admin No Comments

August 15th 2021

Market Review

U.S. stocks finished the week with a mixed performance. Closing at 35,515.38, the Dow Jones Industrial Average increased 0.9% in five trading days. The S&P 500 logged a 0.7% gain for the week to finish at 4,468.00. The Nasdaq Composite, in contrast lost 0.1% during the week and finished at 14,822. Nearly all key S&P sectors closed in positive territory, led by the materials sector. Energy was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.5.

Short-Term Technical Condition

Once again, the market shows the same setting as in the previous weeks. From a purely price point of view, the short-term oriented trend of the market remains intact since the S&P 500 managed to close 84 points above the bearish envelope line from the Trend Trader Index. As a result, the short-term oriented up-trend should remain supportive as long as the S&P 500 does not drop below 4,384 (lower threshold of the Trend Trader Index). In addition, both envelope lines of this reliable indicator are still increasing, which is another positive short-term oriented price driven trend-signal. Although these signals look quite constructive in the first place, we can also see that the underlying momentum of this price driven up-trend remains weak. Although the Advance-/Decline 20 Day Momentum Indicator slightly increased for the week since it succeeded to jump back into the bullish area, its absolute level remains quite low (compared to the current levels of the S&P 500). Furthermore, the Modified MACD has not shown any serious improvements yet, which is another indication for a low-momentum environment. Consequently, this indicator is not confirming the latest price action of the S&P 500. So, from a purely trend point of view, the latest gains can, once again, still be classified as large-cap overshooting rather than being a healthy and sustainable uptrend (at least from a purely trend-point of view).

This can be better seen if we focus on the current upside participation within the current short-term oriented uptrend. Even though we saw smaller improvements in our short-term oriented market breadth indicators, their signal strength still remains quite weak-kneed. Although the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed an increasing bullish gap, their signals are still a bit too weak to be taken too seriously at the moment (since any stronger down-day could lead to a bearish crossover signal again). Additionally, their crossover signals should be much stronger if we consider the current levels of the S&P 500. A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily, as it finished the week nearly flat. Normally, a healthy uptrend should always be accompanied by strong up volume and by an increasing number of advancing stocks. Currently, this is not really the case right now (which is another indication that the recent rally is quite narrow based in its nature). This picture is also supported by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges finished the week unchanged and the SMA 50 has still not managed to get back into the bullish territory. This is just another piece of evidence that the broad market is still struggling to get back on track. However, a positive signal is still coming from the NYSE New Highs/New Lows Indicator, as the number of new yearly highs is still higher than the number of new lows. Thus, the High-/Low-Index Daily remains bullish, although it has not succeeded to widen its bullish gap compared to the previous week. So, from a purely short-term oriented tape point of view, the recent rally can still be classified as quite narrow based in its nature. This is a quite tricky situation, since a trend-reversal in these few stocks could easily trigger a stronger pullback since there is no safety net around to cushion such a move. Thus, the degree of confidence that the current short-term oriented up-trend will continue remains low.

On the contrarian side, most of our option- and sentiment based indicators (AII CBOE Put-/Call Ratio, AII Bulls/Bears Survey, WSC Dumb Money Indicator, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the AII Bulls & Bears Survey) look quite neutral for the time being. Only the WSC Capitulation Index has shown some strength recently, although its gauge is still indicating a risk-on market environment. Unchanged compared to last week the market should approach rough waters within the next couple of weeks (Presidential Cycle). This is based on the fact that – historically – the market usually hits its high in a post-election year around mid-/late summer. Given the current tape structure, we would not be surprised to see increased volatility sooner or later.

Mid-Term Technical Condition

If we focus on the mid-term oriented condition of the market, we can see that the trend on that time-frame still remains intact. The gauge of the Global Futures Trend Index closed in the middle part of its bullish consolidation area. As a result, the overall mid-term oriented trend condition should remain constructive as long as this gauge does not drop below 60 percent. However, given the fact that the S&P 500 closed at record highs on Friday, this gauge should also be a bit stronger in our point of view. Our WSC Sector Momentum Indicator finished the week flat, but still keeps trading at solid bullish levels. This indicates that most sectors within the S&P 500 are still in a mid-term oriented price driven up-trend so far. This can also be observed if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading above the one from riskless money market (currently at 0%).

More importantly, the current mid-term oriented uptrend of the market is still not confirmed by mid-term oriented market breadth. In other words, our mid-term oriented tape indicators are still showing a bearish biased picture. Thus, the degree of confidence in the current mid-term oriented uptrend trend remains low. The Modified McClellan Oscillator Weekly continued to widen its bearish gap, showing that the mid-term oriented tape momentum of the market remains outright weak at the moment. Also, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) has not succeeded to show any signs of major improvements so far. The SMA 100 is still trading in the bearish territory, whereas the SMA 150 is only trading a few percentage points above its bullish threshold. Thus, both indicators have formed a huge bearish divergence compared to the current levels of the S&P 500. Another serious warning signal is coming from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Both indicators continued to weaken since the Upside-/Downside Volume Index Weekly strengthened is bearish signal, whereas the Advance-/Decline Index Weekly seems to roll over into bearish territory soon. In the past, all stronger pullbacks were accompanied by bearish signals in both indicators. Thus, we remain alert. Another negative signal is coming from our entire advance-/decline indicators (Advance-/Decline Volume Line , Advance-/Decline Line Weekly and Advance-/Decline Line Daily) since all of them have not confirmed the latest level of the S&P 500. With such weak mid-term oriented tape signal all across the board, the market looks extremely vulnerable for stronger disappointments. Hence, there is no fundamental reason for us to change our cautious view.

Long-Term Technical Condition

The long-term oriented technical picture of the market slightly weakened. Our Global Futures Long Term Trend Index marginally decreased, although it keeps trading at high levels. This is indicating that the long-term oriented up-trend of U.S. equities remains intact. Basically, we receive the same picture globally. Our WSC Global Momentum Indicator continued its bearish ride, but still shows that 71% 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. Thus, the current bull market remains intact, although it also has started to lose some grip recently. A fact, which can also be observed in out WSC Global Relative Strength Index, since all risky markets continued to lose momentum vs. riskless money market. If we examine our long-term oriented tape indicators, we can see that the SMA 200 remained nearly unchanged, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly declined.

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 Dynamic Variance Portfolio. Moreover, we are proud that the WSC All Weather Model Portfolio reached a new-all time high last week.

Bottom Line

Despite the fact that the current uptrend remains intact, the quality of this trend still looks quite low at the moment. In other words, the current rally is still extremely narrow based in its nature and, therefore, a trend-reversal in a few heavy weighted stocks could easily trigger a sharp pullback since there is no safety net around to cushion such a move. As a matter of fact, the risk-/reward ratio still looks too low to justify a strategic long position at the moment (even if we see further large-cap driven overshooting on a very short time frame). However, in the past every stronger trend-reversal/correction started with an outright weak tape structure, but not every week tape structure lead to a correction. Consequently, there is still a small chance that the current narrow based rally starts to broaden out again sooner or later. But currently, the premium for a strategic long position is simply too low since the chance for a momentum reversal remains too high. This cautious view will remain unchanged until our indicator framework would flash an all clear signal again. Thus, we think conservative members should stay on the sideline, whereas experienced short-term traders should focus on the short side if we see a break in the Trend-Trader Index.

Stay tuned!