March 8th 2020

Market Review

The market was in bounce mode last week. All three major U.S. averages eked out weekly gains after a wild roller-coaster week that saw the Dow swing 1,000 points or higher twice. For the week, the Dow Jones Industrial Average succeeded to gain 1.7% to close at 25,864.78. The S&P 500 managed to eke out a weekly gain of 0.6% to close at 2,972.37. The Nasdaq advanced 0.1% for the week to end at 8,575.62. Among the key S&P sectors, utilities was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 41.9.

Strategy Review

In our last week’s market forecast we highlighted the fact that – on a very short time frame – we should not be too far away from an important short-term oriented low, which could act as basis for a stronger bounce. Moreover, we said that the quality of the upcoming bounce would give further guidance if the recent sell-off represented a great buying opportunity or just relieved oversold conditions, which would then of course lead to further selling pressure. In fact, the market entered a stabilization phase since we saw stronger bouncing during the week. As a matter of fact, the impact of the recent stabilization on our indicator board remains key area of focus right now.

Short-Term Technical Condition

If we focus on our short-term oriented trend indicators, we can see that the short-term down-trend of the market remains well in force and even gained more bearish ground last week. From a pure price point of view, we can see that the S&P 500 closed 209 points (!) below the bearish threshold from the Trend Trader Index. So from a pure price point of view, the S&P 500 is extremely far away from getting back into a short-term oriented uptrend. The same is true if we focus on the Modified MACD, which remains in a bearish free fall and reached the lowest level for months. Additionally, its gauge shows a widening bearish gap and has, therefore, refused to confirm the bounces during the week. The case is the same if we focus on the Advance-/Decline 20 Day Momentum Indicator, which plummeted to the lowest level for months and has, therefore, also not confirmed the bounce we saw last week. So from a pure price point of view, the latest bounce can be still described as corrective rather than being healthy in its nature.

Unfortunately, the same is true if we focus on our short-term oriented market breadth indicators (since all of them have not shown any signs of positive divergences yet). Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show major signs of exhaustion and plummeted significantly to their lowest levels for months. This indicates that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. This is an outright negative signal if we consider the fact that the market showed some stronger rally days last week. This picture is also fully confirmed by the NYSE New HighsNew Lows Indicator, as we saw a strong spike in the number of new lows, whereas the number of new yearly highs was nearly zero! Consequently, the High-/Low-Index Daily remains outright bearish at the moment. Thus, the chances for a healthy (and sustainable) rebound are extremely low at the moment. On top of that it also tells us once again that the latest declines were driven by the whole market and were not only caused by a few heavy weighted stocks within the S&P 500! As a matter of fact, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) has not shown any signs of recovery yet (since both gauges are trading at their lowest levels for months). Consequently, the latest bounce had hardly any positive impact on the current technical condition of the market. Therefore, it is a way too early to bet on fast and sustainable bullish trend-reversal (since the short-term down-trend of the market is well backed by short-term market breadth). That does not necessarily mean that we see fast and stronger declines immediately but it tells us that the chances for a fast and sustainable V-shaped recovery are literally zero.

The main reason, why it could be possible to see further stabilization/volatile sideways trading on a very short-time frame is due to the fact that our entire contrarian indicators remain bullish or have even strengthened their bullish signals last week. This becomes quite obvious if we focus on our option based indicators (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) as all them indicate a broad-based capitulation within the market. This capitulation can be also seen if we focus on the CBOE Volatility Index, which spiked even higher on Friday although the S&P 500 is still trading well above its previous intra-day low at 2,850. On the other hand, we can see that our Smart Money Flow Index continued to show a bullish divergence to the Dow, whereas the gauge from our reliable WSC Capitulation Index continued to drop. These are typical ingredients on the contrarian side when the market enters a bottom building process. This bottom building process would be even supported by a seasonal point of view (Presidential Cycle and the Decennial Cycle), since the market often hit an important intermediate low in early March. However, if we consider the quite grim tape signals at the moment any stabilization phase should turn out to be corrective on a mid-term time horizon. As a matter of fact, we remain quite cautious at the moment.

Mid-Term Technical Condition

Another reason why we believe that the market is at risk for further disappointments is due to the fact that the latest bounce had no positive impact on the mid-term oriented technical condition of the market at all. This is mainly because the gauge from the Global Futures Trend Index dropped 33 percentage points (!) during the week into the bearish area. Currently the gauge is trading around 11% and, thus, far below the very important threshold of 60 percent. In such a case, the technical condition of the market is highly at risk for further disappointments, of course only in combination with weak or bearish readings in mid-term oriented market breadth. As this is absolutely the case now, it is definitely time to get a cautious stance. So even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains far below 60 percent or does not show any signs of positive moment (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well! This means that any upcoming relieve rallies (even stronger ones) are highly likely to turn out to be corrective in their nature. Another negative fact is that the gauge from the WSC Sector Momentum Indicator also dropped significantly for the week, although it is still trading far above its bearish threshold. Nevertheless, this is also a sign that the mid-term oriented (pure price driven) uptrend of several sectors within the S&P 500 has started to break down recently. A fact which can be also observed if we focus on our Sector Heat Map, since the momentum score of riskless money market spiked to 36% last week. This is another indication, that it might take some time until the market will get back into a strong and sustainable risk-on mode.

This picture is widely confirmed by mid-term market breadth. Especially, our Modified McClellan Oscillator Weekly widened its bearish gap last week and has, therefore, not confirmed the latest bounce we saw. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) has not shown any momentum recently and kept trading at its lowest levels for months. This indicates that the underlying trend momentum of the market is clearly bearish, as most of all NYSE listed stocks remain in a strong downtrend at the moment. However, the most concerning signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators clearly turned bearish last week. This indicates that a lot of purchasing power was pulled out of the market last week, and therefore, we would not be surprised to see further selling pressure ahead!

Long-Term Technical Condition

The long-term oriented trend of the market continued to weaken last week. The WSC Global Momentum Indicator dropped to the lowest level for weeks, indicating that the correction was global in scope as all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) dropped below their long-term oriented trend-lines. This global risk-of market environment can be also observed if we focus on the WSC Global Relative Strength Index since all risky assets lost momentum last week. Only the Global Futures Long Term Trend Index was holding up quite well, although it also looks like that it peaked out last week. Another concerning fact is that our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) also weakened significantly last week, which is just another piece of evidence that the current bull-market is highly at risk at the moment.

Model Portfolios

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

Bottom Line

From a pure contrarian- and seasonal point of view, further stabilization/bouncing/bottom building into early March cannot be ruled out at the moment. However, given the fact that the latest stabilization phase had literally zero positive impact on our indicator board (especially within short-term market breadth), the recent stabilization phase can be still described as outright corrective rather than being healthy in its nature. This fact can be also seen if we focus on our WSC Big Picture Indicator which is now showing a bearish consolidation scenario at the moment. Consequently, the market is highly at risk for further disappointments. So in other words, as long as we do not see fundamental improvements within our indicator framework (especially within short-term market breadth), the risk-/reward ratio of being invested is outright depressed at the moment. Consequently, we think it would make sense for conservative members to change the stop loss limit at 2,840 from a daily closing price perspective to 2,890 (intra-day basis). The main rationale, why we think a stop-loss makes sense here is the fact that there might be still a small chance that further bouncing next week would have a positive impact on our indicator framework (although this is not the preferred scenario).

Stay tuned!