August 24th 2019

Market Review

Mainly due to a strong sell-off on Friday, U.S. stocks finished the week in negative territory. The Dow Jones Industrial Average dropped 1.0 percent over the week to 25,628.90. The losses brought the Dow’s decline for August to more than 4 percent. The S&P 500 declined 1.4 percent for the week to finish at 2,847.11. The Nasdaq slipped 1.8 percent for the week to end at 7,751.77. Nearly all key S&P sectors finished in the red for the week, dragged by materials. Utilities were the only gainers. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, traded near 19.9.

Short-Term Technical Condition

From a pure price point of view, the short-term down-trend of the market remains well in force and even gained more bearish ground on Friday. This is mainly due to the fact that the S&P 500 closed 46 points below the bearish threshold from the Trend Trader Index. Consequently, the short-term oriented price trend of the market remains bearish as long as the S&P 500 does not close above 2,935 (upper threshold from the Trend Trader Index). Also from a pure structural point of view, the short-term oriented price trend of the market remains quite bearish biased, as both envelope lines of the Trend Trader Index are still decreasing (on a fast pace). The situation looks similar if we analyze the underlying momentum of this short-term oriented price trend. This becomes quite obvious if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator as both indicators finished the week in bearish territory. Nevertheless, we can also see that both indicators have definitely not confirmed the strong sell-off on Friday, as their gauges were holding up relatively well, if we consider the fact that the S&P 500 dropped by 2.6 percent on that day. This can be seen as quite encouraging signal, although our entire short-term oriented trend indicators still remain bearish from a pure signal point of view.

Basically, the same is true if we focus on our short-term oriented tape indicators (as most of them have also started to show some kind of bullish divergences and, therefore, did not confirm the sell-off on Friday).  The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators succeeded to gain bullish ground last week and the first one even flashed a bullish crossover signal during the week (which was finally broken on Friday). In addition, the spike in new lows on Friday was relatively weak compared to the previous low (in early August) and the following re-test two weeks ago. Especially, if we consider the fact that on Friday the S&P 500 dropped to 2,834 on an intraday basis.  Moreover, we can see that the number of stocks hitting a fresh new high remained quite supportive, even on Friday. As pointed out in our previous outlook, this fact can be seen as a quite strong ingredient that the market should not be too far away from an important bottom. Consequently, this is another piece of evidence that the first low at 2,822 represents an outright strong intermediate bottom. This picture is also confirmed from the High-/Low Index Daily, which was also holding up quite well last week. The only weak breadth signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both indicators showed a quite solid development during the week, they dropped on Friday, offsetting their weekly gains.

The situation on the contrarian side remains almost unchanged compared to the previous week. Although we had seen further selling pressure towards the latest correction low in early August, we received further evidences that 2,822 represents an outright important low (at least on a short-term time perspective). Again, the CBOE Volatility Index (VIX) traded at significantly lower levels on Friday, indicating that a lot of negative expectations are already priced in. This is a typical signal that we have seen the worst already, at least in a short-term time perspective. If we focus on our option based indicators (Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the z-score from the CBOE Put-/Call Ratio Daily) as well as on market sentiment, we can see that they still remain quite bullish. As already mentioned last week, according to the Presidential Cycle the market should also face some seasonal tailwinds up until mid-September. The only negative signal is coming from the Smart Money Flow Index, which clearly confirmed the latest sell-off on Friday. So from a pure contrarian point of view, it also looks like that we should not be too far away from an important bottom.

Mid-Term Technical Condition

This would also explain that the mid-term oriented uptrend of the market slightly strengthened last week (although the market finished the week in negative territory). This is mainly due to the fact that our Global Futures Trend Index recovered significantly last week and has, therefore, not confirmed the sell-off on Friday. Despite the fact that this can be seen as an outright bullish signal, we should not forget that its gauge is still slightly trading below its important 60 percent threshold. So from a pure formal point of view, the current correction cycle is definitely not over yet. Another positive signal is coming from the WSC Sector Momentum Indicator as its gauge was still holding up quite well last week. This indicates that – from a pure price point of view – the mid-term oriented uptrend of the market remains intact. Consequently, this is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. The only slightly weak signal is coming from our Sector Heat Map as the momentum score of riskless money market increased to 23.4 percent.

The mid-term oriented market breadth shows the same setting as in the previous week. Consequently, the situation still looks a bit intermingled at the moment. On the one hand, our Modified McClellan Oscillator Weekly finally flashed a bearish cross-over signal last week, whereas the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped also significantly on Friday. As a matter of fact, both indicators have clearly confirmed the sell-off on Friday.  But on the other hand, we can see once again that mid-term oriented advancing issues as well as mid-term oriented up-volume were still holding up quite well (although only the Advance-/Decline Index Weekly succeeded to stay above its bearish counterpart). In addition, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any bearish moves recently or even gained more bullish ground (Advance-/Decline Volume Line). So all in all, the current technical condition of the market still looks quite weak-kneed but still somehow too supportive to justify another significant correction from current levels or even the start of new bear-market – at least from a current point of view. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented trend of the market looks quite damaged at the moment. This is mainly due to the fact that only the Global Futures Long Term Trend Index still remains quite bullish, whereas our two other trend indicators still remain quite bearish (WSC Global Momentum Indicator and the WSC Relative Strength Indicator). This is telling us that the global bull-market is slightly running out of steam and, therefore, it could be possible that any upcoming recovery rally into September/October might be the last burst of the ongoing bull market. This will be definitely the case, if any upcoming short-term oriented relieve rally will not have the power to bring these gauges back to confirmative levels. Moreover, long-term oriented market breadth does also not look quite supportive at the moment as apart from the High-/Low Index Weekly, most of our tape indicators remain quite weak (Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day simple moving average).

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week.

Bottom Line

Our bottom line remains almost unchanged compared to last week. Despite the fact that we saw even further major evidences that 2,822 represents an outright strong intermediate low, we think it is still a bit too early for conservative investors to get back into the market. This is mainly due to the fact that the bullish divergences/signals are still a bit weak-kneed at the moment. Consequently, the opportunity costs for conservative members of not being invested still remain extremely low for the time being. So even if 2,822 represents the final low, we would like to see at least some bullish signals within our indicator framework (WSC Short-Term Composite and WSC Mid-Term Composite) together with some bullish signals within our short-term oriented trend indicators, before we would advise our conservative members to get fully back into the market again. This ensures that the overall risk-/reward ratio of such a bet remains attractive. As things could change quite quickly in such a market environment, we would strongly advise them to monitor both indicators quite closely within the next couple of days. Aggressive traders should stay on the sideline and should focus on the long-side again if we see a bullish signal within the WSC Short-Term Composite together with some bullish signals within our short-term oriented trend indicators. On the other hand side, they should re-open a short-position if the S&P 500 breaks below 2,800. The main idea behind that call is that if we see a break below 2,800 the bottom building scenario is definitely off the table and we will see further selling pressure ahead. On the other hand, if the market hits an important low at 2,822 (preferred scenario), it could be possible that the market will jump a couple of percent within a few days.

Stay tuned!