November 24th 2019

Market Review

U.S. stocks finished the week slightly in negative territory with the main benchmarks posting their first weekly decline in over a month. The Dow Jones Industrial Average lost 0.5 percent over the week to 27,875.62, snapping a four-week winning streak. The S&P 500 recorded a weekly loss of 0.3 percent to finish at 3,110.29, halting six weeks of gains. The Nasdaq retreated 0.3 percent for the week to finish at 8,519.88, ending its seven-week advance. Among the key S&P sectors, health care was the best weekly performer, while materials dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.3.

Strategy Review

It has been almost three months, since the market faced its latest correction succeeding 7 percent.  Back then in July, we effectively warned our members that we expected to see a limited but stronger pullback into August (see Market Comment July 21st 2019: Time to take profits!). In fact, a few days later the market had tumbled into almost 7 percent, before it entered a bottom building process until early September, which was accompanied by increased down-side volatility. As the ingredients for a final bottom started to accumulate within our board in late August (see Market Comment August 24th 2019: Positive divergences are forming! Time to get back into the market?!), we issued the final bottom confirmation just a week later (see Market Comment September 1st 2019:  Time to raise exposure again as tape is getting back on track!). Since then the market rallied almost 10 percent, leading to a really nice payoff for our members. Despite the fact that the market has faced some critical technical situations since then, we have not changed our bullish outlooks so far. Maybe until now!
This is mainly due to the fact that we saw a fast (within just a couple of days) and stronger deteriorating of our indicators all across the board, although the S&P 500 is just trading less than one percent below its all-time high. As a consequence, most of our indicators are forming a huge bearish divergence at the moment and additionally mid-term market breadth is also showing major signs of exhaustion. This is an extremely toxic situation as the market tends to be outright vulnerable for a stronger pullback in such a situation. So even if we do not see a stronger correction immediately, we think the upside potential should be also extremely limited as well (as long as we do not see a stronger recovery within our indicator framework). As a consequence, the current market premium (risk-/reward ratio) is quite depressed at the moment.

Short-Term Technical Condition

From a pure price point of view, the short-term trend of the market remains intact as the S&P 500 closed 37 points above the bearish threshold from the Trend Trader Index. Nevertheless, the situation looks completely different if we analyze the underlying momentum of that short-term oriented price trend. This becomes obvious if we focus on the Modified MACD, which continued to decrease last week and is about to flash bearish crossover signal within the next couple of days. Also the Advance-/Decline 20 Day Momentum Indicator continued its bearish ride and nearly dropped to into the bearish territory last week. Moreover, both indicators are also showing a huge bearish divergence, if we consider the current levels from the S&P 500 (which is still trading near record levels). Hence, we received further confirmation that the current rally is running out of steam on a very fast pace. As you probably know already, the short-term oriented price trend of the market is only giving a limited picture about its actual condition. As a matter of fact, we have to analyze if such a potential price driven trend break is caused by a few heavy weighted stocks (e.g. Apple, Facebook, Alphabet …) in the index, or if it is a result of a weak demand all across the board. In such a situation, any potential trend-break could have the power to transform into a stronger pullback immediately, since there is no safety net around to cushion such a move. Consequently, short- to mid-term market breadth will give us further guidance what will happen if we see a short-term oriented price driven trend break (negative Trend Trader Index).

Examining our short-term oriented tape indicators reveals that the risk of a stronger correction is increasing on a very fast pace. This is due to the fact that short-term market breadth continued to deteriorate all across the board, although the S&P 500 is hovering shy below its all-time high! This is telling us that only a few large-caps are holding up quite well (driving the rally), although the broad market is already faltering! Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed major signs of exhaustion, whereas the latter also turned bearish last week. This is telling us that the underlying momentum and volume of advancing stocks on NYSE literally collapsed, although the market finished nearly flat for the week. Thus, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) declined and even dropped into bearish territory (SMA 20). Another outright bearish signal is coming from the High-/Low Index Daily, which continued to decline further and flashed nearly a bearish crossover signal last week. This is mainly driven by the fact that we that we only saw 60 new highs on Friday, although the market finished with a gain on that day. So all in all, given the outright weak short-term oriented market breadth structure of the market, we absolutely do not believe that the market has enough power to push higher. So, if we do not see a stronger trend-reversal immediately, the market will most likely enter a volatile consolidation mode, which could easily turn out to be corrective in its nature (preferred scenario).

On the contrarian side, most of our option based indicators (Daily Put/Call Ratio All CBOE Options, AII CBOE Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator, WSC Put-/Volume Ratio and the WSC Put-/Volume Ratio Oscillator) softened their quite bearish signals, but their signals still remain a big red flag on the horizon. Another major sign of complacent is the fact that the amount of bulls on Wall Street remains on critical levels. This is telling us that a lot of investors are already invested, leaving no body left to push prices higher. Above all, if this crowd decides to dump their stocks in order to take profits (since we had already a good year) things can go quite fast. Hence, we remain outright alert at the moment.

Mid-Term Technical Condition

Another reason for this outright cautious view is the fact that the mid-term oriented trend condition of the market deteriorated significantly last week (although the S&P 500 keeps trading slightly below its all-time high). This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped to 57 percent and below its important bullish 60 percent threshold. Therefore, from a pure formal point of view, the technical condition of the market can be described as outright corrective at the moment. This view remains in place, as long as this gauge keeps trading below 60 percent and does additionally not show any signs of positive momentum. If we focus on the pure price driven mid-term oriented uptrend, we can see that it still remains intact. This is not a big surprise at all, if we consider the current levels of the benchmarks. Consequently, our WSC Sector Momentum Indicator was holding up quite well and keeps still trading at quite solid levels. This signals that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This view is also supported by examining our Sector Heat Map as the momentum score of all sectors (except energy like in the previous weeks) keeps trading above the one from riskless money market (currently at 4.3 percent).

Another major reason why we remain outright cautious at the moment is the fact that mid-term market breadth has also started to show some stronger signs of exhaustion recently. Despite the fact the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remains bullish from a pure signal point of view they decreased for the week. On top of that we can see that the bullish gauges from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly also dropped significantly last week (with the first one nearly flashing a bearish crossover signal). Despite the fact that they have not turned bearish so far, their absolute bullish levels can be described as quite weak-kneed at the moment. This is a quite concerning development, because in the past, all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60 percent). Consequently, the risk for stronger disappointments grew significantly last week. On top of that we can see that the bullish gap from the Modified McClellan Oscillator Weekly continued to narrow, which is another indication that the overall tape momentum of the market is outright weak-kneed at the moment. Also the Advance-/Decline Line Daily and the Advance-/Decline Volume Line decreased last week. Another rare bearish fact is that the market triggered a Hindenburg Omen last week, which is a quite good summarization of the current tape condition. The only positive signal is coming from our Advance-/Decline Line Weekly which was holding up quite well last week. So from a pure mid-term oriented tape perspective, it looks like the market does not have enough power to break substantially above its old record high, whereas the downside potential of the market started to increase significantly! As a matter of fact, it looks like the market is heading into a make or break set-up within the next couple of weeks.

Long-Term Technical Condition

Not surprisingly, the long-term technical condition of the market has not shown any significant weaknesses in the last couple of trading sessions. The gauge from the WSC Global Momentum is trading at solid bullish levels, indicating that most local equity markets around the world (in detail 71 percent) remain in a long-term oriented uptrend. Also, the Global Futures Long Term Trend Index is still trading at solid levels (although it has been decreasing for weeks now). In addition, the relative strength of nearly all risky markets remains nearly unchanged compared to the previous week. However, the most important fact is that long-term market breadth in the U.S. still remains constructive and is, therefore, confirming the current long-term oriented trend of the market. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly, the percentage of stocks which are trading above their long-term oriented moving averages (200) and also our High-/Low Index Weekly were holding up quite well.

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. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week.

Bottom Line

Although the S&P 500 only trades less than one percent below its all-time high, we downgrade our strategic view from bullish to outright cautious. The rationale behind that call is the fact that the technical condition of the market looks outright damaged at the moment. In such a situation, the risk of a stronger correction remains outright high. The main reason why we have not seen any stronger pullback yet, is due to the fact that a few mega-caps in the S&P 500 are still holding up quite well (although the broad market is already faltering on a very fast pace). Consequently, the market is extremely vulnerable at the moment, because if we see a trend-reversal in these stocks there is literally no safety-net around to cushion such a move. Given the outright bearish tape structure at the moment, we think there are two scenarios possible. Either, we see a longer-lasting consolidation period (where we see a healthy rotation back into small caps) or the market is heading into a stronger correction within the next couple of days/weeks (preferred scenario). Consequently, we would like to see some negative price action first, before we advise our members to take any actions. This is due to the fact that there is still a small chance for a large-cap driven overshoot/stabilization, plus our Big Picture Indicator has not entered bearish territory so far, although its gauge is on the way to do so soon (preferred scenario). Consequently, we would advise our conservative members to place a stop-loss limit around 3,080 (intraday). This stop loss limit should be in place until our indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 3,080 and should increase their exposure if we see further down testing below 3,050/3,000. Stay tuned!

Stay tuned!