November 21st 2021
Markets were in consolidation mode last week as U.S. averages finished the week with a mixed performance. For the week, the Dow Jones Industrial Average fell 1.3% to close at 35,601.98. The S&P 500 posted a weekly gain of 0.3% and closed at 4,697.96. The Nasdaq finished at 16,057.44 and jumped 1.2% for the week. Among the key S&P sectors, discretionary was the best weekly performer, while the energy sector dragged the most. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, ended near 17.9.
Short-Term Technical Condition
From a purely price point of view, the short-term trend of the market remains intact as the S&P 500 closed 64 points above the bearish threshold from the Trend Trader Index. Consequently, this purely price driven uptrend of the market remains intact as long as the S&P 500 keeps trading above 4,633. Given the fact that we have seen higher highs and higher lows for the past 20 days, both envelope lines of this reliable indicator are still drifting higher on a quite fast pace. Hence, the resistance/support levels for the S&P 500 are increasing as well, which is another quite constructive price trend signal for now. Nevertheless, the situation looks quite different if we examine the underlying momentum of that short-term oriented price-driven uptrend. Although the Modified MACD stabilized at quite high bullish levels, it nearly rolled over into the bearish territory on Friday. And, also our Advance-/Decline 20 Day Momentum Indicator declined during the whole week and finally dropped into the bearish area. As a result, both indicators are showing a quite bearish divergence to the current levels of the S&P 500. Hence, these are early signs that the current price driven rally might slightly run out of steam soon (which of course increases the risk of a potential short-term oriented trend break). As you know and according to our decision making process, a short-term oriented trend break must not necessarily lead to further strong losses since it could be just the result of a healthy breather. Therefore, we analyze the quality of the trend to identify (1) if such a potential slow-down or even a trend break is caused by a few heavy weighted stocks (e.g. Apple, Facebook, Alphabet, Tesla) in the index, or (2) if it is a result of a weak demand all across the board. If the second one holds, a potential trend-break could easily 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 (the trend quality) will give us further guidance.
Unfortunately, our entire short-term market breadth indicators weakened across the board although the S&P 500 increased for the week. This is telling us that the S&P 500 was holding up quite well due to a few heavy weighted stocks in the index, whereas the broad market started faltering. Especially, the short-term gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed major signs of exhaustion and both flashed a bearish crossover signal. This signals that the underlying momentum and volume of advancing stocks on NYSE turned negative. This can also be seen if we focus on the Upside-/Downside Volume Index Daily, which also flashed a bearish crossover signal at the end of 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) also declined and even dropped into bearish territory (SMA 20). This is another quite concerning tape signal as it shows that the current short-term oriented uptrend is running out of steam. Another negative signal is coming from the NYSE New Highs/New Lows Indicator as the number of new lows (112) outpaced the numbers of new highs (93). As a matter of fact, the High-/Low-Index Daily is also heading towards flashing a bearish crossover signal soon. This is another negative trend quality signal if we consider the fact that the S&P 500 is just trading shy below its all-time high. Thus, the risk that the current sentiment driven consolidation period will force the market into a short-term oriented down-trend is quite high.
From a purely sentiment point of view, we can see that the latest consolidation period started to have its expected impact on short-term optimism. The heading activities started to increase as the put-/call ratios (CBOE Put-/Call Ratio and the WSC Put-/Volume) slightly rose for the week. As a result, some of our option based- and dumb money indicators (Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator and the WSC Put-/Volume Ratio Oscillator) started to recede from high bearish levels. Nevertheless, the readings of our entire sentiment based indicators are still showing increased complacent among market participants (AII Bulls & Bears Survey). Further headwinds can be expected from a seasonal point of view (Presidential Cycle), since the last two weeks of November tend to be weak. Thus, we are expecting further sentiment driven consolidations ahead, whereas the risk of nasty down-days is also quite high at the moment.
Mid-Term Technical Condition
Anyhow, another reason why we get a bit more cautious (especially on the short-term) is because the mid-term-oriented trend condition of the market also showed some smaller signs of fatigue last week. This is because the gauge from the Global Futures Trend Index dropped by 14 percentage points last week to 71%, although the S&P 500 increased for the week. Right now, this is not a big game-changer (for the current bull-market) as its gauge is still trading in the middle of the bullish consolidation. Nevertheless, its negative momentum could be interpreted as another short-term oriented warning signal. Apart from that fact, the mid-term-oriented uptrend looks quite solid as the WSC Sector Momentum Indicator has not shown any signs of weaknesses yet. 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 keeps trading above the one from riskless money market (currently at 0%).
Analyzing the mid-term oriented quality of the trend also shows a decreasing upside participation. The percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped for the week, but both gauges are still trading above their bullish threshold. This is telling us that the mid-term oriented uptrend is still supported by the majority of all NYSE listed stocks. Nevertheless, the upside participation is decreasing. The Modified McClellan Oscillator Weekly strengthened its bearish signals as it widened its bearish gap. This shows that the mid-term oriented momentum of advancing issues on NYSE continued to gain bearish ground. Basically, the same is true if we focus on the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly (although the latter one remains at least bullish form a purely signal point of view). Also, our advance-/decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily) weakened last week, the only exception is the Advance-/Decline Line Weekly. Given the weakening trend quality, the current consolidation could have the potential to get a corrective tilt but currently we are not there yet.
Long-Term Technical Condition
The long-term oriented uptrend of the market has also shown some signs of fatigue recently. This is mainly due to the fact that the WSC Global Momentum dropped 6 percentage points last week. It is now indicating that only 52% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are now still trading above their long-term oriented trendline. This indicates that the global bull market is losing some steam. If we focus on the U.S. market we can see that the relative strength of all risky markets weakend last week and more and more markets are dropping below U.S. Treasuries. This is another indication that the risk appetite among investors has started to decrease recently. The Global Futures Long Term Trend Index, in contrast, was holding up quite well. Examining our long-term oriented tape indicators reveals that the SMA 200 and the Modified McClellan Volume Oscillator Weekly decreased for the week while the High-/Low Index Weekly was holding up quite well.
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 Inflation Proof Retirement Portfolio reached a new all-time high last week.
Given the weak short-term oriented tape quality, together with still quite complacent market sentiment, further consolidation can be expected. Currently, the consolidation has still a healthy tilt since most of our trend- and trend quality indicators remain bullish. A fact, which can also be seen if we focus on our Big Picture Indicator, which moved into its bullish consolidation bullish quadrant on Friday. As long as this is the case, our strategic bullish outlook remains unchanged. Thus, conservative investors should remain invested. Nevertheless, we remain a bit alert since the deterioration of the trend quality was quite strong lately. As a matter of fact, it could be possible that the current consolidation period will get a bearish tilt sooner or later. Currently, this is pure speculation since most of our indicators remain supportive. Nevertheless, we think aggressive traders should reduce leverage/high beta trades or other highly sensitive call options/short volatility trades as increased volatility is likely.