November 25th 2018
U.S. stocks finished the holiday-shortened week with deep losses. The Dow Jones Industrial Average slumped 4.4 percent over the week to 24,285.95. The S&P 500 tumbled 3.8 percent for the week to finish at 2,632.56. The Nasdaq notched a week-on-week decline of 4.3 percent for the week to end at 6,938.98. Last week’s performances for all three major indexes marked their worst Thanksgiving weeks since 2011. Among the key S&P sectors, all sectors ended lower for the week, with technology plunging the most. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, traded near 21.5.
Short-Term Technical Condition
Our entire short-term oriented indicators clearly turned bearish last week. From a pure price point of view, we can see that the S&P 500 closed 61 points below the bearish threshold from the Trend Trader Index. In this context, the S&P 500 is extremely far away from getting back into a short-term oriented uptrend. Furthermore, both envelope lines of this reliable indicator are still decreasing on a quite fast pace, which is another typical technical pattern for a strong short-term oriented down-trend. But the case is slightly different if we focus on the Modified MACD. Despite the fact that this indicator flashed a bearish crossover signal, it has also formed a stronger bullish divergence recently. This is mainly due to the fact that its short-term oriented gauge has not confirmed the latest closing low from the S&P 500. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator which was holding up quite well, given the fact that the S&P 500 dropped slightly below its latest closing low (and not below its intra-day low) in October. This is not a big surprise at all. As already mentioned last week, we expected to see some stronger bullish divergences within our short-term oriented trend-indicators in case of a re-test. This fact supports our view that the market remains in a quite volatile and intermediate stabilization process. Moreover, we said that it was not quite unusual to see a lot of changing signals within our short-term oriented trend indicators during that process. As a matter of fact, short- to mid-term market breadth remains key area of focus right now.
If we focus on our short-term oriented tape indicators, we can see that all of them declined for the week. Basically, this is not a big surprise at all if we consider the latest price action of the market. Nevertheless, their overall readings could have been definitely worse, if we consider the fact that the market finished the week with deep losses. To be more precise, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal, indicating major signs of exhaustion for the underlying momentum and volume of all advancing stocks on NYSE. This picture is now also widely confirmed by the NYSE New Highs – New Lows Indicator, which showed a very strong peak in the number of new lows on Tuesday, whereas the number of new yearly highs was nearly zero! Consequently, the High-/Low-Index Daily grew further into bearish territory. As a matter of fact, 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 further into bearish territory. To be more precise, right now there are only 21/25 percent of all NYSE listed stocks which are trading above their 20/50 days moving average! Despite the fact that the current tape situation looks outright grim at the moment, we can also see a lot of bullish divergences in their readings. For example, the total number of new lows is (with the exception of the peak on Tuesday) was much lower compared to the latest correction low in October! This is an outright bullish signal as it is telling us that the broad market was holing up quite well. Basically, the same is true if we focus on the stocks which are trading above their short-term oriented moving averages (20/50). Also the short-term oriented gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are trading higher compared to October whereas the CBOE Volatility Index was also trading much lower compared to back then. So all in all, this is telling us that the intra-day low from the S&P 500 at 2,603 at the end of October represents an outright strong support level. Moreover, we received typical patterns which normally occur during a re-test/bottom-building process. As a matter of fact, we nearly got the same set up as last week as the market looks quite capped in both directions. This is mainly due to the fact that our entire short-term oriented indicators remain quite bearish from a pure signal point of view, but have started to form quite strong bullish divergences recently. Consequently, further volatile side-ways trading looks quite likely (at least from the current point of view).
The situation on the contrarian side is almost unchanged compared to last week as most of our option based indicators still remain quite supportive at the moment (Daily Put-/Call Ratio All CBOE Options, Global Futures Put-/Volume Ratio, Global Futures Put-/Volume Ratio Oscillator, All CBOE Options Call-/Put Ratio Daily and the Equity Options Call-/Put Ratio Oscillator Weekly). As already mentioned last week, this is another indication that the latest re-test of the previous low is just part of a typical (intermediate) bottom building process. Moreover, we can see that the gauge from the WSC Capitulation Index has also not confirmed the latest price action from the S&P 500 (although the signal from its fisher transformation still remains bearish from a pure signal point of view). This is telling us that the latest intra-day low from the S&P 500 at 2,603 should act as strong intermediate bottom. Moreover – from a pure cyclical point of view – the market is often supported by seasonal tailwinds (Christmas Rally) in the end of the fourth quarter. On the other hand side, we can see that the Smart Money Flow Index has not shown any major bullish moves so far, indicating further troubles on a mid-term time horizon. This signal confirms our view, that the recent sell-off is just part of a bigger top-building process/bear market which should unfold in early next year.
Mid-Term Technical Condition
Not surprisingly, the mid-term oriented trend of the market also deteriorated last week. The gauge from our Global Futures Trend Index dropped into the bearish area again as is trading at 15 percent. As this indicator is far away from passing its 60 percent threshold, the current correction cycle is far from being over at the moment. However, it was also good to see that its gauge was holding up quite well compared to its similar levels in October. As a matter of fact, we can also see some bullish divergences here, which is another indication that the chances for a last but corrective bounce into December remain intact. This could also explain the fact that the WSC Sector Momentum Indicator still remains quite bullish, although it dropped again for the week. This indicates that the mid-term oriented uptrend of the market remains intact – at least from a pure price point of view. In more detail, it is telling us that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. Also the momentum score of riskless money market within our Sector Heat Map weakened again and as it increased to 50 percent last week. In our opinion this is just another indication for our preferred scenario that any upcoming bounce will be just turn out to be a bear-market rally instead of a broader-based recovery.
This view is also confirmed by mid-term market breadth. Especially the Modified McClellan Oscillator Weekly widened its bearish gap, which is an indication for an outright weak tape momentum at the moment. Another outright concerning mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals strengthened considerably for the week. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60 percent) were mostly a reliable predictor for further troubles down the road. And also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) decreased last week. But on the other hand side, they were still holding up quite well compared to their levels in October, especially if we consider that the broad index hit its lowest level for months. The same applies to most of our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly), which have also formed some bullish divergences recently (compared to the latest correction low). Thus, we think there is still a good chance for a stronger but corrective year-end rally before the grizzlies show up once more.
Long-Term Technical Condition
The long-term oriented trend of the market also weakened last week. The WSC Global Momentum Indicator dropped to the lowest level for years and signals that only 12 percent 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. This is underlying our view, that the global-bull has entered its final stage. However, also our Global Futures Long Term Trend Index continued its bearish ride, but is still holding up quite well and trading in solid bullish territory. This signals that the long-term oriented trend of U.S. equities is fading away as well. But the most important and threatening signal is coming from our WSC Global Relative Strength Index, as all markets plunged totally into bearish territory last week. In addition, the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. These facts are another indication for a risk-off market environment. Also our long-term oriented tape indicators had to take a hard hit in the last week. The Modified McClellan Volume Oscillator Weekly reached its worst readings for months and the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average their worst readings for years. This is another piece of evidence that the market looks vulnerable for further (and stronger) disappointments on a mid-term time horizon.
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.
Despite the fact that our entire indicators remain outright bearish from a pure signal point of view, most of our short-term oriented ones have not confirmed the latest re-test/price action from the S&P 500. As a matter of fact, our base call remains unchanged compared to last week, as we think the market remains in the middle of a volatile and intermediate bottom building process. In our option, there is a quite good chance that the current bottom building process will act as basis for another recovery/rally into the year-end before further major troubles might be due. The main reason why we mentioned intermediate and not final low is due to the fact that the latest correction cycle has definitely left its mark on some of our mid- to long-term oriented indicator framework. Therefore, we think any upcoming year-end rally will be just the last burst of the bull market which started in 2009. Although we strongly believe that there is still a quite high chance for the year-end rally, we think it would make sense for our conservative members to keep their stop-loss limit at 2,595 (as final safety net).