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October 10th 2021

Market Review

U.S. stocks wrapped an extremely volatile week and all three major U.S. averages finished the week finally in positive territory. The Dow Jones Industrial Average rose 1.2% in five trading days to end at 34,746.25. The S&P 500 added 0.8% over the week to finish at 4,391.34. The Nasdaq Composite rose just shy of 0.1% since last Friday’s close to end at 14,579.54. Most key S&P sectors ended in positive territory for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.8.

Strategy Review

So far, the market is following our expected path. In our last week’s market comment we highlighted that fact that we had seen some typical ingredients for an intermediate bottom. Thus, we expected to see a volatile stabilization period up until early October. In fact, after the market had dropped to a new low on Monday (4,278), we saw a stronger but volatile counter-trend rally afterwards. In the end, the S&P 500 managed to pull out a small gain for the week. Moreover, we said that a typical sell-off cycle is quite tricky, since the way down is always accompanied by stronger and sometimes longer-lasting counter-trend rallies. On average, the volatility is around 31 to 37 percent, when the Big Picture Indicator is showing a bearish consolidation or a bearish market environment (for further details click the Study Tab of our Big Picture Indicator). Thus, analyzing the quality (downside- and upside participation) of each correction leg as well as the following bounce will help to identify whether a major trend-reversal is due or if these moves are just the realization of volatility within the current market regime. Thus, the quality (upside-participation) of the latest stabilization will give further guidance.

Short-Term Technical Condition

Despite the fact that the market finished the week with gains, the readings of our short-term oriented trend indicators developed quite moderately last week. From a purely price point of view, the current short-term oriented trend turned neutral since the S&P 500 only managed to close within both envelope lines of the Trend Trader Index. Moreover, we can see that both envelope lines of this reliable indicator are still drifting lower, indicating that – from a purely structural point of view – the underlying trend structure of the market remains bearish. Basically, the same is true if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator. Even though both indicators are signaling some kind of stabilization, their signals are a way too weak to take them too seriously at the moment. The first indicator is trading at the lowest levels for month, and the latter one has just slightly passed its bullish threshold. Hence, any stronger down-day could easily lead to a bearish crossover within both indicators and, therefore, they are not really confirming the latest move by the market. So, from a purely trend point of view, the latest gains can be still classified as stronger bounce rather than the start of a potential new and sustainable up-trend.

Basically, we receive almost the same picture if we analyze short-term market breadth. Despite the fact that the latest move caused some improvements in the readings of our entire short-term oriented tape indicators, most of them still remain too weak-kneed to confirm the latest levels of the S&P 500. Probably the most encouraging bullish signals are coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both of them flashed a (tiny) bullish crossover signal. Also, the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) has shown some small improvements recently. This shows an increased upside participation in the latest gains we saw. Nevertheless, their absolute levels are still a way too low (compared to the S&P 500), plus any stronger down-day could easily trigger a negative signal again. Another negative signal is coming from the spike in NYSE Volume, which often marks a short-term oriented trend-reversal. Also, the High-/Low Index Daily has not succeeded to widen its bullish gap since we have not seen any spike in the number of stocks hitting a new yearly high so far. In total we saw 125 on Friday and, in contrast, 50 stocks reached a new yearly low on that day. In summary it can be said that the latest upside participation was indeed supportive but the overall recovery level was too weak to be confirmative. Since any stronger down-day could easily wipe out these positive developments we have seen, the current stabilization can still be classified as (stronger) bounce – at least from the current point of view.

The situation on the contrarian side looks quite mixed at the moment. Despite the fact that the gauge of the WSC Capitulation Index dropped by half of its rise, the corresponding fisher transformation is still indicating a risk-off market environment. This can also be seen if we focus on the Smart Money Flow Index, which is far away from confirming the latest gains. Thus, further troubles on a mid-term time horizon are quite likely. On a very short time frame further bouncing/stabilization into expiration (15th October) looks quite likely since the option market (AII CBOE Put-/Call Ratio and the AII CBOE Call-/Put Ratio Oscillator) is getting increasingly bearish. This stabilization phase into mid-October is also supported from a purely seasonal point of view. According to the Presidential Cycle it is quite usual to see a stronger bounce into mid-October before further selling pressure can be expected. Moreover, these historical patterns are also telling us that, historically, the market was not able to hit new highs after August. If we consider the current readings of these indicators such a scenario looks extremely likely.

Mid-Term Technical Condition

This picture is also getting support from the fact that the mid-term oriented condition of the market showed no major signs of improvements compared to the previous week. The gauge from the Global Futures Trend Index still remains within the upper part of its bearish consolidation area, indicating that the market (and, therefore, also the current bounce) has still a corrective tilt at the moment. So, even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains near or below 60% (in combination with weak mid-term market breadth), the market is highly at risk for stronger disappointments. Moreover, with such weak readings the upside potential of the market should be capped as well. Only, from a purely price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator still keeps trading at solid bullish levels so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend at the moment. This can also be seen if we examine our Sector Heat Map, as the majority of sectors within the S&P 500 has still a higher momentum score than riskless money market. Worth mentioning here is the fact, that the score of the riskless money market increased to 9% last week, while energy dropped below and is now trading at 0%

Examining our mid-term oriented tape indicators still reveals the same intermingled picture as in the previous week. First of all, the Modified McClellan Oscillator Weekly widened its bearish gap last week, indicating an outright weak tape momentum at the moment. In such a situation, we would be extremely surprised to see stronger (sustainable) gains ahead. Second, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) has also not shown any signs of improvement so far and both gauges are still trading in the bearish area (forming a bearish divergence to the current levels of the S&P 500). Basically, the same is true if we focus on the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly, as both indicators have not succeeded to turn bullish yet. The only positive signals are coming from our advance-/decline indicators, which were holing up very well (Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) or even improved (Advance-/Decline Volume Line Daily). If we consider the still quite broad based non-confirmation of our mid-term oriented tape indicators, the short-term oriented stabilization can still be classified as corrective rather than being supportive in its nature.

Long-Term Technical Condition

Also, the long-term oriented trend of the market shows the same intermingled picture as in the previous weeks. Once again, our Global Futures Long Term Trend Index declined and signals that of the recent bull market is also losing steam. The WSC Global Momentum Indicator finished the week unchanged and shows that now only 42% of all local equity markets around the world keep trading above their long-term oriented trend-lines. Thus, the recent stabilization has not triggered a global recovery so far. If we compare all relevant asset classes, U.S. equities remain the strongest in terms of relative strength (although the relative strength of nearly all asset classes weakened). Examining our long-term oriented tape indicators reveals that the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly decreased significantly while the SMA 200 remained unchanged for the week.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Since the momentum score of energy rose above average and above the momentum score of the S&P 500, we received a buy signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

Our base case remains unchanged compared to last week. On a very short time frame further volatile stabilization/bouncing into expiration looks quite likely. Although we might see stronger up-days, the current stabilization process can still be classified as corrective rather than being supportive in its nature. This is based on the fact that the current tape condition remains too weak to justify a V-shaped recovery, let alone a new high. Moreover, given the quite damaged mid- to long-term condition of the market, the current sell-off cycle is far of being over yet. Thus, we would not be surprised to see a deterioration of our short-term oriented indicators sooner or later, which is then the final proof that the current stabilization phase has come to an end. Thus, we stick to our cautious strategic view. Therefore, we think conservative members should remain on the side-line as long as we do not see stronger improvements/bullish signals within our indicator framework (especially within the Global Futures Trend Index and the Big Picture Indicator), whereas aggressive traders should monitor our daily indicators closely and should apply tight money management.

Stay tuned!