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November 28th 2021 |

Market Review |

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 2% over the week to 34,899.34. Dropping more than 900 points on Friday, the Dow recorded its worst day of the year. The S&P 500 booked a weekly loss of 2.2% to close at 4,594.62. The Nasdaq slumped 3.5% for the week to end at 15,491.66. Nearly all key S&P sectors ended in negative territory for the week, led by the discretionary sector. The energy sector was the only gainer. The CBOE Volatility Index, often referred to as Wall Street’s “fear gauge,” jumped to 28, its highest level in two months.

Short-Term Technical Condition

Obviously, the expected consolidation period caused a stronger deterioration within our short-term oriented indicators last week. To be more precise, the S&P 500 closed 56 points below the bearish threshold from the Trend Trader Index on Friday. Consequently, the purely short-term oriented price trend (time-series momentum) of the market turned bearish. Nevertheless, from a purely structural point of view, the short-term oriented price trend of the market has not completely broken yet, as both envelope lines of the Trend Trader Index are still holding up quite well (for the time being). As a result, the recent trend-break can be categorized as non-sustainable so far (at least from a purely price point of view). The situation looks completely different if we analyze the underlying momentum of this short-term oriented price trend. The Modified MACD flashed a bearish crossover signal already during the week and, furthermore, widened its bearish gap towards the end of the week. This is indicating further selling pressure ahead. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge dropped to the lowest level for weeks. Thus, this indicator clearly confirmed the latest sell-off on Friday. As already mentioned several times, it is not unusual that that all of our short-term oriented trend indicators turn bearish during a consolidation period. To distinguish if a short-term trend break is still part of a bullish biased consolidation period or the vanguard for stronger potential losses, the underlying short- to mid-term oriented trend-quality will give further guidance.

Although the S&P 500 is just trading 3% below its all-time high, the deterioration within our trend quality indicators continued to be quite strong. This is telling us that latest trend-break (from bullish to bearish) was definitely driven by a broad basis, instead of being just the result of a few heavy weighted stocks in the index. Thus, it can be described as more sustainable in its nature (rather than being just part of a bullish biased consolidation period). To be more precise, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily plummeted significantly for the week. This shows us that the momentum of stocks volume and advancing volume literally collapsed last week. Another outright negative trend quality signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). There we can see that only 15%/39% of all NYSE listed stocks are currently trading in a short-term oriented uptrend. These numbers are definitely showing us that the latest trend break was quite broad based in its nature. This fact is also confirmed by our NYSE New HighsNew Lows Indicator. There we can see that the number of stocks hitting a fresh yearly low was 10 times higher (202 on Friday) as the number of stocks which were pushed to a new yearly high (only 10 on Friday). As a result, the High-/Low-Index Daily also turned bearish last week, whereas short-term up-volume has not shown any signs of strength so far. Another rare negative trend quality signal is based on the fact that the market triggered another Hindenburg Omen last week. Basically, this is a good summarization of the current weak condition of the stock market. As a matter of fact, the potential for further stronger losses remains outright high at the moment.

The increased volatility has started to have its designated impact on market sentiment. Most of our relevant option- and sentiment based indicators turned neutral (WSC Dumb Money Indicator, Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator, z-score of the AII CBOE Put-/Call Ratio and the WSC Put-/Volume Ratio Oscillator) last week. This shows that the crowd started to get nervous about the latest developments. Nevertheless, the impact could have been much stronger since the number of bulls remains at high levels, whereas the put-/call ratio closed below 1 (indicating mediocre fear). On the other side, we can see that the Fisher Transformation of the WSC Capitulation Index is indicating a risk-off market environment. Thus – from a purely sentiment point of view – further room for negative surprises is still given.

Mid-Term Technical Condition

Probably, the most concerning fact at the moment is that the mid-term oriented trend deteriorated significantly during the last week. This is mainly because the gauge from the Global Futures Trend Index dropped almost 19 percentage points for the week and closed at 52%. This is already in the bearish consolidation area since it is below the very important threshold of 60%. In such a case, the risk for stronger waterfall declines or even a correction is quite high. Especially if the mid-term oriented down-trend is confirmed by a strong trend quality. Since this is the case right now, it is definitely time to take a more cautiously strategic view. So even if we see some form of bounce ahead, a sustainable recovery is only possible if this indictor is getting back on track. On the other hand side, we can see that the mid-term oriented price-driven uptrend has not been broken yet since the WSC Sector Momentum Indicator was holding up quite well. This is not a big surprise at all, since the market is still trading only 3% below its all-time high. Thus, the momentum score of riskless money in our Sector Heat Map keeps currently trading at 0%.

Another reason to be alert is due to the fact that trend quality of the bearish biased mid-term oriented down-trend also strengthened last week. As a matter of fact, the latest decline was definitely more than just a stronger sentiment driven washout event. The Modified McClellan Oscillator Weekly widened its bearish gap last week, showing that the momentum of mid-term advancing issues on NYSE is quite negative at the moment. Furthermore, we can see that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) also dropped below 50%. Thus the participation in the latest decline was quite broad-based. However, the most concerning signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators show that a lot of purchasing power was pulled out last week and, therefore, the market internals have now definitely a bearish tilt. As long this is the case, the risk for a stronger correction remains high. So even if we do not see stronger selling pressure, with such weak readings across the board the upside potential should remain capped as well.

Long-Term Technical Condition

The long-term up-trend of the market also showed strong signs of exhaustions. The most concerning signal is coming from our WSC Global Momentum since it gauge plummeted significantly for the week. This indicates that now only 26% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are still trading above their 200 day moving average. Thus the global bull market looks quite damaged at the moment. This weakness in global risky assets can also be observed if we focus on the WSC Global Relative Strength Index as all relative strengths decreased significantly last week. In addition, nearly all markets are now trading below U.S. Treasuries. Our Global Futures Long Term Trend Index, in contrast, was holding up quite well. Nevertheless, we can also see some exhaustions in the quality of this long-term up-trend, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the SMA 200) weakened last week. This is another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

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, as the momentum score of financials dropped below average and below the one of the S&P 500 we received a sell signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

Although the S&P 500 trades less than 3% below its all-time high, we downgrade our strategic view from bullish to cautious. Even though the latest price action was in line with our expectations, the deterioration within our indicator board shows that the latest consolidation period has now definitely a corrective/bearish tilt. In such a situation, the risk of stronger and waterfall-like declines is outright high. Therefore, the risk-/reward ratio of a long position in risky assets/strategies looks outright low at the moment. So even if we see a stronger oversold bounce within the next couple of days, with such weak readings across the board the upside potential of the market also looks quite capped for the time being. Thus, we think it makes sense for conservative investors to place a stop-loss limit (intraday) at 4,565. This stop loss limit should be in place until our indicator framework turns positive again. A fact, which can also be seen if we focus on our Big Picture Indicator, which moved into its bearish consolidation bullish quadrant on Friday. As long as this is the case, our strategic cautious outlook remains unchanged.

Stay tuned!