December 16th 2018

Market Review

U.S. stocks finished another week with losses. For the week, the Dow Jones Industrial Average declined 1.2 percent, to finish at 24,100.51. The blue-chip index dropped to its lowest level since early May and is now down 2.5 percent for the year. The S&P 500 recorded a weekly loss of 1.3 percent and closed at 2,599.9 – its lowest closing level since April. The benchmark index is down 2.8 percent year to date. The Nasdaq fell 0.8 percent for the week to close at 6,910.66. For the year, the tech-heavy index is now up just 0.1 percent. Most key S&P sectors ended in negative territory for the week, led by financials. Utilities were the only advancers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 21.6.

Strategy Review

In our last week’s market comment, we highlighted the fact that the market had successfully entered the last stage of our projected path (low quality market top -> correction -> bounce -> re-test -> year-end rally = bull-trap -> bear market).  Consequently, we expected that any upcoming bounce should definitely turn out to be corrective in its nature rather than being the start of a new and sustainable trend-reversal. Moreover, we said that the latest stage of such a cycle tended to be quite volatile, as the way down is always accompanied by stronger but corrective counter-trend rallies (bull-traps). As a matter of fact, we advised our conservative members (who were not able to get out of the market two weeks ago) to sell into strength, as we expected to see a stronger but limited bounce before further selling pressure should drag the market lower. In fact, the S&P 500 rallied towards 2,685 until Wednesday and afterwards it tumbled by more than 3 percent, closing at its lowest level since April.

Short-Term Technical Condition

Anyhow, our entire short-term oriented trend indicators remain bearish and, therefore, it is a way too early to bet on a sustainable trend-reversal at the moment. From a pure price point of view, the S&P 500 closed 61 points below the bearish threshold from the Trend Trader Index. Additionally, both envelope lines of this reliable indicator are still decreasing on a quite fast pace, which is another typical technical pattern for a strong short-term oriented down-trend. Basically, the same is true if we focus on the Modified MACD as it showed a widening bearish gap last week. Additionally, both trend lines from this reliable indicator are drifting lower, indicating an outright bearish short-term oriented trend momentum at the moment. However, the case is slightly different if we examine on the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that this indicator is now trading quite far below its bullish threshold, its gauge was holding up quite well, given the fact that the S&P 500 dropped to its lowest closing level since April. As a matter of fact, the Advance-/Decline 20 Day Momentum Indicator did not fully confirm the latest sell-off from last week. As this indicator tends to be a leading one, we would not be surprised to see another volatile but corrective rally attempt in the next couple of trading session.

The main reason why we believe that any upcoming bounce should turn out to be corrective in its nature is due to the fact that short-term market breadth looks outright grim at the moment. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily dropped to further bearish territory, indicating major signs of exhaustion for the underlying momentum and volume of all advancing stocks on listed on NYSE. This picture is also widely confirmed by the NYSE New HighsNew Lows Indicator, which showed a very strong peak in the number of new lows on Monday and Friday, whereas the number of new yearly highs was nearly zero! Therefore, the High-/Low-Index Daily grew further into bearish territory and has, therefore, fully confirmed the latest sell-off from last week. More importantly, both indicators showed that the latest sell-off was driven by the broad market and not only by a few heavy weighted stocks in the index. This is an outright bearish signal as it indicates that the market will not have enough power to initiate a sustainable trend-reversal at the moment. Consequently, any upcoming bounce should turn out to be a bull-trap rather than being a great buying opportunity. The main reason why it is possible to see at least another but limited rally attempt is due to the fact we can also see some bullish divergences in some of our tape indicators. This becomes quite obvious if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that both gauges are trading in quite bearish territory, they were holding up quite well recently. Also the short-term oriented gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are trading slightly higher compared to the latest lows we saw since October.

On the contrarian side, we can see that the market is quite oversold (Advance-/Decline Ratio Daily) and in addition that market sentiment is also outright bearish at the moment, supporting our short-term bounce view. Apart from that fact, the overall picture still looks outright grim. The Smart Money Flow Index has clearly confirmed the sell-off from last week, plus the fisher transformation from the WSC Capitulation Index grew back into bearish territory last week, indicating further troubles down the road.

Mid-Term Technical Condition

The mid-term oriented trend of the market remains nearly unchanged compared to the previous week. The gauge from our Global Futures Trend Index is staggering at 13 percent and, thus, far away from passing its 60 percent threshold. But, it was also good to see that its gauge was holding up relatively well compared to its similar levels in October. As a matter of fact, we can also see some bullish divergences here, which is another indication for another corrective bounce into the year-end. From a pure price point of view, the mid-term oriented uptrend of the market is clearly bearish, as the WSC Sector Momentum Indicator keeps trading below its bullish threshold. This signals that most sectors within the S&P 500 are 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 strengthened again and as it increased to 60 percent last week. In addition, already six sectors are trading below the one from riskless money market. In our opinion this is just another indication for our preferred scenario that the any recovery will just turn out to be a bear-market rally instead of a broader-based recovery.

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. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60 percent) 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 in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) dropped to their lowest levels for months. The percentage of stocks which are trading above their mid-term oriented simple moving average (100/150), in contrast, were holding up quite well compared to the situation in October (but still remain quite bearish from a pure signal point of view). So all in all, the mid-term oriented tape condition of the market is confirming our view that the market just has entered a new bear-market.

Long-Term Technical Condition

The long-term technical picture of the market weakened once again. Although our WSC Global Momentum Indicator increased by 3 percentage points last week, it is still trading at its lowest levels for years. This indicates that the global bull market is over, as nearly zero percent 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 (which is another confirmation that the global bull market has come to an end). Also our Global Futures Long Term Trend Index continued its bearish ride and dropped to the lowest level for weeks. In contrast, our WSC Global Relative Strength Index showed again some small improvements. Nevertheless, this time all risky markets are trading below the one from U.S. Treasuries, a clear indication for a risk-off market environment. Also our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) weakened tremendously last week as they all reached their worst levels for months. As already pointed out in our latest outlook, this is another piece of evidence that the market looks vulnerable for further (and stronger) disappointments on a mid- to long-term time horizon!

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model.

Bottom Line

Our outlook remains unchanged compared to last week. In our opinion, the market has just entered a new bear market and, therefore, any upcoming gains should turn out to be limited in price and time. This scenario will be unchanged as long as we do not see a significant recovery within our mid-term oriented indicator framework (which looks quite unlikely for the next couple of months). Consequently, we remain outright bearish from a pure strategic point of view. However, on a very short-time frame, another stronger but corrective rally attempt looks quite likely. Nevertheless, even if we see another significant bounce into the year-end, we think the upside potential of the market looks outright capped on the upside. As a matter of fact, we would advise our conservative members to stay on the side-line, whereas our aggressive members should remain bearish as long as we do not see a significant recovery within our short-term oriented indicator framework.

Stay tuned!