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September 26th 2021

Market Review

U.S. stocks experienced a roller-coaster week that saw the major averages dropping more than 2% at the beginning of the week, but managed to rebound strongly at the end of the week. In the end, major indexes finished the week in slightly positive territory. The Dow Jones Industrial Average gained 0.6% during the week to close at 34,798.00. The S&P 500 closed at 4,455.48 and ended the week up 0.5%. The Nasdaq eked out a tiny weekly gain of 0.02% to end at 15,047.70. Among the key S&P sectors, energy was the best weekly performer, while the utilities sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 17.8.

Strategy Review

Over the past couple of weeks, we received a growing number of evidences that the market had entered a quite complex and longer-lasting top-building process. As already stated several times, such a volatile top-building process is always a fork in the road. Because during such a distribution phase, we either see broadening leadership within major indexes (increase in new yearly highs, higher percentage of stocks trading above their SMA 20/50 …) or the underlying market condition continues to worsen. The first scenario can be described as healthy consolidation, since the strengthening tape structure is just the basis for further rallying within an ongoing bull-market. In the second scenario, the weakening leadership (in combination with quite elevated index levels) leads to increased volatility, which is then just the vanguard for stronger pullbacks (e.g. 2020, late 2019, early/mid 2018, early 2016, mid 2015 or 2011). More precisely, a text-book like building process always starts with a limited sell-off (3-7%), which is then followed by a stronger counter-trend rally. If such a counter-trend rally is not confirmed by improving market breadth, it will not be sustainable in its nature. The result is renewed selling pressure which pushes the market towards the latest or even to a new low. The final low is achieved, when such a retest or new low is accompanied by an improving tape structure (less new lows, less downside volume …). Otherwise, further selling pressure can be expected. Worth mentioning is that such a process is quite complex, since it could take days or even weeks (whereas the tilt between supportive and corrective could get also quite narrow sometimes). In rare circumstances, it is also possible to see an immediate correction-leg, without any corresponding bounce event. Basically, that was the main reason why we recommended our conservative members to place a stop-loss limit. In fact, it looks like the market is following a typical top-building pattern, since we saw such an initial sell-off on Monday (which also triggered our recommended stop-loss limit, since the S&P 500 dropped to 4,305 on that day). Although the bounce started already the next day, the move itself was just another typical step within such a complex top-building process. As a result, the quality of the latest counter-trend rally will give further guidance.

Short-Term Technical Condition

Despite the fact that the market finished the week on a higher note, the short-term oriented trend has not managed to turn bullish yet. From a purely price point of view, the trend can be described as neutral since the S&P 500 closed between the two envelope lines of the Trend Trader Index. Worth mentioning is the fact, that this neutral signal is extremely fragile, since the S&P 500 only closed 1 point above the bearish threshold of the Trend Trader Index. In addition, both envelope lines of this indicator formed a rounding top at the beginning of the week. This is signaling that within the past 20 days we saw lower highs and lower lows. Another strong bearish signal is coming from the underlying trend-momentum of this price driven trend. There, we can see that the Modified MACD increased its bearish gap during the week and has, therefore, not confirmed the bounce from last week. Basically the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. Although the indicator turned slightly bullish from a purely signal point of view, its gauge if far away from confirming the latest move of the S&P 500.

More importantly, the situation looks quite similar if we analyze the upside participation of the latest bounce. There, we can see that the readings from our entire short-term oriented breadth indicators remain bearish or bearish biased. As a result, the latest move of the S&P 500 can still be classified as (corrective) bounce rather than the beginning of a renewed short-term oriented uptrend. This applies in particular to the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that they showed a small recovery on Friday, both gauges have not managed to pass their bullish threshold yet. This is telling us that the upside participation remains weak-kneed. Basically, the same is true if we focus on the momentum of advancing stocks (Modified McClellan Oscillator Daily) and advancing volume (Modified McClellan Volume Oscillator Daily). Both indicators are far away from confirming the latest price action of the S&P 500. Thus, we would be surprised to see further strong and sustainable gains on the horizon. On the other hand, we should not forget that the market internals have not fully turned bearish yet since we have not seen a significant spike in new lows so far. A fact, which can also be observed if we focus on the High-/Low-Index Daily, which still remains bullish from a purely signal point of view. Consequently – from a technical point of view – the market internals still remain somehow constructive, albeit with a quite corrective tilt. In such an environment it is quite common to see stronger bounces which are then followed by renewed selling pressure (since the tape condition is too weak to justify significantly higher prices but still somehow supportive to trigger immediate waterfall declines).

On the contrarian side, we can see that the informed guys continued to sell into strength since the Smart Money Flow Index has definitely not confirmed the bounce of the Dow Jones Industrial Average. Moreover, we can see that the WSC Capitulation Index is still indicating a risk-off market environment. Another interesting fact is that the latest sell-off has not really lead to increased fear among the market. The z-score of our Daily Put-/Call Ratio All CBOE Options Indicator remains neutral, whereas the Put-/Volume Ratio Oscillator even dropped into bearish territory last week.  This shows that the degree of complacent among the crowd remains quite high. On the other hand, we can also see that the amount of bears started to increase (which is another short-term negative signal since it is still far away from being extreme). The only positive signal is coming from a seasonal point of view (Presidential Cycle). There, we can see that it is not usual to see some kind of stabilization/bouncing in the first two weeks of October before further headwinds can be expected.

Mid-Term Technical Condition

However, another reason why we remain strategically cautious is based on the fact that the mid-term oriented trend-condition of the market also continued weakened last week. The most important signal is coming from the Global Futures Trend Index since its gauge plummeted to the bearish consolidation area (albeit to its upper range). Hence, it has not confirmed the latest bounce of the S&P 500. But more importantly, as long as the gauge remains below 60%, any upcoming gains should turn out to be corrective in their nature. However, from a purely price point of view, the mid-term oriented uptrend of the market still remains intact as we have not seen a stronger pullback so far. Consequently, the WSC Sector Momentum Indicator still keeps trading in solid bullish territory and has even succeeded to increase recently. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. This can also be seen if we focus on our Sector Heat Map as the momentum score from riskless money market finished the week unchanged (0%).

Unchanged compared to the previous week, mid-term oriented market breadth is far away from confirming the current mid-term oriented price driven uptrend at the moment. In other words, the mid-term oriented upside participation remains outright weak-kneed at the moment. Mid-term oriented down-volume is still dominating mid-term oriented up-volume (Upside-/Downside Volume Index Weekly), whereas mid-term oriented advancing issues (Advance-/Decline Index Weekly) remain too weak to be taken too seriously at the moment. Historically, such situations have always been associated with quite bearish biased and volatile market environments. These negative facts are amplified by outright bearish readings of the Modified McClellan Oscillator Weekly (since both gauges dropped to lowest level for months). Another strong indicator for weak mid-term oriented leadership is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Although both gauges improved at the end of the week, they keep trading far below their bullish thresholds. Thus, the latest move of the S&P 500 can still be categorized as bounce rather than the beginning of a new and sustainable uptrend. Only the advance-/decline indicators not focused on volume were holding up relatively well (Advance-/Decline Line Weekly, Advance-/Decline Line Daily, Advance-/Decline Volume Line).

Long-Term Technical Condition

On a long-term time perspective, we received further evidences for an aging rally. The WSC Global Momentum Indicator has finally entered the bearish area (as it dropped 7 percentage points for the week), and shows that now only 48% 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. Also our Global Futures Long Term Trend Index decreased for another week, indicating that the bull-market of U.S. equities continued to weaken. A fact, which can also be observed in our WSC Global Relative Strength Index as nearly all risky markets continued to lose momentum vs. riskless money market (although some of them showed some tiny improvements on Friday). In addition, more and more markets are dropping below U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 improved, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly weakened.

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.

Bottom Line

Given the fact that the recent recovery rally had zero positive impact on our indicator board (especially within short-term market breadth), we strongly believe that latest move can still be described as corrective bounce rather than the beginning of a new and sustainable uptrend. Thus, it looks like the market has now entered the next step in a typical top-building process. As a result, a period of weaknesses and/or a stronger move towards the latest low can be expected sooner or later. If this re-test is accompanied by an improving tape structure, it is time to get back into the market otherwise further declines can be expected. Consequently, the situation remains tense. A fact, which can also be observed within our Big Picture Indicator since its gauge entered the bearish consolidation area.  Even if we do not see stronger selling pressure immediately, with such weak readings across the board the upside potential of the market looks extremely capped as well. This base case scenario remains unchanged as long as we do not see stronger improvements within our short-term oriented indicator framework. However, after the stop-loss limit was triggered on Monday, conservative members should definitely stay on the side line. Currently, the risk-/reward ratio still looks too low to justify a bargain hunt at the moment.

Stay tuned!