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December 12th 2021 |

Market Review |

U.S. rallied strongly bounced for the week, with some major indexes posting new record highs. Snapping a 4-week losing streak, the Dow Jones Industrial Average gained 4.0% to close at 35,970.99. The S&P 500 ended the week 3.8% higher at a record of 4,712.02. The Nasdaq closed at 15,630.60 and booked a weekly gain of 3.6%. All key S&P sectors ended in positive territory for the week, led by the technology sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.7.

Short-Term Technical Condition

From a purely price point of view, the short-term oriented trend of the market turned positive again. This is based on the fact that the S&P 500 closed 30 points above the bullish threshold of the Trend Trader Index. Although this can be interpreted as a positive price signal in the first place, we can also see that both envelope lines of the Trend Trader Index have not recovered yet. Basically, the same is true if we analyze the underlying trend momentum of this price driven trend. Although the Modified MACD succeeded to flash a bullish crossover on Friday, the signal itself looks extremely weak-kneed at the moment. Thus, it has not fully confirmed the latest recovery of the S&P 500. The same is true if we focus on our Advance-/Decline 20 Day Momentum Indicator. Although its gauge slightly strengthened for the week, it declined on Friday and has, hence, not confirmed the latest high of the S&P 500. In addition, the indicator is still trading in deep bearish territory which is another quite non-confirmative signal for the time being. So from a purely short-term oriented trend point of view, the recent recovery can still be classified as (stronger) bounce rather than the beginning of a new price driven uptrend – at least for now.

Basically, the same is true if we evaluate the upside participation of the latest recovery. Although the S&P 500 reached a new all-time high on Friday, most of our short-term oriented trend quality indicators only improved moderately or even weakened last week. This shows that the latest price action was just driven by a few mega caps and by short-covering rather than being the result of a broad based demand. The momentum of advancing stocks and advancing volume remains negative since the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not succeeded to turn bullish yet. In other words, declining stocks and declining volume are still outpacing advancing volume and advancing issues on a short-term time perspective. A fact, that can also be observed if we focus on the Upside-/Downside Volume Index Daily. These are still quite negative signals, since a healthy uptrend should always be accompanied by strong up-volume and by an increasing number of advancing stocks. Currently, this is not the case right now, which is another indication that the recent recovery was mainly driven by a few heavy weighted stocks (large tech) in the index rather than being the result of a strong demand all across the board. This view is also supported by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Although both indicators slightly improved for the week, they are far away from confirming the current level of the S&P 500. Additionally, we have not seen any spike of new highs or any major improvements in the High-/Low-Index Daily yet, although the S&P 500 reached record levels on Friday. So, from a purely short-term trend quality point of view, the recent recovery can still be classified as bounce rather than being the beginning of a new and sustainable uptrend – at least for the current point of view.

Analyzing market sentiment shows, that the level of fear within the market continued to increase, although it has not reached extreme levels so far. The gauge of the AII CBOE Put-/Call Ratio rose above 1, showing increasing hedging activities on Friday. Thus, most of our option based oscillators (AII CBOE Put-/Call Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator) remain supportive or even strengthened their bullish signal last week. Nevertheless, the z-score of the AII CBOE Put-/Call Ratio still remains in neutral territory, showing that the hedging activities have not reached extreme levels yet. Another interesting fact is that the number of bears in the AII survey decreased quite a lot last week. Thus, it looks like retail investors bought in big last week. On the other hand, we can see that Smart Money remains quite cautious, whereas the WSC Capitulation Index is still showing a risk-off market environment. Further headwinds are coming from a seasonal point of view (Presidential Cycle) since the market normally faces some headwinds after a stronger bounce at the beginning of the month.

Mid-Term Technical Condition

From a purely signal point of view, the mid-term oriented showed some small signs of improvements. This is mainly due to the fact that the Global Futures Trend Index managed to increase by a few percentage points on quite low levels last week. Although this can be interpreted as a positive development, we should not forget that this indicator is still trading in the lower part of its bullish consolidation area and, therefore, far below the important 60% bullish threshold. In such a situation, the market remains highly at risk for stronger losses. Especially, if we consider the weak short-term oriented trend structure at the moment, such a move could happen within days. Thus, we remain alert. On the other side, we can see that most sectors within the S&P 500 remain in a mid-term oriented price driven uptrend, as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can also be observed if we examine our Sector Heat Map, as the momentum score of the riskless money market sector remains at 0% and all other sectors are trading above.

Examining the quality of the mid-term oriented trend strengthens the quite bearish picture from the previous week. Despite the fact that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) slightly increased for the week, both gauges have not succeeded to turn bullish yet. On top of that we can see that the Upside-/Downside Volume Index Weekly remains bearish, whereas the Advance-/Decline Index Weekly only developed moderately last week. These are still quite concerning signals, because in the past, all stronger pullbacks were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60%). Another negative mid-term oriented signal is coming from the Modified McClellan Oscillator Weekly which widened its bearish gap (indicating that the latest recovery had zero impact on the momentum of mid-term oriented advancing stocks). Further indication for a quite poor trend quality is coming from our entire advance-/decline indicators (Advance-/Decline Line Daily, Advance-/Decline Volume Line and the Advance-/Decline Line Weekly) since none of them has reached a new high recently.

Long-Term Technical Condition

The long-term oriented picture of the market remains almost unchanged compared to last week. The global bull market has not recovered substantially, since only 35% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are now trading above their 200 day moving average. This weakness in global risky assets is also supported by the fact that the relative strength of most asset classed dropped below 0 (or risk less money market). Once again, the Global Futures Long Term Trend Index continued to decrease (although it still remains bullish from a purely signal point of view). Additionally, long term trend quality continued to deteriorate last week (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the SMA 200). This is another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

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 fact that the latest gains had literally zero positive impact on our indicator board, the quality of the latest advance was outright poor. Thus the latest recovery can be classified as stronger oversold bounce rather than the beginning of a new sustainable uptrend. Therefore, the risk of renewed and stronger selling pressure towards or even below the latest low remains in place. A fact, which can also be seen if we focus on our WSC Big Picture Indicator which is now showing a bearish consolidation market regime. As long as this is the case, the narrow based recovery has not enough power to broaden out significantly to become a sustainable recovery. Thus, there is no reason to change our strategic cautious view. However, even if we see some kind of a volatile consolidation period rather than renewed selling pressure, with such weak readings across the board the upside potential of the market should also be quite capped. Thus, the current risk-/reward ratio still looks too low to justify a strategical long position at the moment.

Stay tuned!