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September 12th 2021

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 2.2% over the week to 34,607.72. The S&P 500 booked a weekly loss of 1.7% to close at 4,458.58. The Nasdaq shed 1.6% for the week to end at 5,115.49. All key S&P sectors ended in negative territory for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, increased to 21.

Strategy Review

Over the past weeks, our indicator framework showed an increasingly narrowing leadership,meaning that only due to the performance of a few mega-caps, the S&P 500 had reached a new all-time high, although the broad market was already faltering. We warned our members that such a situation was extremely dangerous since a trend-reversal within these few stocks could easily trigger a fast paced correction (as there was literally no safety net around to cushion such a move). As a result, we downgraded our strategic view from bullish to cautious since the risk-/reward ratio of being invested had deteriorated significantly back then. Although not every weak tape structure lead to a correction in the past, every correction started with a weak tape structure. Even though the market sold off in most cases, there were also times when such a narrow based rally transformed back into a more broad-based set-up again and vice versa. Such distributions could take weeks or even months, whereas the tilt between supportive and corrective could get also quite narrow within this time frame. Therefore, sidestepping such situations could cause opportunity- and trading costs, but in the end avoiding larger pullbacks/corrections still remains the most important driver for long-term results. However, last week our indicator framework showed that the recent large-cap driven rally transformed back into a more broad based setup. As a result, we raised our strategic view back to cautiously bullish. Moreover, we said that further tape confirmation was needed to strengthen that view (otherwise we were not afraid to downgrade this view again). Therefore, the development of our short-term oriented breadth indicators remained key area of focus (especially after the S&P 500 had shown some weaknesses).

Short-Term Technical Condition

According to our short-term oriented trend indicators, the time-series momentum of the S&P 500 turned clearly negative. This is based on the fact, that the S&P 500 dropped 12 points below the bearish threshold of the Trend Trader Index on Friday. Additionally, we can see that the underlying momentum of this price driven trend also started to weaken again, since the Modified MACD also flashed a bearish crossover signal. Given the recent strength of its bullish signal, this turnaround can be interpreted as a quite negative signal. Another quite weak signal is coming from the Advance-/Decline 20 Day Momentum Indicator, since it also dropped into bearish territory last week. Hence, this indicator clearly confirmed the recent decline of the S&P 500. However, in times of increased volatility, it is not unusual that short-term oriented trend indicators show fast changing signals. In such a situation, short- to mid-term market breadth will give us further guidance if the recent weakness has the potential to transform into a more significant pullback again or if it was just the realization of increased volatility.

Unfortunately, our entire short-term oriented market breadth indicators had to take a hard hit during the last couple of trading sessions. Thus, the recent broad-based set-up has definitely transformed back into a more corrective environment. More specifically, the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) decreased significantly as both gauges dropped into bearish territory again. Thus, the recent short-term oriented trend-break was definitely baked by a broader basis. Additionally, the momentum of this broad based down-trend turned also negative again. This can be seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators flashed a quite strong bearish crossover signal. As a result, the recent trend-break was confirmed by a strong number of declining issues and declining volume. This can also be seen if we focus on the Upside-/Downside Volume Index Daily, which also turned negative again (and shows that the selling pressure was not only focused on a few heavy weighted stocks in the index). On the other hand, we can see that most of this selling pressure was mainly driven by profit taking so far (which can still be interpreted as a somehow constructive signal – at least for the time being). This becomes obvious if we examine the NYSE New Highs/New Lows Indicator, as there were still 110 stocks reaching a new yearly high on Friday, vs. 30 new lows. As long as new lows are not outpacing new highs, the underlying tone should remain somehow constructive. Consequently, the High-/Low Index Daily was holding up relatively well, although it decreased for the week. So all in all, it looks like that the current market environment transformed back into a more corrective set-up again.

Unchanged compared to last week, most of our entire option- and sentiment-based indicators (AII CBOE Put-/Call Ratio, AII Bulls/Bears Survey, WSC Dumb Money Indicator, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the AII Bulls & Bears Survey) remain neutral at the moment. On the other hand side, we can see that the Smart Money Flow Index increased its bearish divergence to the Dow. Thus, the WSC Capitulation Index spiked to the highest level for months, which is another quite dark cloud on the horizon. Moreover – from a purely seasonal point of view – the market is about to enter quite rough waters in the next couple of weeks (Presidential- and Decennial Cycle).

Mid-Term Technical Condition

Although the situation looks quite difficult on a short-term time perspective, the mid-term oriented up-trend of the market has not been fully affected yet. Our Global Futures Trend Index is still trading in the middle of its bullish consolidation area. As long as the gauge from this indicator does not show negative momentum (and remains above 60%), the risk of a stronger down-turn should be limited. Therefore, it will be crucial to monitor the gauge of this indicator closely within the next couple of days. It will give us further guidance if the recent short-term weaknesses will be just the starting point for further declines or just a temporary weakness. From a purely price point of view, most sectors within the S&P 500 still remain in a mid-term oriented uptrend since the gauge of the WSC Sector Momentum Indicator is still trading at quite encouraging bullish levels. This can also be observed if we examine our Sector Heat Map, as the momentum score of all sectors remains above the one from the riskless money market (currently at 0%).

Although the mid-term oriented uptrend looks quite constructive from a purely signal point of view, it is not confirmed by mid-term market breadth. Moreover, it showed stronger signs of deteriorating (although the market just lost 1.7% for the week). This is another piece of evidence that the latest decline was definitely more than just a sentiment driven washout event. While the Advance-/Decline Line Weekly was holding up relatively well and the Advance-/Decline Line Daily slightly declined for the week, the Advance-/Decline Volume Line, in contrast, plummeted to the lowest level for weeks. This applies also for the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges dropped significantly for the week and are now trading in bearish territories. Moreover, we can see that the gauges of the Modified McClellan Oscillator Weekly continued their bearish rides, showing that the underlying mid-term oriented tape momentum remains week. Further concerning signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators strengthened their bearish signals. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for stronger losses down the road. Right now, we are not there yet, but we will have to keep a close eye on this development.

Long-Term Technical Condition

The long-term oriented technical picture of the market has also shown some signs of exhaustion recently. The Global Futures Long Term Trend Index continued to decrease, although its gauge is still far away from being bearish. This shows that U.S. equities still remain in a long-term oriented technical bull market. The situation looks a bit different if we analyze how many local equity market around the world are still trading above their long-term oriented averages. There we can see that gauge of the WSC Global Momentum Indicator dropped to 58% (after it had shown some strength before). This is telling us that the global bull market is also losing stream (although it has not reached critical levels below 50 yet). Basically, we receive a similar picture if we analyze the relative strength of risky markets (since all of them declined according to the WSC Global Relative Strength Index). Also long-term market breadth weakened (SMA 200, the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly).

Model Portfolios

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

Bottom Line

Given the strong deterioration all across the board (especially on a short-term time perspective), the recent set-up transformed back into a more corrective set-up – at least on a short-term time perspective. As a result, the risk-/reward ratio deteriorated again, after looking quite promising last week. On a mid-term time perspective, the situation could be described as supportive and, therefore, the current set-up could transform back into a healthier market environment again. For such a case, we definitely need to see stronger improvements within our short-term oriented indicators (which is not the case right now). Another concern was definitely the speed and magnitude of the latest deterioration (if we consider the fact that the S&P 500 only lost 1.7%). If this development continues, the situation could easily turn out corrective within a trading day. A fact, which can also be observed within our Big Picture Indicator. Currently, this reliable indicator is still showing a bullish biased consolidation period from a purely signal point of view. Nevertheless, its distance to its bearish consolidation quadrant is also quite close at the moment. Consequently, the situation remains tense. In the end, we recommend our conservative members to keep their stop loss-limit at 4,365 (intraday) and to monitor the developments of our indicator framework closely.

Stay tuned!