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December 19th 2021 |

Market Review |

As expected in our latest Market Timing Forecast, U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 1.7% over the week to 35,365.44. The S&P 500 booked a weekly loss of 1.9% to close at 4,620.64. The Nasdaq plummeted 2.9% for the week to end at 15,169.68. Among the key S&P sectors, health care was the best weekly performer, while the energy sector dragged the most. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, ended near 21.6.

Short-Term Technical Condition

The current price trend of the market is neutral as the S&P 500 closed between the two envelope lines of the Trend Trader Index on Friday. However, this signal is quite fragile since the S&P 500 only closed a few points above the bearish threshold of the Trend Trader Index. In addition, both envelope lines of this indicator are slightly declining. This is signaling that within the past 20 days we saw lower highs and lower lows (which is another typical negative trend signal at the moment). More importantly, we can see that the underlying momentum of this price driven trend also started to weaken again, as the Modified MACD flashed a small bearish crossover signal. Another quite weak signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although it slightly improved at the end of the week, it closed far below its bullish threshold. Therefore, the current short-term oriented downtrend remains well in force, at least from a purely signal point of view.

The situation looks quite similar if we analyze the quality of that short-term-oriented downtrend (since our entire indicators have not shown stronger signs of recovery yet). Thus, the quality of the current short-term oriented downtrend still looks quite high for the time being. The percentages of stocks which are trading above their short-term oriented simple moving averages (20/50) are trading well below their bullish thresholds. This shows a high downside participation since most stocks are still in a strong short-term-oriented price driven downtrend at the moment. Additionally, the momentum of declining stocks (Modified McClellan Oscillator Daily) and declining volume (Modified McClellan Volume Oscillator Daily) is still outpacing its bullish counterparts. A fact, which can also be seen if we focus on the Upside-/Downside Volume Index Daily, which widened its bearish gap significantly. This shows that the recent selling pressure was not only caused by a few heavy weighted stocks in the index). This picture is also confirmed by the NYSE New HighsNew Lows Indicator since the number of fresh 52 weeks low is still outpacing the number of new highs. As a result, the High-/Low-Index Daily widened its bearish gap. As long as this is the case, the quality of the current downtrend should remain high. Therefore, it is a way too early to bet on a sustainable trend reversal at the moment.

Analyzing market sentiment shows that the level of fear within the market slightly decreased for the week but still remains at elevated levels. The gauge of the AII CBOE Put-/Call Ratio dropped below 1, showing that the hedging activity slightly decreased for the week. Thus the AII CBOE Put-/Call Ratio Oscillator softened its bullish signal, whereas the Equity Options Call-/Put Ratio Oscillator is still showing that the momentum of puts options on single stocks remains high. These signals should remain somehow supportive for stocks. Plus, from a purely seasonal point of view (Presidential Cycle), the market often faces tailwinds in the last two weeks of the week. Nevertheless, we can also see that the WSC Capitulation Index is still signaling a risk-off market environment, since Smart Money remains cautious. Additionally, we can observe that the number of bears on Wall Street dropped to quite low levels again. Thus, there are still enough investors around which could push prices lower, if we see further declines.

Mid-Term Technical Condition

Unchanged compared to last week, the mid-term-oriented trend of the market also still looks quite vulnerable at the moment. This is mainly due to the fact that the gauge of the Global Futures Trend Index keeps trading far below its 60% bullish threshold! Although it has succeeded to show some positive momentum recently, the correction risk will not be off the table as long as its gauge keeps trading below that important threshold! Additionally, the bearish divergence between its signal and the S&P 500 still remains quite huge. Thus, we remain cautious for the time being. However, on the other side we can see that the price driven uptrend of the market (measured by the WSC Sector Momentum Indicator) remains intact so far, although it slightly declined for the week. This can also be observed if we examine our Sector Heat Map, as the momentum score of all sectors still remain above the one from riskless money market. This is not a big surprise at all, since we have not seen a stronger down-leg so far. Thus, the mid-term-oriented uptrend of the market looks quite fragile at the moment.

More importantly, the vulnerability of the current mid-term-oriented uptrend is also confirmed by the corresponding trend quality indicators. First of all, the Modified McClellan Oscillator Weekly continued its bearish journey and dropped to the lowest level for months. This signals that the momentum of mid-term-oriented declining stocks remains outright negative. Another concerning fact is that mid-term-oriented advancing issues as well as mid-term-oriented up-volume are trading below their bearish counterparts. In the past, the market never showed stronger and sustainable gains with quite bearish readings in both of those indicators. Thus, we remain cautious (even if we see short-term bounces) at the moment. Basically, the same is true if we focus on the percentage of stocks which are trading above their mid-term-oriented moving averages (100/150). Both gauges declined for the week, indicating a broad-based downside participation at the moment. Moreover, we can see that our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) decreased, whereas the latter one even plummeted to the lowest level for months. As a result, all of them are showing a huge bearish divergence to the current level of the S&P 500 at the moment. So from the current trend quality point of view, the upside-potential of the market looks quite capped, whereas the down-side risk remains high.

Long-Term Technical Condition

The long-term-oriented technical picture of the market slightly weakened. Our Global Futures Long Term Trend Index decreased for another week, indicating that the bull-market of U.S. equities continued to weaken. Basically, we receive the same picture globally. Our WSC Global Momentum Indicator dropped to its lowest level for more than one year and shows that only 23% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their 200 day moving average. This is another sign that the global bull market is running out of steam. The only positive sign is coming from our WSC Global Relative Strength Index. Nearly all risky markets slightly improved versus the riskless money market. Still most markets are trading below U.S. treasuries. If we examine our long-term-oriented tape indicators, we can see that all of them declined (SMA 200, Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly).

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

Although a seasonal bounce cannot be ruled out, there is absolutely no fundamental reason to change our cautious strategic view. Given the fact that literally all signals continued to deteriorate all across the board or remain outright week, the risk for stronger selling pressure remains high. Thus, the current risk-/reward ratio does not justify a strategical long position (even though bottom fishing may look appealing in some cases). This is based on the fact that we have not seen any signs of stabilization within our trend quality indicators yet. Therefore, stronger up-days are most likely just the result of short-covering (oversold bounces). Thus, such moves should be corrective in their nature, rather than being the start of a new short-term-oriented uptrend. A fact, which can also be seen if we focus on our Big Picture Indicator, which is still jumping around in its bearish consolidation quadrant. As long as this is the case, our strategic cautious outlook remains unchanged.

Stay tuned!