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August 1st 2021

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average slid 0.4% over the week to 34,935.47. The S&P 500 booked a weekly loss of 0.4% as well to close at 4,395.26. The Nasdaq shed 1.1% for the week to end at 14,672.68. All three indexes hit record highs on Monday and are up for July, with Dow showing a 1.3% monthly gain, the S&P 500 rising 2.3% and the Nasdaq up 1.2% for the month. Most key S&P sectors ended in positive territory for the week, led by materials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, increased to 18.2.

Short-Term Technical Condition

The short-term oriented trend situation of the market remains almost unchanged compared to last week. From a purely price point of view, the short-term oriented uptrend of the market remains intact since the S&P 500 managed to close 47 points above the bearish envelope line from the Trend Trader Index. Furthermore, both envelope lines of this reliable indicator are still increasing, which can also be seen as a positive short-term oriented price driven trend. However, the underlying momentum of this price driven trend remains quite weak. Despite the fact that the Modified MACD managed to flash a small bullish crossover signal, it is a way too weak to be taken too seriously at the moment. Therefore, it is not a big surprise at all that the Advance-/Decline 20 Day Momentum Indicator has not managed to turn bullish yet. As a result, both indicators are still showing a huge bearish divergence to the current levels of the S&P 500. So, from a purely price point of view, the current uptrend still looks quite fragile in its nature.

This view is broadly confirmed by short-term market breadth. Thus, the recent price action can still be classified as part of a (corrective) top building process rather than being the part/start of a healthy consolidation period. First of all, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily stay bearish, showing that the underlying momentum of advancing volume of advancing stocks remain outright week. Another concerning signal is that the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) is still showing a huge bearish divergence compared to the current level of the S&P 500. This shows that the latest market top was mainly driven by a few heavy weighted stocks in the index rather then being a broad based rally. As already pointed out last week, this is an outright bearish signal as it shows that the current upside/trend participation is extremely narrow based. A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily. The only positive signal is coming from the NYSE New Highs/New Lows Indicator since we saw a small pickup in the number of stocks hitting a new yearly high (whereas the number of new lows have not shown any bearish spike so far). As a matter of fact, the High-/Low-Index Daily slightly strengthened its bullish signal (albeit on quite low levels). In conclusion, the market internals are still indicating that the market remains in a distributive phase (and, therefore, the market remains quite vulnerable at the moment).

On the contrarian side, we can see that the increased fear within the market started to level off (WSC Put-/Volume Ratio Oscillator, Equity Call-/Put Ratio Oscillator, AII Bulls & Bears Survey and the All CBOE Call-/Put Ratio Oscillator), whereas the WSC Capitulation Index and the Smart Money Flow Index have started to weaken recently. This is another typical ingredient within a classical top building process. Because heading activities tend to spike after the initial sell-off and are then leveling off in the upcoming bounce and should remain low if we see further selling pressure ahead. Anyhow, unchanged compared the last week the market should approach rough waters within the next couple of weeks (Presidential Cycle). This is based on the fact that – historically – the market usually hits its high in a post-election year around late July/early August. Given the current tape structure, such a scenario looks quite likely, at least from the current point of view.

Mid-Term Technical Condition

Another reason for such a scenario is clearly the fact that the mid-term oriented condition of the market also continued to weaken last week. This is mainly because the gauge from the Global Futures Trend Index lost further momentum and dropped to the lowest level for weeks. Although it is still trading in the middle of its bullish consolidation area, it may be just a question of time until we see a drop of this reliable indicator below the 60% threshold. If this is the case, the risk of a fast-paced correction is extremely high (of course only in combination with weak or bearish readings in mid-term oriented market breadth). Right now, we are not completely there yet, but nevertheless, this is undermining our cautious view at the moment (as the gauge could easily drop very fast below this important threshold within days). And as long as the gauge of this indicator doesn’t improve significantly, the upside potential of the market should be limited as well. The mid-term oriented price driven uptrend of the market, in contrast, still looks quite strong (at least for the time being). Although the WSC Sector Momentum Indicator decreased for the week, it still keeps trading at solid bullish levels. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend. This can also be observed if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading above the one from riskless money market (currently at 0%).

Examining our mid-term oriented tape indicators still reveals a bearish biased picture at the moment. 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 the SMA 100 is still trading in the bearish area (forming a huge 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 (although the latter one remains at least bullish form a purely signal point of view). The same applies for our Advance-/Decline Indicators. While our Advance-/Decline Line Weekly and Advance-/Decline Line Daily were trading sideways, the Advance-/Decline Volume Line even plummeted to the lowest level for months. These facts undermine our view that, from a purely mid-term oriented tape perspective, it looks like the market is running out of fuel on a very fast pace. Hence, there is no fundamental reason for us to change our cautious view.

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 succeeded to improve last week and indicates that the long-term oriented price driven uptrend of U.S. equities remains intact. Nevertheless, we can see that the global momentum of the recent bull market is also loosing steam. Although our WSC Global Momentum Indicator remains quite bullish, it continued to decrease and shows that now only 74% (compared to 100% a few weeks ago) of all local equity markets around the world keep trading above their long-term oriented trend-lines. If we compare all relevant asset classes, U.S. equities remain the strongest in terms of relative strength (although the relative strength of all asset classes continued to deteriorate). 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, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio. Moreover, we are proud that the WSC All Weather Model Portfolio reached a new-all time high last week.

Bottom Line

The situation remains unchanged compared to last week. Given the outright weak/deteriorating tape condition (especially on a short-term time perspective) our strategic bearish view remains unchanged. Even if we see further mega-cap overshooting/consolidating, the sustainability of the current move looks outright fragile at the moment. Thus, the risk of a sharp trend-reversal (price momentum crash) remains high. As a matter of fact, the risk-/reward ratio looks too low to justify any strategic long position at the moment. Currently, the market remains in a (corrective) distribution process and, therefore, we remain cautious. In the past every stronger correction started with an outright weak tape structure, but not every week tape structure lead to a correction. So even if we see a longer-lasting and volatile consolidation period instead of another strong down-leg/correction, we would sacrifice 2 to 4% upside potential until our indicator framework would flash an all clear signal again. Thus, our bearish view will remain unchanged as long as we do not see a significant recovery within our short- to mid-term oriented indicator framework. So, in the end, we think conservative members should stay on the sideline, whereas experienced short-term traders should focus on the short side again if we see a break in the Trend-Trader Index (albeit they should use close stops given the risk of quite nasty bounces).

Stay tuned!