October 6th 2019

Market Review

U.S. averages finished a quite volatile week with a mixed performance. The Dow Jones Industrial Average lost 0.9 percent over the week, to end at 26,573.72. The S&P 500 declined 0.3 percent for the week to finish at 2,952.01. Both, the Dow Jones Industrial Average and the S&P 500 posted their third down week. The Nasdaq closed at 7,982.47, ending the week 0.5 percent higher and snapping a two week losing streak. Among the key S&P sectors, health care was the best weekly performer, while energy dragged the most. The CBOE Volatility Index, the gauge of S&P 500 options known as the VIX, ended at 17.

Strategy Review

In our last week’s comment, we highlighted the fact that the market looked vulnerable for further consolidation work into early October. As a matter of fact, we advised our members not to panic (even if we see some nasty down-days), since the underlying tone remained supportive. Moreover, we said that we expected to see a stronger impulsive relieve rally soon afterwards, as the ongoing consolidation period had already caused a stronger deterioration within short-term optimism (option market).

In fact, after the S&P 500 had shed over 3 percent until Wednesday, short-term optimism (option market) reached extreme bearish levels, causing a strong impulsive rally where the market rallied more than 2 percent within two days. In the end, the S&P 500 closed nearly unchanged for the week.

Consequently, the market followed a typical textbook like consolidation period so far and, therefore, the quality of the underlying tape (market breadth) structure would give us further guidance where the market is heading. Because under normal circumstances, a consolidation period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, such a consolidation period forces the market into a typical top building process, which is then of course just the harbinger of a more significant pullback/correction. Worth mentioning is the fact, that such a consolidation period could last from a few days until several weeks, whereas the tilt between corrective and supportive consolidation can also get quite narrow. Consequently, the quality of the underling tape (market breadth) structure will give us further guidance, if the latest recovery was just an oversold bounce or in fact the beginning of a new and sustainable uptrend.

Short-Term Technical Condition

From a pure price point of view, the latest relieve rally can be still categorized as bounce rather than the beginning of a new and sustainable uptrend. This is mainly due to the fact that the gauge from the S&P 500 closed 8 points below the bearish threshold from the Trend Trader Index. Moreover, we can see that both envelope lines of that reliable indicator started to build a bearish rounding top and are now decreasing. This is another indication that the latest pullback might be just the beginning of larger distribution process rather than being just a short-lived breather. Another negative signal is coming from the Modified MACD, which refused to confirm the latest bounce on Friday. As a matter of fact, we would not be surprised to see another period of down-testing ahead. This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator as it did not show any signs of major strength at the end of the week. Nevertheless, we should also not forget that this indicator still remains bullish form a pure signal point of view and indicates that 2,855 (recent intraday low) represents an outright strong intermediate bottom. Moreover, it tells is that – from a pure price point of view – the current consolidation period has still a bullish tilt. Anyhow, as already mentioned above, it is not quite unusual to see a lot of bearish or even fast changing signals within a consolidation period. As a matter of fact, short- to mid-term market breadth is a key area of focus right now.

Unfortunately, most of our short-term oriented tape indicators did not show major signs of improvements last week. Especially, our Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show a widening bearish gap, indicating that the underlying tape momentum of the market is outright negative at the moment. This is telling us that there was absolutely no recovery of advancing volume and advancing stocks, although the market finished nearly flat for the week. Basically, the same is true if we focus on the percentage of all Russell 3000 listed stocks which are trading above their short-term oriented moving averages (20/50). There we can see that the latest recovery was mainly driven by a few heavy weighted stocks in the index rather than being driven by the broad market. This is a quite negative sign as it is telling us that the latest recovery was quite selective in its nature so far. So all in all, these signals are telling us that the underlying condition of the market looks quite damaged at the moment and, therefore, the current consolidation period does definitely not look constructive in its nature anymore. On the other hand, we can also see that the High-/Low Index Daily is still somehow supportive, as we have not seen any serious negative spike in the number of stocks which are hitting a fresh yearly low so far. Above all, we saw a reduction of new lows on Friday, together with a small increase in new highs. Consequently, this is definitely a signal which does not fit into the puzzle right now, as it indicates that we might have seen the worst already (at least for now).

On the contrarian side, we can see that the market is recuperating from extreme oversold conditions (Advance-/Decline Ratio and the Upside-/Downside Volume Ratio), plus market sentiment and the option market remain outright bearish at the moment. As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market is trading much lower until the 18th of October, when the option expiring date is due (since all these put-options would be in the money then). In other words, 2,855 represents an outright strong intermediate bottom. This picture is also confirmed by the WSC Capitulation Index (which formed somehow a rounding top) as well as from a pure seasonal point of view (Presidential Cycle). There we can see that the market has often hit an important low at the beginning of the month, which was then the basis for another stronger rally into mid-October (before further stronger troubles might be due). Interestingly, this time frame would perfectly match the option expiring date. This might also explain the fact that our reliable Smart Money Flow Index fell towards a new low, although the Dow Jones Industrial Average did not. This is a quite serious mid-term oriented red-flag on the horizon (at least for now).

Mid-Term Technical Condition

Another reason, why we still believe that it is still a bit too early to pull the trigger is due to the fact that the mid-term oriented uptrend of the market still remains intact. A fact, which is quite important to monitor in an ongoing consolidation period. To be more precise, the Global Futures Trend Index is still trading above its 60 percent threshold and is, therefore, still indicating a consolidation period with a bullish tilt. On the other hand, we can also not ignore the fact that its gauge decreased significantly for the week (20 percentage points) and is now just trading 5 percent above the important threshold. Consequently, if this trend continues the current consolidation period could easily turn out to get a more corrective tilt. However, we are not there yet and we would just get quite cautious (change our strategic bullish outlook) if such a drop below 60 percent is accompanied with outright weak or bearish readings in mid-term oriented market breadth. Moreover – in such a case – we would also like to see some negative developments in the WSC Sector Momentum Indicator as well. Right now, we can see that the WSC Sector Momentum Indicator 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. This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors (except energy like in the previous weeks and now also health care) keeps trading above the one from riskless money market (currently at 17.9 percent).

The mid-term oriented market breadth condition still looks quite supportive, although the recent price action has definitely left its mark on some of our tape indicators. This becomes quite obvious as the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped into the bearish area. Nevertheless, we can also see that both indicators just trade slightly below their bearish threshold, which can be somehow interpreted as quite positive sign (given the recent circumstances). The same is true if we focus on the Upside-/Downside Volume Index Weekly which just slightly strengthened its bearish signal last week. On the other hand, we can see that the Advance-/Decline Index Weekly as well as the Modified McClellan Oscillator Weekly are still holding up quite well. This is indicating that the overall tape momentum remains somehow still quite constructive for the time being. Also our advance-decline indicators (Advance-/Decline Line Daily, and the Advance-/Decline Line Weekly) with the exception of the Advance-/Decline Volume Line have not shown any major weak signals in the last couple of trading sessions. So all in all, the current technical condition of the market looks quite weak but still somehow too supportive to call for a major market top right now. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks. In other words, if the current bounce/recovery will not be able to bring these indicators back on track (even on a short-term time perspective), the current recovery will just be part of a typical top-building process (rather than being the start of a new and sustainable uptrend).

Long-Term Technical Condition

The long-term oriented trend of the market shows nearly the same picture as in the previous weeks. The WSC Global Momentum Indicator remains unchanged compared to last week, as its gauge still shows that 42 percent 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. Consequently, the recent sell-off had not a major impact on global markets so far. Moreover, we can see that our Global Futures Long Term Trend Index has not shown any signs of weakness recently, signaling that the long-term oriented trend of U.S. equities remains intact. The only weaker signal is coming once again from our WSC Global Relative Strength Index as the relative strength of all risky markets dropped. Moreover, we can also see some exhaustion in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly the Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) lost some ground last week. This might be another indication that the current recovery might be just part of a larger top building process rather the beginning of a new uptrend.

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.

Bottom Line

Our base call remains unchanged compared to last week since the market remains in the middle of a volatile (but still bullish biased) consolidation process. In our preferred scenario, the latest intra-day low at 2,855 represents an outright strong intermediate bottom, which acts as basis for further stabilization/bullish biased strength into mid-October. Consequently, if any upcoming stabilization/recovery into mid-October will not be accompanied by strong improvements within our market breadth indicators, another but much stronger correction leg is highly likely (as the latest consolidation cycle has definitely left its mark on some of our short- to mid-term oriented indicator framework). Consequently, short- to mid-term market breadth will give us further guidance within the next couple of days. However, although we strongly believe that we might have seen the worst already (at least for now), we think it would make sense for our conservative members to place a stop-loss limit again at 2,840 (intra-day basis). This stop-loss limit should just act as safety net, just in case if our indicator framework strongly deteriorates during the week and will, therefore, not confirm our mid-October strength scenario. Stay tuned!

Stay tuned!