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February 20th 2022 |

Key Takeaways

  • No fundamental reason to change our cautious strategic outlook
  • Stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment
  • On a very short-time frame, the chances for an oversold but corrective bounce are accumulating

Market Review |

U.S. stocks finished the week with strong losses. The Dow Jones Industrial Average declined 1.9% over the week to 34,079.18, whereas it faced its worst trading day in 2022 on Thursday. The S&P 500 recorded a weekly loss of 1.6% to finish at 4,348.87. The Nasdaq lost 1.8% for the week to end at 13,548.07. Most key S&P sectors ended in negative territory for the week, led by energy. The staples sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.8.

Strategy Review

The market is heading down our expected path. After the initial sell-off in late January, our indicator framework showed that the ingredients for a stronger bounce within an ongoing down-trend were accumulating on a fast pace. In fact, after the S&P 500 had dropped to 4,326 at the end of January, the market strongly bounced until early February. Although the bounce turned out to be quite strong in terms of price, we warned our members not to jump the gun as it looked outright corrective in its nature. Thus, we expected to see at least another significant move towards or even below the initial low.  Moreover, we said that if such a new down-leg (close or even below the initial January low) was accompanied by positive divergences in market breadth (shrinking downside volume/declining issues, decreasing new lows, increased tape momentum and fewer stocks below their moving averages) in combination with persistent buy signals within our contrarian indicators, the market would have a good chance to hit an important (intermediate?) low. After we have successfully seen the retest of the previous low on Friday (as the bears had taken the S&P 500 down to 4,327 on an intraday basis), the big question is if that move was accompanied by any kind of positive divergences or if it was just the vanguard for further selling pressure down the road?

Short-Term Technical Condition

Not surprisingly, our entire short-term-oriented trend indicators remain bearish. From a purely price point of view, the trend remains negative since the S&P 500 closed 55 points below the bearish threshold of the Trend Trader Index. Additionally, both envelope lines of this reliable indicator are still decreasing on a quite fast pace, which is another typical technical pattern for a strong short-term-oriented down-trend. This negative price trend is also accompanied by strong momentum as the Modified MACD showed a widening bearish gap at the end of the week. The only slightly positive signal is coming from our Advance-/Decline 20 Day Momentum Indicator. Despite the fact that this indicator is still trading in deep bearish waters, its gauge succeeded to improve quite considerably during the week. As a matter of fact, this indicator did not fully confirm the latest declines from last week. As this indicator tends to be a leading one, we would not be surprised to see another volatile but corrective rally attempt in the next couple of trading sessions.

Currently, any upcoming oversold bounce will not have enough power to transform into a new and sustainable uptrend. The main reason behind that call is based on the fact that the quality of the current short-term-oriented down-trend still looks quite high in its nature (although we saw some minor positive divergences during the latest re-test). Especially, the signals of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily weakened or even turned bearish last week. This is indicating major signs of exhaustion since the momentum of advancing stocks and advancing volume of all NYSE listed stocks remains negative. This picture is also widely confirmed by the NYSE New HighsNew Lows Indicator as it showed strong readings in the number of new lows (whereas the number of new yearly highs was still quite depressed). Therefore, the High-/Low-Index Daily is far away from turning bullish. More importantly, both indicators showed that these declines were still mainly driven by the broad market and have not been the result of a few heavy weighted stocks in the index. A fact, which was also confirmed by short-term down-volume (Upside-/Downside Volume Index Daily) and by the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although the situation looks quite grim from a purely signal point of view, the downside participation was not as strong as compared to the previous low in late January. For example, the number of new lows was almost twice in late January, when the S&P 500 traded nearly at similar levels. Basically, the same is true if we focus on the  percentage of stocks which are trading above their short-term oriented moving averages (20/50). Moreover, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily were also holing up relatively well compared to late January. These are typical patterns which occur if the market is about to hit an important low. Thus, there is a good chance to see some kind of stabilization ahead. Nevertheless, these signals (divergences) are a way too weak at the moment to initiate a sustainable trend-reversal.

Analyzing market sentiment also shows that the ingredients for a bounce-attempt are again accumulating. The number of bears in the AII Bulls & Bears survey jumped back to 43.2% as dumb money realized that the recent bounce was just nothing more than a huge bull-trap. Moreover, we can see that the hedging activity with the option market has also continued to pick up again recently (Daily Put-/Call Raito All CBOE Options, WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). On the other hand, we can see that the Smart Money Flow Index and the WSC Capitulation Index have relatively been holding up quite well recently. Even from a purely seasonal point of view (Presidential Cycle and Decennial Cycle), another non sustainable rally attempt into mid-March looks quite possible before further major troubles might be due.

Mid-Term Technical Condition

This mid-term-oriented negative outlook would coincide with the fact that the mid-term-oriented condition of the market looks quite grim. First of all, the gauge from our Global Futures Trend Index dropped into outright bearish territory and is, hence, far away from passing the important 60 percent threshold. As long as we do not see a stronger recovery here, it is definitely a way too early to change our cautious strategic view. Secondly, the mid-term-oriented positive price trend of the market is also fading out, as the WSC Sector Momentum Indicator dropped significantly (and nearly touched its bearish threshold). Thus, we received further confirmation for our bearish base case scenario. In other words, this signals that more and more sectors within the S&P 500 are underperforming riskless money market on a relative basis. This view is also supported by examining our Sector Heat Map. There we can see that the momentum score of riskless money market strengthened significantly as it increased to 26% and has doubled in the past weeks. In addition, already four sectors are trading equally or even below the riskless money market. In our opinion this is just another indication that any short-term recovery will just turn out to be a bear-market rally instead of a broader-based recovery.

This view is also confirmed by the high quality of this mid-term-oriented down-trend. Once again, our Modified McClellan Oscillator Weekly widened its bearish gap and has, therefore, reached its lowest level for years. This indicates that the underlying momentum of mid-term-oriented advancing stocks remains outright negative at the moment. Another serious mid-term-oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators strengthened their bearish signals last week. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for further major troubles down the road. In addition, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and especially the Advance-/Decline Volume Line) dropped towards new lows! Thus they have formed a quite bearish divergence to the current levels of the S&P 500. Only the gauges of the percentage of stocks which are trading above their mid-term-oriented simple moving average (100/150), in contrast, were holding up quite well (although they still remain deeply bearish from a purely signal point of view). So, all in all, the mid-term-oriented tape condition of the market is confirming our view that is a way too early to bet on a sustainable trend reversal (even though the chances for a stronger oversold bounce are increasing on a very short-term time frame).

Long-Term Technical Condition

The long-term technical picture of the market weakened once again. Although our WSC Global Momentum Indicator finished the week nearly unchanged, it indicates that only 23% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term-oriented trend lines. This is another confirmation that the global bull market is extremely weak-kneed at the moment. Also, our Global Futures Long Term Trend Index continued its long lasting bearish ride and dropped to the lowest level for months. In addition, we can see that the relative strength score of most risky markets (apart from commodities) keep trading below riskless money market (although some of them has shown some improvements recently). Analyzing our long-term-oriented tape indicators reveals that the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly weakened, while the SMA 200 finished the week where it started. As already pointed out in our last week’s outlook, this is another piece of evidence that the market looks vulnerable for further (and stronger) disappointments.

Model Portfolios

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

Bottom Line

On a very short time frame, we saw some minor ingredients for a stronger intermediate low. Currently, these signals are a bit too weak-kneed to be taken too seriously at the moment. Thus, further confirmation within our short-term-oriented indicators will be needed in the next couple of days. However, even if we would see some kind of stabilization/bouncing in the next couple of days, the readings within our entire indicator framework remain too weak to initiate a new and sustainable trend-reversal. A fact, which can also be observed within our Big Picture Indicator (as its gauge kept jumping around within its bearish consolidation quadrant last week). As a matter of fact, any upcoming bounce would be nothing else as just a non-sustainable move within an ongoing mid-term-oriented down-trend. Thus, there is still no fundamental reason to change our cautious strategic outlook for the time being. That being said, we think conservative members should stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment.

Stay tuned!