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January 30th 2022  |

Market Review |

All three major U.S. averages eked out weekly gains after a wild roller-coaster week that saw them experiencing outsized swings each day the week. After dropping to new intra-day lows on Monday and to fresh closing lows on Wednesday, the gains on Friday helped major indexes to close in positive territory for the week. The Dow Jones Industrial Average succeeded to gain 1.3% for the week to close at 34,725.47. The S&P 500 managed to eke out a weekly gain of 0.8% to finish at 4,431.85. The Nasdaq advanced less than 0.1% for the week to end at 13,770.57. Among the key S&P sectors, energy was the best weekly performer, while the industrial sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.7.

Short-Term Technical Condition

Despite the strong up-day on Friday, our entire short-term-oriented trend indicators remain outright bearish at the moment (as they even gained more negative ground last week). The S&P 500 closed 114 points below the bearish threshold from the Trend Trader Index. Thus, the broad index is extremely far away from getting back into a short-term-oriented price driven uptrend. More importantly, the underlying momentum of this price driven uptrend also looks outright negative at the moment. The Modified MACD reached its lowest level for months and has, additionally completely refused to confirm the bounce on Friday. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. Although this indicator showed an extremely tiny recovery on Friday, its gauge plummeted to the lowest level for months during the week. So, from a purely price trend point of view, the recovery on Friday can still be classified as (corrective) bounce rather than the beginning of a new and sustainable up-trend (at least for the time being).

This view is also confirmed by the fact that the quality of this downtrend was also extremely high last week. In other words, none of our short-term-oriented trend quality indicators have shown any signs of positive divergences yet. The short-term gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily plummeted to their lowest levels for more than one year. This indicates that the underlying momentum of declining stocks and declining volume on NYSE is remains outright strong. Thus, both indicators did not confirm the bounce on Friday. This picture is also fully confirmed by the NYSE New HighsNew Lows Indicator. During the whole week we saw stronger extremely negative spikes in the number of new lows, whereas the number of new highs was nearly zero! Consequently, the signal of the High-/Low-Index Daily remains outright bearish. Another reason why the recent (down-)trend quality looks outright high, is based on the fact that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) kept trading at outright low levels. This is telling us that the latest declines were driven by the whole market and were, therefore, not just the result of a few heavy weighted stocks in the index. A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily. As a result, the latest gains can still be classified as volatile and oversold bounce rather than the beginning of and a sustainable uptrend. That does not necessarily mean that we see renewed selling pressure immediately, since the way down is always accompanied by stronger but limited counter-trend rallies/bounces (caused by short-covering and bargain hunters). But as long as our trend quality indicators do not show stronger signs of improvements, the chances that any upcoming bounce will turn out to be the beginning a new sustainable uptrend remain outright low.

Analyzing market sentiment shows that the ingredients for a stronger bounce are definitely accumulating. Probably the most supportive fact is that the number of bears in the AII Bulls & Bears survey spiked to 52.9% last week. This is the highest number since the Corona crisis in 2020. Such a spike is definitely a strong sign of capitulation, indicating that a lot of negative news is priced in on a short-term time perspective. Moreover, we can see that our entire option based indicators grew into bullish territory (z-score of the AII CBOE Put-/Call Ratio, AII CBOE Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator). Further support on the contrarian side is coming from the Smart Money Flow Index, which did not confirm the latest closing low on Wednesday. Thus, the chances of a counter-trend rally are definitely accumulating. Even though such a relieve rally often causes the temptation to go in big, the chances that it will be faded again will remain high. Normally, if the market hits an important bottom, we usually see a strong counter trend rally, which normally lasts about 5 to 10 trading sessions. After that, the market tends to show renewed weaknesses, which could then lead to a retest or even a break of its previous low. If this weakness or re-test comes along with quite positive divergences within our indicator framework (less new lows, a lower CBOE Volatility Index and further positive divergences) we can be quite sure that the market hits rock bottom. Currently, we have not seen any of these patterns yet. Moreover, we can see that the WSC Capitulation Index is still indicating a risk-off market environment. Thus, the minor positive divergence of the Smart Money Flow Index should not be overrated – at least for the time being.

Mid-Term Technical Condition

This view is also supported by the fact that the latest up day on Friday had literally zero impact on the readings of our mid-term-oriented indicators. Thus, the risk for stronger disappointments on a mid-term time horizon remains high – at least from the current point of view. The gauge of the Global Futures Trend Index dropped by 23 percentage points (!) and closed in its deep bearish territory last week. Readings, we have not seen since March 2020. However, as long as the indicator does not show stronger signs of improvements, the market remains highly at risk for further disappointments. Even if we do not see further stronger selling pressure immediately, 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 the gauge keeps trading far above its bearish threshold, the recent weaknesses indicates that also the mid-term-oriented (price driven) up-trend of several sectors within the S&P 500 has started to weaken recently. This can also be observed if we focus on our Sector Heat Map as the momentum score of riskless money market started to increase whereas the score of cyclical sectors dropped significantly for the 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.

If we examine the quality of the mid-term-oriented downtrend, we receive the same message. Especially, our Modified McClellan Oscillator Weekly widened its bearish gap last week and did not confirm the latest bounce we saw on Friday. Also, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) showed that the selling pressure was quite broad-based during the week (whereas the bounce has not led to any significant recovery within the broad market so far). A fact which is also confirmed by our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they dropped to new lows last week. Probably, the most concerning signals are coming from our Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly (as both indicators clearly strengthened their bearish signals last week). This indicates that a lot of purchasing power was pulled out of the market. Thus, the chances for a fast V-shaped recovery towards the latest high are extremely low – at least for the time being.

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 more than one year, indicating that the correction is global in scope (since less than 10% out of all local equity markets around the world which are covered by our Global ETF Momentum Heat Map are still trading above their long-term-oriented trend-lines). This global risk-of market environment can also be observed if we focus on the WSC Global Relative Strength Index since all risky assets lost momentum last week. In addition, more and more assets are dropping below the relative strength score U.S. Treasuries. Only the Global Futures Long Term Trend Index was holding up quite well, although it also continued its bearish journey. 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) 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

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. The allocation of the WSC Sector Rotation Strategy remains unchanged. Thus, the WSC Model Portfolio Composite is also changing most of its positions. Analyzing these positions, also reveals a quite defensive allocation for the time being.

Bottom Line

Our outlook remains unchanged compared to last week. Even though the ingredients for a stronger sentiment driven bounce are accumulating, there is no fundamental reason to change our cautious outlook for the time being. This is based on the fact, that we have not seen any typical patterns for a sustainable bottom yet. As long as we do not see a significant recovery or any kind of positive divergences in our short-term-oriented indicator framework, any upcoming gains can still be classified as corrective bounce rather than being the beginning of a new sustainable uptrend. 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). Thus, the market remains extremely vulnerable for further disappointments. Thus, 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!