November 4th 2018

Market Review

The U.S. stock market finished the week with solid gains. The Dow Jones Industrial Average gained 2.4 percent over the week to close at 25,270.83. The S&P 500 was also 2.4 percent higher on the week and finished at 2,723.06, the best week since May. The Nasdaq rallied 2.6 percent for the week to close at 7,356.99, its best week since August. Most key S&P sectors ended in positive territory for the week, led by materials. Utilities were the only decliners. The Chicago Board Options Exchange Volatility Index (VIX), a measure of investor uncertainty, fell to 19.51.

Strategy Review

In our last week’s comment, we highlighted the fact that we still expected to further strong selling pressure ahead as there were no major signs for an important (intermediate) low within our indicator framework visible. Moreover, we mentioned that we would monitor any renewed sell-off quite closely as it would give us further guidance where the market is heading. To be more precise, we said that if any new down-leg (close or below the previous low of the market) was accompanied by positive divergences in market breadth (shrinking downside volume/declining issues, decreasing new lows, increased tape momentum and fewer stocks below their moving averages) in combination with persistent buy signals within our contrarian indicators, we would have the final confirmation that an important bottom building process might be in force. In fact, after the bears had taken the S&P 500 down to 2,606 on an intraday basis on Monday, stocks strongly rebounded for the rest of the week. Anyhow, after our members have successfully side-stepped the recent correction, the big question is if last week’s bounce was mainly driven by short-covering (and, therefore, renewed weaknesses can be expected) or if the market has now entered a bottom building process (which could be the basis for a strong counter-trend rally into Q4)?

Short-Term Technical Condition

Despite the fact that the market finished the week with solid gains, the readings within our short-term trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market still remains quite bearish at the moment. Although the Trend Trader Index almost flashed a neutral trend-scenario on Friday, we can see that both envelope lines from this reliable indicator are still drifting lower on a very fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical pattern if the market remains extremely short-biased. This can be also seen, if we focus on the Modified MACD which has refused to flash a bullish crossover signal so far, although its short-term oriented gauge showed some small signs of recovery on Friday. Another bearish signal is coming from the Advance-/Decline 20 Day Momentum Indicator, as its gauge is far away from being bullish (although it confirmed the bounce from last week). Despite the fact that this can be interpreted as some form of positive divergence, the signal is still a way too weak to be taken too seriously at the moment!

From a pure signal point of view, the current short-term oriented bearish trend is still widely confirmed by short-term market breadth. This is mainly due to the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not turned so far, although the market finished the week on a higher note. This indicates that the recent rally was mostly driven by heavy weighted stocks within in the S&P 500, whereas the broad market still remains pretty weak-kneed. This becomes pretty obvious if we focus on the NYSE New Highs-/New Lows Indicator, as only the total number of new lows has decreased significantly over the past days, whereas the total number of new highs remains outright depressed. As a matter of fact, the High-/Low Index Daily is still far away from flashing a bullish crossover signal, as the bullish gauge of this reliable indicator remains outright depressed and keeps trading at the lowest levels for months! Basically, the same is true if we have a closer look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges increased for the week, they are still trading far below their bullish 50 percent threshold. This is telling us that the underlying tape structure of the market still remains outright damaged at the moment and, therefore, it is still a bit too early to bet on a sustainable counter-trend rally! On the other hand, we have seen some encouraging signs of a bottom building process recently. This was mainly due to the fact that the new intra-day low from the S&P 500 on Monday was definitely accompanied by a lower VIX, less down-volume, fewer stocks hitting a fresh yearly low and some small positive divergences in the percentage of stocks which are trading above their short-term oriented moving averages (20/50)! As a matter of fact, we have received the first ingredients for a typical (intermediate) bottom building process.

Above all, the bullish signals within our contrarian indicators remain persistent. Due to the increased hedging activity among the crowd, the signals within our option based indicators ((Daily Put-/Call Ratio All CBOE Options, Global Futures Put-/Volume Ratio, All CBOE Options Call-/Put Ratio Daily, All CBOE Options Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator Weekly) remain outright bullish. Moreover, the WSC Capitulation Index has dropped by half of its rise recently, which is another indication for an intermediate bottom. Consequently, a stronger bounce until 16th of November (option expiration day) looks quite possible. On the other hand, we can see that the Smart Money Flow Index has definitely not confirmed the bounce from last week yet, indicating that the chances are extremely high to see another stronger down-leg afterwards.

Mid-Term Technical Condition

This view is widely confirmed by our mid-term oriented trend indicators as we have not seen any signs of major improvements/bullish divergences yet! This becomes pretty obvious if we focus on the Global Futures Trend Index, which kept trading at the lowest levels for years (8 percent) and far below its extremely bearish 20 percent threshold. This indicator is, therefore, definitely not confirming the latest recovery from the S&P 500. As always mentioned, as long as we do not see any stronger upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming bounce should be limited in price and time. Moreover, we can say that the current correction cycle will be definitely not over as long as its gauge remains far below its outright bearish 60 percent threshold! Consequently, it still can be possible to see at least another strong down-day which pushes the market back to the lower end of its current trading range. And from a pure price point of view we can see that the WSC Sector Momentum Indicator continued to strengthen its bearish signal! At the moment, only 20 percent of all sectors within the S&P 500 are outperforming riskless money market on a relative basis. And also the momentum score of riskless money market weakened again and increased to 50 percent. As shown in our Sector Heat Map, currently 4 sectors are trading below the one from riskless money market.

Examining mid-term oriented market breadth reveals a quite intermingled picture. On the first hand side, our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) showed some small signs of recovery last week and are confirming the latest bounce from the S&P 500. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week, although their gauges are still far below the bullish threshold. But this indicates that the recent bounce was not strong enough the get the broad market back on track! Consequently, there has been no significant recovery within the broad market so far as most NYSE listed stocks remain in a strong mid-term oriented down-trend. This broad based non-confirmation can also be observed if we focus on the Advance-/Decline Index Weekly and on the Upside-/Downside Volume Index Weekly. Both indicators finished the week unchanged at quite bearish levels and, therefore, it is a way too early to bet on a sustainable trend-reversal for the time being. On top of that, we can see that the mid-term oriented tape momentum of the market also remains extremely short-biased as the Modified McClellan Oscillator Weekly continued to show a widening bearish gap last week. Apart from the fact that the readings from that indicator are far away from confirming the recent gains last week, it is also signaling that the current correction cycle is not over yet.

Long-Term Technical Condition

The long-term oriented trend of the market has not shown any significant signs of recovery. The WSC Global Momentum Indicator is still trading near the lowest level for years and signals that only 12 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. Also our Global Futures Long Term Trend Index continued its bearish ride (but is still holding up quite well and trading in solid bullish territory). This signals that the long-term oriented trend of U.S. equities is slightly reversing from quite elevated levels. Our WSC Global Relative Strength Index reveals that the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries (which is another indication for a risk-off market environment). Focusing on our long-term oriented tape indicators reveals that the Modified McClellan Volume Oscillator Weekly and especially the High-/Low Index Weekly again weakened last week while the percentage of stocks which are trading above their 200 day moving average showed some bullish gains.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model.

Bottom Line

On a very short time frame, we saw some minor ingredients for a typical intermediate bottom building process. Moreover, from a pure contrarian point of view, further bouncing into expiration cannot be ruled out at the moment. Nonetheless, we should not forget that the readings from our entire short-term oriented indicators still remain outright bearish from a pure signal point of view. As a matter of fact, the recent price action can be still categorized as oversold bounce. However – given the increased volatility – things could change quite quickly during the week. Therefore, the most advisable approach for aggressive traders is to watch the tape quality quite closely within the next couple of days. We will either see an increasing short-term oriented tape structure (which would be the final confirmation that the market hit an important intermediate low) or the recent bounce will just represent another good short-selling opportunity. Conservative members should remain on the side-line as we would like to see at least some further improvements/bullish signals within our indicator framework (especially within the Global Futures Trend Index) first. This ensures that the overall risk-/reward ratio of such a bet remains attractive. Right now, we are still more than 5 percent ahead of the curve (as we side-stepped the current correction) and, therefore, we have still enough risk budget available to wait for further confirmation. Moreover, we should not forget that the current tape structure of the market is a way too damaged to justify a stronger V-shaped recovery towards 2,850 at the moment. In our opinion, the most preferred scenario is that we see a stabilization/low quality rally into expiration, before further troubles might be due. As a matter of fact, there is no reason to be greedy at the moment.

Stay tuned!