday) was much smaller than the number of new lows (265 on Friday). As a matter of fact, the High-/Low-Index Daily is far away from entering the bullish territory. So, from a purely trend quality point of view, the recent recovery can still be classified as (oversold) bounce rather than being the beginning of a new and sustainable uptrend – at least for the current point of view. Thus, the overall short-term-oriented condition of the market remains extremely vulnerable at the moment.

The latest bounce started to have its designated impact on market sentiment as it resolved oversold conditions (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and caused a reducing in hedging activities. Thus, the bullish readings of our entire option based indicators (z-score of the AII CBOE Put-/Call Ratio, AII CBOE Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator) softened compared to last week. Nevertheless, most of them still remain bullish from a purely signal point of view, whereas the number of bears on Wall Street remains high. Thus, further bouncing/stabilization on a very short-time frame cannot be ruled out at the moment. This might also explain the fact that the WSC Capitulation Index has slightly turned bullish recently, indicating a risk-on market environment on a very short time frame.

Mid-Term Technical Condition

Even though further bouncing on a very short time frame cannot be ruled out from a sentiment point of view, the technical situation on a mid-term-oriented time-frame still looks quite grim. Even though our Global Futures Trend Index has shown some small signs of recovery recently, it is still trading at outright bearish levels. Thus, the gauge keeps trading far below its important 60% bullish threshold. As long as we do not see stronger signs of momentum or levels above 60%, the market remains at risk for further stronger waterfall declines. Given the quite weak readings on a short-term time perspective, the risk of such moves remains high. Thus, we remain alert since the latest gains still look quite corrective in their nature. On the other side, we can see that most sectors within the S&P 500 remain in a mid-term-oriented price driven uptrend at the moment. This is based on the fact that the WSC Sector Momentum Indicator remains bullish from a purely signal point of view. This can also be seen if we examine our Sector Heat Map, as the majority of sectors within the S&P 500 has still a higher momentum score than riskless money market. But worth mentioning here is the fact that the score of the riskless money market increased to 6.7% last week (showing a weakening price trend-structure).

Analyzing the mid-term-oriented trend quality (upside participation) strengthens the quite bearish picture from the previous week. Despite the fact that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) slightly increased for the week, they are still trading in deep bearish waters. The same applies for the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly as both indicators have not shown major signs of recovery so far. Historically, all major downturns were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60%). Thus, we remain cautious at the moment. Consequently, we will monitor all three indicators quite closely over the next couple of sessions. Another negative mid-term-oriented signal is coming from the Modified McClellan Oscillator Weekly which widened its bearish gap and also reached the lowest level for months (indicating that the momentum of mid-term-oriented advancing stocks remains outright negative). The only small positive signals are coming from our advance-decline indicators. While the Advance-/Decline Line Weekly finished the week unchanged, the Advance-/Decline Line Daily and especially the Advance-/Decline Volume Line managed to increase.

Long-Term Technical Condition

The long-term-oriented trend of the market shows the same setting as in the previous week. The WSC Global Momentum signals that only 29% 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. Thus, the global bull market looks outright damaged at the moment. Also, our Global Futures Long Term Trend Index, which has been decreasing for weeks now, dropped again to the lowest levels for months. Although it remains in solid bullish waters, this fact is telling us that the long-term-oriented trend of U.S. equities is weakening. This can also be seen if we focus on the WSC Global Relative Strength Index as the relative strength of almost all risk asset classes (expect commodities) is trading below riskless money markets. These negative trend signals are confirmed by the fact that the trend quality on a long-term-oriented time horizon also continued to weaken last week (High-/Low Index Weekly and Modified McClellan Volume Oscillator Weekly and the SMA 200).

Model Portfolios

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

Bottom Line

Our outlook remains unchanged compared to last week. Even though further bouncing/stabilization cannot be ruled out, there is no fundamental reason to change our cautious outlook for the time being. This is based on the fact that we have not seen any typical patterns for a sustainable bottom yet. As long as we do not see a significant recovery or any kind of positive divergences in our short-term-oriented indicator framework, any upcoming gains can still be classified as corrective bounce rather than being the beginning of a new sustainable uptrend. A fact, which can also be observed within our Big Picture Indicator (which is still indicating a bearish consolidation market regime). Thus, the market remains extremely vulnerable for further disappointments. Thus, conservative members should stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment.

Stay tuned!