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June 20th 2021

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 3.5% over the week to 33,290.08. The S&P 500 booked a weekly loss of 1.9% to close at 4,166.45. The Nasdaq shed 0.2% for the week to end at 14,030.38. Nearly key S&P sectors ended in negative territory for the week, led by materials. The technology sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, increased to 20.7.

Short-Term Technical Condition

Although we expected to see some kind of sentiment driven washout-events, the recent weakness turned out to be quite strong. This can be seen if we focus on the S&P 500, which closed 33 points below the bearish threshold from the Trend Trader Index on Friday. As a result, the purely short-term oriented price trend (time-series momentum) of the S&P 500 turned slightly negative. Additionally, we can see that the underlying momentum of this price driven trend also started to weaken and finally turned negative on Wednesday, since the Modified MACD flashed a bearish crossover signal on that day. Another weak signal is coming from the  Advance-/Decline 20 Day Momentum Indicator, as it dropped significantly for the week. Hence, this indicator clearly confirmed the recent decline of the S&P 500 (although the indicator itself has not turned bearish yet). Consequently, further selling pressure cannot be ruled out from a purely trend point of view. Nevertheless, the short-term oriented price up-trend of the market has not completely broken yet, since both envelope lines of the Trend Trader Index have not formed a bearish rounding top yet. Also, the Advance-/Decline 20 Day Momentum Indicator is still far away from being bearish. As a result, the recent trend-break can be categorized as non-sustainable so far (at least from a purely price point of view). In times of increased volatility, it is not unusual that our short-term oriented trend indicators give contradicting signals. In such a situation, short- to mid-term market breadth will give us further guidance if the recent weakness has the potential to transform into a more significant pullback or if it was just the realization of increased volatility.

Unfortunately, also our entire short-term oriented market breadth indicators had to take a hard hit during the last couple of trading sessions. Thus, it looks like that we might see further down-testing ahead. More specifically, the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) decreased significantly in the last week and even entered bearish territory. Consequently, the recent short-term oriented down-trend looks quite broad-based in its nature since (as it is backed by a broader basis). Moreover, we can see that the momentum of this broad based down-trend turned also negative last week. This can be seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators flashed a bearish crossover signal and especially the one from the Modified McClellan Volume Oscillator Daily was quite strong. As a result, the recent trend-break was confirmed by a huge number of declining issues and declining volume. Another negative signal is coming from the Upside-/Downside Volume Index Daily which also shows that the selling pressure was not only focused on a few heavy weighted stocks in the index. On the other hand, we can see that most of this selling pressure was mainly driven by profit taking so far (which can be interpreted as still a quite positive signal). This becomes obvious if we examine the NYSE New Highs/New Lows Indicator, as we still saw 75 stocks reaching a new yearly high and only 29 stocks reaching a new yearly low on Friday. As long as new lows are not outpacing new highs, the underlying tone should remain somehow constructive. Consequently, the High-/Low Index Daily was holding up relatively well and is still far away from flashing a bearish crossover signal (although it decreased for the week). Nevertheless, the risk of further (stronger) selling pressure is increasing. On the other hand, even if we do not see some stronger selling pressure immediately, the upside potential of the market also looks quite capped (if we consider all these short-term bearish signals around).

On the contrarian side, we can see that the recent washout day started to have its designated impact on short-term optimism. Almost our entire option- and sentiment based indicators (AII CBOE Put-/Call Ratio Daily, WSC Dumb Money Indicator and the Equity Options Call-/Put Ratio Oscillator) turned neutral (albeit not bullish yet). Additionally, the market is sightly oversold (Upside-/Downside Volume Ratio Daily) and, therefore, a stronger bounce cannot be ruled out at the moment. However, given the fact that the WSC Capitulation Index is still negative in combination with a still quite bearish WSC Put-/Volume Ratio Oscillator, there is a high chance that such a bounce will be faded again (at least from a purely contrarian point of view).

Mid-Term Technical Condition

Although the situation looks quite difficult on a short-term time perspective, the mid-term oriented up-trend of the market has not been affected yet. Although our Global Futures Trend Index slightly decreased for the week, it is still trading in its outright bullish area (92 percent) and, hence, is far away from being bearish. As long as the gauge from this indicator does not show negative momentum (and remains above 60%) the risk to see a correction or a longer-lasting down-turn should be quite limited. Therefore, it will be crucial to monitor the gauge of this indicator closely within the next couple of days. It will give us further guidance if the recent short-term weaknesses will have the potential to transform into a more significant move (if we see a fast deteriorating gauge of this indicator). Anyhow, currently most sectors within the S&P 500 still remain in a strong mid-term oriented price driven uptrend as the WSC Sector Momentum Indicator is still trading at quite encouraging bullish levels and even succeeded to increase for the week. As a matter of fact, the underlying price trend of the S&P 500 looks quite solid at the moment. This can be also observed if we examine our Sector Heat Map, as the momentum score of all sectors remains above the one from the riskless money market (currently at 0%).

However, another reason to be a bit alerted is due to the fact that mid-term oriented market breadth also started to deteriorate last week (although the broad index only lost 1.9 percent for the week). This is another piece of evidence that the latest decline was definitely more than just a sentiment driven washout event. While the Advance-/Decline Line Weekly was holding up very well and the Advance-/Decline Line Daily slightly declined for the week, the Advance-/Decline Volume Line, in contrast, plummeted to the lowest level for weeks. This applies also for the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges dropped significantly for the week. Moreover, we can see that the short-term oriented gauge of the Modified McClellan Oscillator Weekly also formed a rounding top on high bullish levels, showing that the underlying mid-term oriented tape momentum started to weaken. Further concerning signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Despite the fact that both indicators remain quite bullish from a purely signal point of view, they also weakened for the week. If this trend continues it might be also just a question of time until we see a bearish crossover signal in these two indicators. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for stronger losses down the road. Right now, we are not there yet, but we will have to keep a close eye on this development.

Long-Term Technical Condition

The long-term oriented technical condition of the market is still showing a quite solid picture. The WSC Global Momentum exhibits that the current bull market remains global in scope as 81% of all local equity markets around the world (which are covered by the WSC Global ETF Momentum Heat Map) remain in a long-term oriented uptrend. Another encouraging signal is coming from our Global Futures Long Term Trend Index which has not shown any weaknesses yet and keeps trading at the highest levels for months. This indicates that the S&P 500 still remains in a strong technical bull market for the time being. In contrast, our WSC Global Relative Strength Index weakened significantly last week, but still all markets have a higher relative strength score than U.S. Treasuries. Analyzing long-term market breadth also reveals a quite intermingled picture. While the High-/Low Index Weekly succeeded to improve and to widen its bullish gap for the week, the SMA 200, in contrast, slightly decreased and the Modified McClellan Volume Oscillator Weekly even flashed a bearish crossover signal.

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 technology 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

Although we expected to see some kind of sentiment driven washout-events, the recent deterioration within our short-term oriented indicator framework turned out to be surprisingly strong. Especially, if we consider the fact that the market only lost 1.9% for the week. Reflecting the quite weak readings within our short-term oriented indicator framework, we think that the market hit an intermediate high last week. As a result, the risk-/reward ratio is getting a negative tilt (at least on a short-term time perspective). That does not necessarily mean that we see increased further pressure immediately, but on the other hand – with such weak readings all across the board – the upside potential of the market also looks quite capped. At least on a short-term time perspective. Currently, it is still a bit too early to say if the recent short-term weaknesses will have the potential to trigger a stronger pullback (since most of our signals still remain somehow supportive). A fact which can be also observed if we focus on our Big Picture Indicator (path view). Hence, our strategic bullish outlook remains unchanged – at least for now. Nevertheless, we think it might be a good time for conservative investors to take profits, whereas aggressive traders should use close stops as we are expecting increased volatility ahead.

Stay tuned!