March 1st 2020

Market Review

It was a tough week on Wall Street  as the main benchmarks posted the steepest weekly losses since the financial crisis 2008. For the week, the Dow Jones Industrial Average fell more than 12% to end at 25,409.36 – its biggest weekly percentage loss since 2008. The S&P 500 closed at 2,954.22 and lost 11.5% week to date in its worst weekly performance since the crisis. Closing at 8,567.37, the Nasdaq lost 10.5% this week and was nearly 13% below a record high. All key S&P sectors ended in deep negative territory for the week, led by energy. Moreover, it was one of the fastest decline from an all-time high into correction territory on record. The CBOE Volatility Index hit a high of 49.48, its highest level since February 2018.

Strategy Review

In our last week’s market forecast we mentioned the fact that – on a very short time frame – further selling pressure/washout-days (to dampen short-term optimism) could be expected. In fact, on Monday we saw a typical washout-day as the S&P 500 lost slightly more than 3% on that day. Given the elevated sentiment within the option market, the decline on that day was within expectations. What turned out to be a huge surprise was the strong negative impact of that washout-day on our indicator framework, since our entire short-term oriented trend- as well as nearly all our breadth indicators turned extremely bearish on that day. A fact, which we definitely did not have two weeks ago, given the outright supportive signals back then. Especially the massive spike in new lows on Monday, in combination with a 9-to-1 down-day were extremely concerning signals as they indicated the heavy selling pressure on that day rather than the result of profit taking. What followed was one of the fastest weekly corrections on record as all three major indices tumbled slightly more than 10% for the week. This was very painful, as most mid- to long-term investors did not have the time to react. Consequently, the big question is, if we have seen the worst already or was this just the preliminary stage for further massive declines?

Short-Term Technical Condition

Obviously, the short-term oriented price trend of the market turned quite bearish on Monday and continued to strengthen during the rest of the week. On Friday, the S&P 500 closed 303 (!) points below the bearish threshold from the Trend Trader Index. Consequently, the pure price driven down-trend of the market will remain in place for a while. This can be also seen if we consider the fact that both envelope lines of the Trend Trader Index started to decrease on a fast pace, indicating a stronger short-term oriented trend break from a pure structural point of view. The situation looks similar if we analyse the underlying trend momentum of this short-term oriented price trend. There we can see that the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator clearly confirmed the latest declines as both of them have not shown any signs of bullish divergences recently. The only positive signal is the fact that both gauges have reached outright low levels, which might be an indication that the market had gone too far too fast, indicating that the chances for a stronger bounce are increasing on a fast pace. Nevertheless, if we consider the outright negative readings, any upcoming bounce will be, at best, just part of a volatile bottom building process rather than the start of a fast V-shaped recovery towards pre-correction levels (at least from a pure short-term oriented trend point of view).

Unfortunately, this view is also confirmed by our entire short-term oriented market breadth indicators as all of them turned outright bearish last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed major signs of exhaustion (already at the beginning of the week) and plummeted significantly into bearish territory and to the lowest level since late 2018. This indicates that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. Moreover, both indicators have not shown any signs of recovery so far, which is another indicator for further selling pressure ahead. This picture is also confirmed by the NYSE New HighsNew Lows Indicator, which showed the strongest spike of consecutive new lows since 2018, whereas the number of new yearly highs was almost zero! Especially the strong spikes in new lows at the beginning of the week caused a bearish crossover signal in the High-/Low-Index Daily on Tuesday, which continued to strengthen during the week. At the end, the indicator reached the highest bearish level since 2018. This is of course telling us that the whole correction was driven by a tremendous amount of stocks in the whole market and was not only caused by a few large-caps within the S&P 500.  A fact, which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). To be more precise, right now there are only 5/9 percent of all NYSE listed stocks which are trading above their 20/50 days moving average! So in the end, most of the selling pressure was coming from the broad market rather than from a few large-caps and, therefore, it is a way too early to bet on a sustainable trend-reversal (at least for the time being). The only positive signal is that most of them have already reached outright bearish territory, indicating that the chances for a stronger bounce or some other form of stabilization are increasing on a very fast pace.

This case is also confirmed from a pure contrarian point of view as most of our indicators are already showing a very high degree of capitulation in the market. This is probably the most important ingredient for a stronger intermediate low. First of all, on Friday the CBOE Volatility Index spiked to the highest level since 2011 indicating a selling/panic climax. A fact which can be also observed if we focus on our reliable WSC Capitulation Index which also climbed to its highest level since early 2019. Nevertheless, we can also see that the WSC Capitulation Index dropped slightly on Friday, indicating that we might not be too far away from a stabilization period. This would coincide with the fact that our entire option based indicators switched from outright bearish to outright bullish last week (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio), whereas the market is additionally extremely oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily). Another interesting point is – that from a pure seasonal point of view (Decennial Cycle) – the market should hit an intermediate low in these days, which is then followed by a stronger bounce -> renewed weaknesses and a then by another stronger rally into April until further major trouble might be due. Although this time frame is quite long to make any serious forecasts right now, the short-term bounce view is supported by the fact that the Smart Money Flow Index showed a huge positive divergence compared to the Dow Jones Industrial Average on Friday. So all in all, we received a lot of ingredients that the market might not be too far away from an important intermediate low or at least from some point of stabilization (at least from a pure contrarian point of view).

Mid-Term Technical Condition

The main reason why we mention intermediate and not final low is due to the fact that the latest decline has definitely left its mark on the readings of our mid-term oriented indicators. There we can see that the gauge from our Global Futures Trend Index dropped into the middle part of its bearish consolidation area. This is telling us that the market is still highly at risk for further declines, whereas any upcoming gains tend to be outright fragile/corrective in their nature. Consequently, the current correction cycle will be definitely not over as long as its gauge remains far below its outright bearish 60 percent threshold (or does not show any stronger signs of positive momentum). On the other hand, we can also see that the pure price driven mid-term oriented uptrend of the market remains intact since the WSC Sector Momentum Indicator still keeps trading at comfortable bullish levels, although it has lost some momentum recently. This is also a signal which supports the recovery/bounce scenario – at least from the current point of view. This can be also observed if we focus on our Sector Heat Map. Although the momentum sore of risk-less money market jumped to 27%, it still keeps trading below most other sectors within the S&P 500.

On the other hand side, we can see that mid-term market breadth also had to take a very hard. This is due to the fact that – apart from our advance-/decline indicators – our entire mid-term oriented tape indicators turned bearish last week. Especially our Modified McClellan Oscillator Weekly flashed a bearish crossover signal on Friday, whereas the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped to the lowest level since 2019. This indicates that the underlying trend momentum of the market is outright bearish, as most of the NYSE listed stocks are definitely not in an uptrend anymore. Another concerning signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly as both indicators flashed a (small) bearish crossover signal last week. This indicates that a lot of purchasing power was pulled out of the market last week. Moreover, it indicates – from a pure tape point of view – that any upcoming gains tend to be corrective or outright fragile in their nature. As mentioned above, what is still holding up quite well are most of our advance-/decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line). That might be also the reason, why the Advance-/Decline Index Weekly only flashed a small bearish crossover signal, which is also a positive signal if we consider the recent circumstances.

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market also continued to weaken. The WSC Global Momentum Indicator dropped to zero percent, indicating that the correction was global in scope as all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) dropped below their long-term oriented trend-lines. This weakness in global risky assets can be also seen if we focus on the WSC Global Relative Strength Index as all of them lost momentum last week. In contrast to that, we can see that the Global Futures Long Term Trend Index was holding up quite well, indicating that U.S. equities still remain in a robust long-term oriented uptrend. If we focus on our long-term oriented tape indicators we can also see a quite mixed picture, since the Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average turned quite bearish, whereas the High-/Low Index Weekly is still holding up quite well.

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. Moreover, since the momentum score of Health Care rose above average and above the one of the S&P 500 we received a buy signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

From a pure contrarian and seasonal point of view, the ingredients for a stabilization phase are accumulating on a fast pace. As a matter of fact, it could be possible that the market might not be too far away from an important short-term oriented low, which could act as basis for a stronger bounce. The main reason, why we mention short-term and not final low is due to the fact that our entire indicator framework looks quite bearish biased at the moment. As a matter of fact, any upcoming bounce could easily turn out to be corrective in its nature. On the other hand, it could be also possible that any upcoming bounce will lead to a stronger recovery/bullish signals within our short-term oriented framework (visible due to a strong reduction of new lows/increase in new highs and/or further positive divergences/signals), which would be then the confirmation for a recovery-/Decennial Cycle scenario. This narrow make or break set-up can also be seen in our WSC Big Picture Indicator which is now showing a bearish consolidation scenario. Therefore, the most advisable approach for conservative members (who have not sold on basis of our short-term oriented indicator signals last week) is to watch the tape quality of any upcoming bounce quite closely. We will either see an increasing short-term oriented tape structure (which would be the final confirmation that the market hit an important intermediate low) or the recent bounce will just represent a good opportunity to get out. As things could change quickly, we would additionally suggest to place a stop-loss limit (closing price) at 2,840 (just in case the bounce scenario will not take place).

Stay tuned!