September 27th 2020

Market Review

Despite the quite strong bounce on Friday, U.S. stocks finished the week mostly with losses. The Dow Jones Industrial Average dropped 1.8% in five trading days to end at 27,173.96. The S&P 500 closed 0.6% lower week to date at 3,298.46. Both the Dow and S&P 500 posted four-week losing streaks, their longest slides since August 2019, despite the gains on Friday. The Nasdaq in contrast had its first weekly gain in four weeks, rising 1.1% over that time period to finish at 10,913.56. Most key S&P sectors ended in negative territory for the week, led by the energy sector. Techs, discretionary and utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 26.4.

Short-Term Technical Condition

Although the S&P 500 bounced 1.6% on Friday, the short-term down-trend of the market remains well in force and even gained more bearish ground last week. From a pure price point of view, we can see that the S&P 500 closed 54 points below the bearish threshold from the Trend Trader Index. Furthermore, both envelope lines of this reliable price driven trend indicator are decreasing 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 technical pattern for a strong short-term oriented down-trend. Additionally, this is telling us that the current short-term oriented down-trend will definitely turn out to be more sustainable in its nature. A fact which can be also observed if we focus on the Modified MACD. Consequently, we would not be surprised to see further (strong) selling pressure ahead. Another interesting point is that the Modified MACD refused to confirm the bounce on Friday (since both trend-lines dropped to the lowest level for months on that day). This is another strong piece of evidence that the strong up-day on Friday was just an oversold bounce rather than being the start of a major trend-reversal. This view is also supported by the fact that the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of bullish divergences so far (as it also dropped to the lowest level for months during the week). So from a pure short-term oriented trend point of view, the market remains extremely short-biased.

More importantly, this negative view is also confirmed by short-term market breadth and, therefore, further selling pressure is highly likely. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are telling us that the underlying tape momentum of the market remains extremely weak kneed. In more detail this means that the number of declining volume and declining issues on NYSE is still outpacing its bullish counterparts. Not even the strong bounce on Friday caused any recovery in the gauges of these indicators. Hence, the strong up-day on Friday can be still categorized as oversold bounce rather than being the start of a new up-trend. Therefore, we strongly believe that it is a bit too early to start buying the dips. This picture is also widely confirmed by the NYSE New HighsNew Lows Indicator, as the numbers of new yearly lows overtook the new yearly highs.  As a matter of fact, the High-/Low-Index Daily flashed a small bearish crossover signal, which is another proof of evidence for our current correction scenario. The same is true if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). During the week, both indicators (20/50) dropped to their lowest levels since April. Consequently, the bounce on Friday was not able to push the majority of all NYSE listed stocks back to confirmative levels. The main reason, why we have not seen much stronger selling pressure yet, is due to the fact that (tech-heavy) large caps are still holding up quite well. However, in such a situation the market remains extremely vulnerable to negative driven news-flow and, therefore, we remain outright cautious as long as we do not see a significant improvement within the overall tape structure.

The picture on the contrarian side is telling us that there is still enough down-side potential left. This is mainly due to the fact that most of our fear indicators have not shown any signs of capitulation yet. The CBOE Volatility Index kept trading at moderate levels during the week, whereas the z-score from the All CBOE Options Put-/Call Ratio is still showing that the crowd still remains quite complacent for the time being. Additionally, we can see that the Smart Money Flow Index fell to a new low during the week, whereas the  WSC Capitulation Index is still indicating an extremely risk-off market scenario. Even from a pure seasonal point of view (Presidential Cycle and Decennial Cycle), we expect to see further selling pressure up until mid-October. Interestingly, the Decennial Cycle shows that – from a historical point of view – the market often faced a stronger but corrective bounce at the end of September. Given the fact that the latest bounce just relieved oversold conditions (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily) but did not lead to a major improvement of our tape structure, this historical pattern perfectly fits into our current outlook. Nevertheless, we would not be surprised to see at least a bit more bouncing at the beginning of the week since some of our contrarian indicators remains somehow supportive (Equity Options Call-/Put Ratio Oscillator and the  All CBOE Options Call-/Put Ratio Oscillator).

Mid-Term Technical Condition

Another reason why we remain strategically bearish is based on the fact that the mid-term oriented condition of the market also continued to weaken significantly last week. The most important signal is coming from the Global Futures Trend Index as its gauge plummeted to the upper range of its bearish consolidation area. Hence, the gauge has not only dropped to its lowest level since May, but more importantly, it also dropped below its important 60% threshold. So from a formal point of view, the market remains extremely short-biased (highly at risk for stronger pullbacks) as long as its gauge keeps trading below that important threshold. However, from a pure 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 not shown any weaknesses recently. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. This can be also seen if we focus on our Sector Heat Map as the momentum score from riskless money market finished the week unchanged (13.2%). Nevertheless, we can see that the momentum score of riskless money market has increased since beginning of August, which is another major red flag at the horizon. Consequently, it is definitely too early to change our strategic bearish view.

This view is also supported by the fact that mid-term oriented market breadth also continued to weaken considerably. During the week, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped to their lowest level for months. This is telling us that most NYSE listed stocks are per definition in a mid-term oriented down-trend at the moment. With such weak readings across the board, the chances for a sudden positive trend-reversal remain outright low. On top of that we can see that the Modified McClellan Oscillator Weekly flashed a bearish crossover signal, which is another indication for an outright weak (mid-term oriented) tape momentum. In such a situation, we would be extremely surprised to see sustainable gains ahead. Another outright concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly since both indicators continued to lose bullish ground. The latter one even flashed the expected bearish crossover signal and the first one seems to follow soon. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for a stronger correction. Also our advance-/decline indicators (Advance-/Decline Line Weekly, Advance-/Decline Line Daily) weakened last week, the only exception is the Advance-/Decline Volume Line. So all in all, we have currently a deteriorating tape structure all across. So even if we do not see a stronger pullback immediately, with such weak readings all across the board, there is absolutely no upside potential left as well. As a matter of fact we remain extremely cautious at the moment!

Long-Term Technical Condition

The long-term oriented uptrend of the market has also shown some signs of fatigue recently. This is mainly due to the fact that the WSC Global Momentum dropped 20 percentage points last week into the bearish territory. It is now indicating that only 48% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are in a long-term oriented up-trend at the moment (in the previous week this gauge showed a reading of 68%). This is another indication that the current pullback is definitely part of a larger correction cycle (rather than being just a healthy breather). In contrast, the readings from the Global Futures Long Term Trend Index continued to increase last week. This can be also observed if we focus on the Global Relative Strength Index, as the relative strength of all risky markets (except commodities) keeps trading far above the one from U.S. Treasuries. Basically, this has to do with the fact that U.S. Treasuries hardly act as safe haven anymore. However, we can also observe that long-term market breadth started to show some exhaustion, as the readings from our entire long-term oriented tape indicators weakened last week  (High-/Low Index Weekly, SMA 200 and the Modified McClellan Volume Oscillator Weekly even flashed a bearish crossover signal). This might be another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

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 strong up-day on Friday had zero positive impact on our indicator board (especially within short-term market breadth), we strongly believe that this move can be still described as corrective oversold bounce rather than the beginning of a new and sustainable uptrend. In other words, our entire indicator framework continued to worsen last week and, therefore, the risk for further increased selling pressure (even waterfall declines) remains high. Thus, we see absolutely no reason to change our strategic bearish outlook for the time being. So 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. As a matter of fact, the risk-/reward ratio still looks too low to justify a bargain hunt at the moment. Thus, our bearish view will remain unchanged as long as we do not see a significant recovery within our short- to mid-term oriented indicator framework. So in the end, we would recommend our conservative members to stay on the sideline, whereas aggressive traders should focus on the short-side as long as our short-term oriented indicator framework continues to worsen/remain bearish. Nevertheless, we would recommend to use close stops as the risk of nasty bounces remain high.

Stay tuned!