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May 26th 2019

Market Review

U.S. stocks finished the week in negative territory. The Dow Jones Industrial Average declined 0.7 percent during the week to end at 25,585.69. The S&P 500 Index lost another 1.2 percent from the prior Friday’s close to finish at 2,826.06. The Nasdaq tumbled 2.3 percent during the week to 7,637.01. Most key S&P 500 sectors finished lower, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.9.

Short-Term Technical Condition

According to our short-term oriented trend indicators, the bearish status of the market remains well in force and even gained more negative ground last week. If we focus on the Trend Trader Index, we can see that the pure price driven down-trend of the market remains in place as the S&P 500 closed 35 points below the its bearish threshold. In addition, both envelope lines of this reliable indicator are still drifting lower on a very fast pace, which is another indication for a well-established bearish short-term oriented price driven trend at the moment. Another concerning fact is that the Modified MACD dropped to its lowest levels for weeks and has, therefore, wiped out its small bullish divergence we saw two weeks ago. This is telling us that the underlying trend momentum of the market gained even further negative ground last week. On top of that, we can also see that the gauge from the Advance-/Decline 20 Day Momentum Indicator has also finally dropped below its bullish threshold last week. As this indicator tends to be a leading one and given the fact that our entire short-term oriented trend indicators are now signalling a negative market environment, it is highly likely to see further pain down the road.

This picture is now also widely confirmed by short-term market breadth as our entire tape indicators continued to deteriorate significantly last week. The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bearish ground last week. This is telling us that the underlying short-term oriented tape momentum of the market has absolutely not shown any signs of a recovery so far. This can be also observed if we focus on the NYSE New HighsNew Lows Indicator, as the number of stocks which are hitting a fresh yearly high was nearly offset by the ones hitting a new low. As a matter of fact, the High-/Low-Index Daily nearly flashed a bearish crossover signal on Friday. This is another major red flag on the horizon, as it is telling us that the market internals continued to weaken significantly last week. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50) as both indicators continued to drop significantly last week. This indicates an extremely weakening upside participation at the moment as the majority of stocks on NYSE clearly turned bearish last week. Moreover, if we consider the current levels from the S&P 500 in combination with such weak readings within our short-term oriented breadth indicators, it is quite obvious that only large cap stocks are still holding up quite well at the moment (whereas the broad market is already faltering on a fast pace). Such a situation is outright critical as a trend-reversal in these large-caps could easily trigger another stronger waterfall decline. As a matter of fact, we are outright cautious at the moment.

The only positive signals are coming from the contrarian side. There we can see that most of our option based indicators turned or even strengthened their bullish signals (Global Futures Put/Volume Oscillator, Daily Put/Call Ratio All CBOE Options and the Equity Options Call/Put Ratio Oscillator). On top of that, we can see that the WSC Capitulation Index is still indicating a risk-on market environment, whereas the Smart Money Flow Index is still holding up quite well. Another quite bullish signal is coming from the Presidential Cycle. There we can see that the market often hit an important low in mid-May, which was then the basis for another stronger rally into deeper summer (before the market will hit its final high in Q3 2019). However, given the outright bearish tape structure at the moment, we think that any upcoming contrarian and oversold bounce will not have enough power to trigger a sustainable trend-reversal at the moment.

Mid-Term Technical Condition

Another major reason for that view is the fact that the mid-term oriented condition of the market also continued to deteriorate significantly last week. Especially, the gauge from the Global Futures Trend Index dropped further into the bearish consolidation area last week and is, therefore, clearly trading below the very important 60 percent threshold. In such a situation, the risk of a fast paced pullback remains quite high if this signal is accompanied with an outright weak mid-term market tape structure (which is unfortunately the case right now). So even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains near or below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well! Only – from a pure price point of view – the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator has not turned bearish so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend (which is not a big surprise at all, if we consider the fact that the market rallied nearly 13 percent on a year-to-date basis). This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors (except energy and material) keeps trading above the one from riskless money market. Nevertheless, there we can also see that the momentum score of riskless money market continued to increase within the past four weeks, which is another red flag on the horizon.

Another major reason, why we have turned quite cautious recently is the fact that our entire mid-term oriented breadth indicators continued to weaken significantly last week. Especially, our Modified McClellan Oscillator Weekly narrowed its bullish gap and also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped a few percentage points. This indicates that the underlying trend momentum of the market turned clearly bearish, plus most of all NYSE listed stocks are definitely not in an uptrend anymore. However, the most concerning signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators weakened once again or even turned bearish. This is a quite serious technical signal, if we consider the fact that the market just lost 1.2 percent and that both indicators were trading at confinable bullish levels a few weeks ago. Moreover it tells us that a lot of purchasing power was pulled out of the market last week and, therefore, the market internals have now definitely a bearish tilt. In the past, bearish readings within these indicators (in combination with a bearish Global Futures Trend Index) mostly led to a stronger correction or forced the market at least into a longer-lasting top-building process. Consequently, we think it is definitely time to get a more cautious stance!

Long-Term Technical Condition

The long-term oriented trend of the market shows an intermingled picture. Although our WSC Global Momentum Indicator dropped quite significantly during the week (8 percentage points), it still keeps trading at a solid bullish level. It signals that 57 percent 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. This is an indication that the current rally still remains supportive in its nature. In addition, our Global Futures Long Term Trend Index flashed a very supportive momentum signal as it succeeded once again to gain more bullish ground last week. Also nearly all markets in our WSC Global Relative Strength Index increased last week, which can be seen as a quite supportive long-term oriented signal (at least for now). Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average) reveals that all of them lost some steam last week.

Model Portfolios

Last week, there have been no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio.

Bottom Line

Although the market trades only a few percentage points below its all-time high, we think it is now definitely time to get a more cautious stance. As mentioned above, we saw absolutely no recovery or any kind of bullish divergences within our indicator framework last week as all of them continued to deteriorate significantly last week. As a matter of fact, most of them have already reached critical levels, indicating that the current technical condition of the market is quite damaged at the moment (as only a few large-caps are holing up quite well whereas the broad market is already faltering). Consequently, the latest bottom building process which started with a recovery from the previous low at 2,801 on the 13th of May has now definitely a corrective tilt (as it is accompanied with a deteriorating tape structure). As a consequence, it is highly likely to see a break below or at least a re-test of that important support level soon. However, even if we do not see a stronger pullback immediately, we think the upside potential of the market looks quite capped as well (since market breadth is too weak to justify a stronger and impulsive rally). Thus, any upcoming (large-cap driven) oversold and contrarian driven bounce should be limited in price and time (if market breadth keeps trading at such low levels). The only thing that does not fit in the puzzle right now is the quite bullish set-up on the contrarian side. Therefore, it could be possible to see at least another stronger rally attempt by the market. However, as long as our remaining indicator framework (especially short- to mid-term market breadth) does not show any signs of significant recovery, any upcoming bounce should be limited in price and time. As capital appreciation is the most important driver for long-term success, we think that the current risk/reward ratio of being invested is definitely decreasing on a very fast pace. As a consequence, we would advise our conservative members to adjust their stop-loss limit at 2,790 (but now on an intra-day basis), whereas aggressive short-term traders should switch on the bearish side as long as our short-term oriented indicator framework remains bearish.

Stay tuned!