December 30th 2018

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 2.8 percent over the week to close at 23,062.40. The S&P 500 logged a 2.9 percent rise for the week to finish at 2,485.74. The Nasdaq ended at 6,584.52 and jumped 4.0 percent over the past week. It was the first weekly gain for all three indexes since the end of November. All three indexes are still nursing sharp month-to-date losses, however, with the S&P down 9.9 percent, the Dow off 9.7 percent and the Nasdaq down 10.2 percent. Nearly all key S&P sectors ended in positive territory for the week, led by discretionary; the utilities sector was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 28.3.

Short-Term Technical Condition

Despite the fact that the market finished the week with solid gains, the readings within our short-term oriented trend indicators have been developing moderately so far. From a pure price point of view, the short-term oriented trend of the market remains outright bearish. The S&P 500 closed far below the bearish threshold from the Trend Trader Index (75 points) and also both envelope lines of the index are still decreasing on a quite fast pace. This indicates that within the past 20 days we saw extremely lower highs and lower lows, which is another typical pattern if the market remains outright short-biased. This can be also seen, if we focus on the Modified MACD. Although its short-term oriented gauge showed some small signs of recovery on Friday, it refused to flash a bullish crossover signal and is still trading at the lowest level for months. Another bearish signal is coming from the Advance-/Decline 20 Day Momentum Indicator, as its gauge is far away from being bullish and did not really confirm the strong gains from last week. As a matter of fact, the recent rally can be still categorized as an extremely oversold bounce rather than the start of a new and more importantly, sustainable up-trend.

This picture is widely confirmed by our short-term oriented market breadth indicators as they have absolutely not confirmed the bounce from last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily plummeted once again last week and to their lowest levels for months and have, therefore, not confirmed the latest bounce from last week. This signals that the underlying momentum and volume of advancing stocks on NYSE have absolutely not recovered at all during the bounce process at the end of the week. Moreover, this view is also confirmed by the NYSE New HighsNew Lows Indicator, which showed again strong peaks in the number of new lows, whereas the number of new yearly highs was nearly zero! Accordingly, the High-/Low-Index Daily is still trading at very high bearish absolute levels (although it recovered compared to the previous week on a relative basis). The only positive signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50), as both gauges recovered slightly last week, but are still trading at the lowest levels for years. Thus, the chances for a sustainable up-trend are extremely low at the moment. So all in all, the latest bounce was nothing more than a typical oversold technical market reaction which is quite typical after a stronger waterfall decline (please have a closer look at the strategy review from our previous Market Comment).

On the contrarian side, we can see that the option market is outright bearish at the moment and, therefore, it could be possible that the current volatile stabilization process might continue until mid-January. The main reason for such a case is due to the fact that the put-/call ratio has reached the highest level for years. As approximately 90 percent of all uncovered options are an also-ran, it could be possible to see at least stable prices until 18th of January (when the option expiring date is due). Moreover, we can see that market sentiment is also quite negative, which could be another catalyst for a bear-market stabilization/rally. However, apart from that fact the picture looks quite grim. This is mainly due to the fact that Smart Money has not shown any major signs of recovery, whereas the WSC Capitulation Index is still indicating a risk-off market scenario.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market deteriorated once again last week. The Global Futures Trend Index dropped to the absolute bottom and thus, to its lowest level for years! This index 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! As a matter of fact, we can say that the latest recovery is just part of a typical bull-trap within the ongoing bear-market! Also, our WSC Sector Momentum Indicator dropped once again into further bearish territory, signaling that most sectors within the S&P 500 are underperforming riskless money market on a relative basis. This view is also confirmed by the readings of our Sector Heat Map as the momentum score of riskless money market strengthened once again (by 12.3 percentage points) and jumped to 82.8 percent. And now, already eight sectors are trading below the one from riskless money market. As already pointed out last week, this is just another indication for our preferred scenario that the recovery will just turn out to be a bear-market rally instead of a broader-based recovery!

Examining mid-term oriented market breadth reveals a recovery as the picture generally improved compared to the previous weeks. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly), as all of them gained some bullish ground last week and are, therefore, confirming the latest move from the S&P 500. Apart from that fact, the mid-term technical condition of the market still looks quite grim at the moment. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) are still trading far below the bullish threshold, although they slightly increased for the week. On top of that, also the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly remain absolutely bearish at the moment, indicating an outright weak mid-term oriented tape condition. Basically the same is true if we focus on the Modified McClellan Oscillator Weekly, which dropped once again to its lowest level for months. The main reason, why we saw a stronger bounce was due to the fact that most of our indicators slightly recovered from outright bearish readings, which is quite typical after such a sell-off we saw two weeks ago.

Long-Term Technical Condition

The long-term oriented trend of the market weakened again last week. The WSC Global Momentum Indicator indicates that only 8 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are still trading above their long-term oriented trend lines. This is underlying our view that the global-bear market is fully in force right now. This view is also confirmed by our Global Futures Long Term Trend Index, which continued its bearish ride last week. And although our WSC Global Relative Strength Index showed some small improvements last week, the relative strength of all risky markets is trading below the one from U.S. Treasuries. These facts are another indication for our long-term oriented risk-off market scenario. Focusing on our long-term oriented tape indicators reveals that the Modified McClellan Volume Oscillator Weekly and especially the High-/Low Index Weekly weakened again last week while the percentage of stocks which are trading above their 200 day moving average showed some bullish gains. So all in all, the long-term condition of the market still looks outright grim which underlines our bear-market case (at least from a current point of view).

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. The allocation of the WSC Global Tactical ETF Portfolio and the WSC Sector Rotation Strategy remains unchanged. Worth mentioning is the fact, that three out of four model-portfolios are strongly outperforming their benchmarks at the moment.

Bottom Line

Our outlook remains unchanged compared to last week. In our opinion, the market is just in the middle of a bear market and as a matter of fact, any upcoming gains should be limited in price and time. This applies also to the latest recovery as it can be still classified as typical bear-market rally rather than being the start of a new and sustainable uptrend. Consequently, we remain outright bearish from a pure strategic point of view. This case remains unchanged as long as we do not see a stronger recovery within our indicator framework. However, on a very short-time frame the market is recovering from outright oversold conditions. Such a bear market stabilization phase could normally last from several days up to several weeks. Consequently, it is absolutely essential not to get greedy if we see further bouncing down the road. From a pure risk-/reward point of view, such a bear market rally is not an attractive bet to play at all, since it is nothing more than picking up pennies in front of a steam roll. As a matter of fact, we would advise our conservative members to stay on the side-line, whereas our aggressive members should focus on the short-side as long as we do not see a significant recovery within our short-term oriented indicator framework.

Stay tuned!