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March 6th 2022 |

Key Takeaways

  • No fundamental reason to change our cautious strategic outlook from January 16th
  • Sentiment hits extreme negative levels, thus, the risk for oversold bounces are accumulating
  • Stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment
  • New high in our WSC Inflation Proof Retirement Portfolio

Market Review |

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 1.3% over the week to 33,614.80. The blue-chip index notched its fourth straight losing week. The S&P 500 booked also a weekly loss of 1.3% to close at 4,328.87. The Nasdaq slumped 2.8% for the week to end at 13,313.44. Among the key S&P sectors, energy was the best weekly performer, while the financial sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, increased to 32.

Short-Term Technical Condition

Not surprisingly, the short-term-oriented price trend of the of the market remains bearish as the S&P 500 closed 30 points below the bearish threshold of the Trend Trader Index. Additionally, both envelope lines of this price driven trend indicator are still dropping on a quite fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows (which is another typical technical pattern for a strong short-term-oriented down-trend). In this context, the S&P 500 is extremely far away from getting back into a short-term-oriented price driven uptrend. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as it keeps trading in deep bearish territories. Thus, the indicator is still far away from confirming the recovery of the S&P 500 from its previous low two weeks ago. Moreover, the price momentum of this negative trend also remains negative since the Modified MACD has not turned bullish so far. Even if a bullish crossover signal on low levels indicated some kind of short-term stabilization, the situation would remain bearish biased as long as both trend lines do not show stronger sigs of positive momentum. However, currently our entire short-term-oriented trend indicators have not shown any positive moves recently and, therefore, the short-term-oriented down-trend of the market remains well in force.

Although we have seen some minor signs of improvements on low levels recently, the quality of this short-term-oriented down-trend still remains quite high. As a result, any upcoming bounces might not have the potential to trigger a sustainable trend-reversal for the time being. While the Modified McClellan Oscillator Daily succeeded to flash a tiny crossover signal, the Modified McClellan Volume Oscillator Daily, in contrast, widened its bearish gap. These movements are indicating that the underlying momentum of advancing stocks and advancing volume still remains weak-kneed or even deteriorated. A setting which is also confirmed by the NYSE New HighsNew Lows Indicator. Although we have seen some pick up in the number of new highs recently, the number of new lows was still twice as high at the end of the week. As a matter of fact, the High-/Low Index Daily is still far away from flashing a bullish crossover signal (although it slightly improved compared to the previous week). Thus, the situation will remain bearish as long as we do not see a significant pickup in new highs. 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). Both gauges finished the week nearly unchanged but are still trading far below their bullish 50 percent threshold. Another red flag is coming from short-term down-volume (Upside-/Downside Volume Index Daily). All these facts are telling us that the underlying tape structure of the market still remains damaged at the moment and, therefore, it is still a bit too early to bet on a sustainable counter-trend rally!

Analyzing market sentiment also shows that the ingredients for another oversold bounce are again accumulating. The Smart Money Flow Index was holding up quite well recently, whereas the WSC Capitulation Index also dipped into bullish territory last week. Moreover, we can see that the number of bears in the AII Bulls & Bears survey jumped back to 53%. The last time this gauge reached similar levels was in mid-January, which was then followed by a stronger but non-sustainable rally attempt into mid-February. Worth mentioning is the fact that the option market was also outright bearish back then. Currently, most of our option based indicators remain more or less neutral for the time being (Daily Put-/Call Ratio All CBOE Options, WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). Thus, we would not expect that any upcoming bounce will turn out to be strong enough to trigger a sustainable trend-reversal.

Mid-Term Technical Condition

This view is also confirmed by the fact that the mid-term-oriented down-trend of the market remains well in force. Although we saw some recovery on low levels, the Global Futures Trend Index keeps trading far below its 60 percent threshold. As long as we do not see a stronger recovery here, it is definitely a way too early to change our cautious strategic view. Moreover, we can see that the mid-term-oriented price trend of the S&P 500 remains weak-kneed since the WSC Sector Momentum Indicator finished the week nearly unchanged at quite low levels. This is another confirmation for our cautious strategic view, since a lot of sectors within the S&P 500 continued underperforming riskless money market on a relative basis. This view is also supported by examining our Sector Heat Map as the momentum score of riskless money market trades at 24.4%.

This negative mid-term-oriented down-trend is also accompanied by a very high trend quality. Once again, our Modified McClellan Oscillator Weekly widened its bearish gap and dropped to its lowest level for years. This indicates that the underlying momentum of mid-term-oriented advancing stocks remains outright negative. The next serious mid-term-oriented tape signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators considerably strengthened their bearish signals last week. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for further major troubles down the road. In addition, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and especially the Advance-/Decline Volume Line) dropped towards new lows! Only the gauges of the percentage of stocks which are trading above their mid-term-oriented simple moving average (100/150), in contrast, finished the week nearly unchanged. Still, they remain deeply bearish from a purely signal point of view. So, all in all, the mid-term-oriented tape condition of the market is confirming our view that is a way too early to bet on a sustainable trend reversal (even though the chances for a stronger oversold bounce are increasing on a very short-term time frame).

Long-Term Technical Condition

The long-term technical picture of the market remains unchanged. Our WSC Global Momentum Indicator slightly increased by 3 percentage points, but still indicates that only 29% 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. This is another confirmation that the global bull market is extremely weak-kneed at the moment. Also, our Global Futures Long Term Trend Index continued its long lasting bearish ride and dropped to the lowest level for months. In addition, we can see that the relative strength score of most risky markets (apart from commodities) keeps trading below riskless money market (although some of them have shown some improvements recently). Analyzing our long-term-oriented tape indicators reveals that the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly weakened, while the SMA 200 finished the week where it started. As already pointed out in our last week’s outlook, this is another piece of evidence that the market looks vulnerable for further (and stronger) disappointments.

Model Portfolios

Last week, there were no changes in the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Since the momentum score of technology dropped below average and below the S&P 500, we received a sell signal for that ETF in our WSC Sector Rotation Strategy. Thus, the WSC Model Portfolio Composite is also changing small parts of its allocation. Moreover, we are proud to announce that our WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

Given the quite weak-kneed readings all across the board, there is no fundamental reason to change our cautious outlook yet. On a very short-time the chances for an oversold bounce are accumulating. However, given the quite weak-kneed readings all across the board, any upcoming gains can be still classified as oversold bounce rather than the beginning of a new and sustainable uptrend. This view remains unchanged, as long as we do not see a stronger recovery in our indicator framework. A fact, which can also be observed within our Big Picture Indicator (as its gauge kept jumping around within its bearish consolidation quadrant last week). That being said, we think conservative members should stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of strategical bargain hunt at the moment.

Stay tuned!