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July 17th 2021

Market Review

U.S. stocks wrapped a volatile week that left the major averages finally lower for the week. The Dow Jones Industrial Average lost 0.5% for the week to close at 34,687.85. The S&P 500 dipped 1% from last Friday’s close to end at 4,327.16. The Nasdaq fell 1.9% during the same period to finish at 14,427.24. Despite the week’s losses, all three benchmarks hit record highs during the week. And the Dow is still up 13% for the year and sits just 1.2% from an all-time high. The S&P 500 is up 15% on the year and is 1.5% below its record level. Most key S&P sectors closed lower for the week, led by the energy sector. Utilities were the biggest gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 18.5.

Short-Term Technical Condition

Despite the fact that the S&P 500 is just trading 1.5% below its all-time high, the short-term trend structure of the market has started to weaken significantly. From a purely price point of view, the short-term oriented uptrend remains intact since the S&P 500 closed 36 points above the bearish threshold from the Trend Trader Index. However, the situation looks completely different if we analyze the underlying momentum of this short-term oriented uptrend. There we can see that the Modified MACD flashed a small bearish crossover signal last week. This indicates that the short-term oriented uptrend started to show stronger signs of exhaustion last week. This can also be seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that the S&P 500 hit a new all-time high on Tuesday, the gauge of this reliable indicator dropped significantly for the week (and, therefore, closed below its bullish threshold on Friday). Given the fact that this indicator tends to be a leading one, this huge bearish divergence can be definitely interpreted as red flag on the horizon. However, worth mentioning is the fact that it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, during a consolidation period (or even after a stronger rally). Thus, short- to mid-term market breadth will give guidance, if any upcoming short-term oriented price break will be just part of a healthy breather or will lead to stronger sustainable losses down the road.

Unfortunately, short-term oriented market breadth had to take a hard hit during the last couple of trading sessions. This is a quite surprisingly development, given the fact that the S&P 500 is trading shy below its all-time high. As a result, the risk of stronger declines has definitely increased during the past couple of days. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show major signs of exhaustion and dropped significantly for the week. This indicates that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. This picture is now also confirmed by the NYSE New Highs minus New Lows Indicator, as the number of new lows started slightly to pick up, whereas the number of new yearly highs steadily decreased during the week! This shows, that the latest high was mainly driven by large-cap mega (tech) stocks rather than being the result of a broad based demand. Consequently, the High-/Low Index Daily also weakened, although it is still bullish from a purely signal point of view. In consequence, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) dropped deeper into bearish territory. To be more precise, currently there are only 23/29 percent of all NYSE listed stocks which are trading above their 20/50 days moving average. These are the lowest numbers we have seen this year. But more importantly, both indicators have formed an outright bearish divergence to the current levels of the S&P 500. A fact, which is also true if we focus on the Upside-/Downside Volume Index Daily. So all in all, the with such weak readings the chances for further sustainable gains on the horizon are diminishing on a fast pace. That does not necessarily mean that we see a stronger down-leg immediately, but with such weak numbers the upside potential of the market also looks extremely capped at the moment.

On the contrarian side, the market is slightly oversold (Upside-/Downside Volume Ratio Daily), plus we saw some elevated fear in the option market (AII CBOE Put-/Call Ratio), whereas the WSC Capitulation Index is still indicating a risk-on market environment. All these facts are short-term supportive and, therefore, another rally attempt and/or further volatile consolidation into late July cannot be ruled out. However, from a seasonal point of view (Presidential Cycle) the market should approach rough waters within the next couple of weeks. This is based on the fact that – historically – the market usually hit its high in a post-election year around late July/early August. Given the current tape structure, such a scenario looks quite likely, at least from the current point of view.

Mid-Term Technical Condition

Given the fact that the S&P 500 is still trading near record highs, the mid-term oriented uptrend of the market still remains well intact. Although our reliable Global Futures Trend Index dropped by a few percentage points, is still trading in the upper part of its bullish consolidation range. As a matter of fact, the current technical condition of the market can still be classified as supportive rather than corrective – at least from a purely signal point of view. However, if we consider the rapid decline in short-term market breadth, we would not be surprised to see strong negative momentum sooner or later. But for now, the gauge still remains supportive. Therefore, further consolidation into deeper July cannot be ruled out (at least from a purely signal point of view). This view is also confirmed by the WSC Sector Momentum Indicator, which even managed to reach its highest level for months. This signals that most sectors within the S&P 500 remain in a strong price-driven mid-term uptrend (which is not a surprise at all given the current index level). A fact, which can also be observed if we focus on our Sector Heat Map, since the momentum score of riskless money market remains at 0 percent. Despite the fact that these signals remain quite strong in their nature, mid-term market breadth is drawing a different picture.

One reason for our cautions view is based on the fact that our entire mid-term oriented breadth indicators weakened last week (and some of them even significantly). Thus, they are not confirming the strong mid-term oriented price driven uptrend of the market anymore. First, our Modified McClellan Oscillator Weekly rolled over into bearish territory (although on very high levels). Second, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) came down substantially last week and the SMA 100 even dropped into deep bearish territory. The same is true if we have a look at the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. While the latter one succeeded to stay at least bullish, the first one flashed a bearish crossover signal. In the past, bearish readings within these indicators (in combination with a strong negative momentum/bearish readings in the Global Futures Trend Index) mostly led to a stronger correction. And while our Advance-/Decline Line Weekly was holding up quite well, the Advance-/Decline Line Daily weakened and the Advance-/Decline Volume Line even plummeted to the lowest level for months. As a result, all of them have formed serious bearish divergences if we consider the current levels of the S&P 500. Sooner or later, these divergences will be sorted out. Consequently, we remain extremely cautious at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market shows again the same intermingled picture as in the previous week. Once again, our Global Futures Long Term Trend Index succeeded to improve last week and indicates that the long-term oriented price driven uptrend of U.S. equities remains intact. And despite the fact that our WSC Global Momentum Indicator slightly decreased, it shows that still 77% 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 the relative strength of all risky markets slightly improved compared to the previous week and all sectors are again trading above U.S. Treasuries. But on the other side, all of our long-term oriented tape indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, SMA 200) weakened for the week.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the momentum score of industrials fell below average and below the average from the S&P 500, we received a sell signal for that ETF within the WSC Sector Rotation Strategy.

Bottom Line

Despite the fact that the S&P 500 is just trading shy below its all-time high, the technical picture of the market deteriorated significantly last week. As a result, the current market environment is getting increasingly bearish biased in its nature. Especially, the bearish readings within our short-term oriented tape indicators in combination with a weakening mid-term oriented trend-structure is telling us that there is a good chance that the market is in the middle of a bearish-biased top building process. In the best case, we see another contrarian driven non-sustainable rally attempt towards the latest high (in combination with further weakening or non-confirmative signals on a short- to mid-term time perspective) to complete a text-book like top-building process. Currently, we are not completely there yet since there are still some signals which do not fit into the puzzle right now. Thus, we are still a bit early with our call. This can also be seen if we focus on our Big Picture Indicator, which just dropped into the bullish biased consolidation quadrant. Thus, there is still a chance that the current fragile market environment will transform back into a healthier set-up (albeit not our preferred scenario). However, in the end we think it is definitely time to get a more cautious view as things could change quite quicky during the week. As a result, we think it is time for conservative members to take profits on strong days and to place a stop-loss limit at 4,255 (intraday). This stop-loss should remain in place as long as we do not see any improvements within our indictor framework. Aggressive traders should close profitable long positions/highly sensitive call options. Experienced short-term traders should focus on the short-side as soon as we see a short-term trend break in the Trend Trader Index and as long as our entire short-term- to mid-term oriented tape indicators continue to deteriorate. A break below 4,291 would pave the way towards 4,255 and then towards 4,166. However, use close stops to avoid being squeezed on strong intra-day bounces.

Stay tuned!