March 25h 2018

Market Review

U.S. stocks finished the week sharply lower, with the main benchmarks recording their biggest weekly losses in more than two years. For the week, the Dow Jones Industrial Average slumped 5.7 percent, to finish at 23,533.20. The blue-chip index recorded its lowest close of 2018 and is now down nearly 5 percent since the start of the year. The S&P 500 closed at 2,588.26 and recorded a weekly loss of 6 percent. The benchmark index is down 3.2 percent year to date. The Nasdaq fell 6.5 percent for the week to close at 6,992.67. All key S&P sectors finished in the red for the week, dragged by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 24.9.

Strategy Review

Despite the fact that the market has rallied almost 9 percent from the latest correction low in early February, we received a growing number of evidences that the market was highly at risk for another stronger correction two weeks ago.  We warned our members that any rally/bounce/recovery without a broader based tape confirmation would definitely not be sustainable in its nature. Moreover, from a pure cyclical point of view (Presidential Cycle) we also expected another significant pullback into April, before a V-shaped but also corrective rally could bring some relief. Given the outright weak tape structure two weeks ago, we advised our conservative members to step at the sideline as it was just a question of time until sharp waterfall declines could be expected. In fact, the carnage started on Wednesday and in the end, U.S. stocks scored their biggest weekly losses in more than two years! Anyhow, after we have successfully predicted/side-stepped the second correction this year, the big question is if it is time for a bargain hunt or will the market face further declines?

Short-Term Technical Condition

Not surprisingly, 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 121 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 formed a bearish rounding top and started to decrease. This is another typical technical pattern for a strong short-term oriented down-trend. Also the gauge from the Modified MACD dropped significantly to the lowest level for months and shows a widening bearish gap. The case is slightly different if we focus on the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that this indicator plummeted into deep bearish territory, it has shown a small bullish divergence recently. Given the fact that the S&P 500 dropped almost below its latest correction low in early February, the gauge from the Advance-/Decline 20 Day Momentum Indicator was holding up quite well compared to its levels back then. This indicates that we might be not too far away from an important low. However, in such a situation short-term market breadth is key area of focus as it will tell us if we have seen the worst already or if further selling pressure can be expected.

If we focus on our short-term oriented tape indicators, we can see that all of them had to take a hard hit recently. Basically, this is not a big surprise at all if we consider the latest price action of the market. 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 advancing stocks on NYSE. This picture is now also widely confirmed by the NYSE New HighsNew Lows Indicator, as we have seen a pretty strong increase in the number of new lows, whereas the number of new yearly highs remains outright depressed! 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 deeper into bearish territory. To be more precise, right now there are only 18/32 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. This indicates that we might have seen the worst already. For example, the total number of new lows is much lower compared to the latest correction low in early February! 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 early February. So all in all, we think we have seen the worst already (at least for now), although further down-testing cannot be ruled out at the moment (as the tape structure is quite damaged at the moment).

However, another strong buy signal is coming from the contrarian side. The market is quite oversold at the moment, plus the strong spike in the Daily Put-/Call Ratio All CBOE Options indicates that a lot of investors have thrown in the towel recently. Another strong buy signal is coming from our reliable Bottom Indicator, which dropped into its buy zone last week. Moreover, if we focus on our cyclical roadmap, we can see that in the past the market used to run into an important low in early April which was followed by a strong V-shaped rally before a cyclical bear market used to hit the market in early May. This scenario is quite likely as the gauge from the Smart Money Flow Index dropped to a new low, which indicates that the market will face major troubles on a mid-term time horizon. Moreover, if we consider the positive bullish divergence within our short-term oriented tape indicators a stronger but corrective rebound into April looks quite likely.

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 plummeted during the week 34 percent to the middle part of the bearish consolidation area. As this indicator did not manage to pass its 60 percent threshold during the last couple of weeks, it was correct again that the latest recovery was corrective in its nature. However, it was also good to see that its gauge was holding up quite well compared to its levels in early February. As a matter of fact, we can also see some bullish divergences here, which is another indication that we might see a stronger but corrective bounce into mid-/late April. This could also explain the fact that the WSC Sector Momentum Indicator still remains quite bullish, although it dropped 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. This can also be observed if we focus on our Sector Heat Map as the momentum score of most sectors keeps trading above the one from riskless money market. Nevertheless, we can see that the momentum score of riskless money market significantly increased in the last weeks (currently at 31.9 percent), which is another indication that any upcoming bounce into late April should turn out to be corrective in its nature.

This view is also confirmed by mid-term market breadth. There we can see that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped considerably last week. On top of that the Modified McClellan Oscillator Weekly widened its bearish gap, which is another 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 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. Given the fact that most of our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) have formed some bullish divergences recently (compared to the latest correction low), we think a stronger but corrective rally attempt into mid-April looks quite likely before a cyclical bear market (losses until minus 20 percent) could hit the market in summer.

Long-Term Technical Condition

The long-term oriented uptrend of the market remains unchanged compared to last week. The WSC Global Momentum Indicator is still trading at solid bullish levels, as 78 percent of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are still in a long-term oriented up-trend at the moment. Also the readings from the Global Futures Long Term Trend Index are still trading at the highest levels for years. This can be also observed if we focus on the Global Relative Strength Index, as the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. Nevertheless, we can also observe some exhaustion in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) weakened last week. But this is not a big surprise at all, if we consider the recent circumstances.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Sector Rotation Strategy. As the relative strength score from the SPDR DJ Index dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the S&P Latam 40 is being added within the portfolio.

Bottom Line

Although our entire short-term oriented indicators remain quite bearish from a pure signal point of view, we received a lot of evidences that an intermediate bottom might be at hand soon. That does not necessarily mean that the market will take off immediately, but if we consider all the bullish divergences within our indicator framework, we received further confirmation for our cyclical roadmap. Consequently, a stronger but corrective V-shaped rally into mid-/late April looks quite likely before a cyclical bear market could hit the market in late Q2. Therefore, we think it would make sense that aggressive traders should cover their short-positions if the S&P 500 breaks above 2,610. Afterwards, they should focus on the long side again as long as we do see a reduction in the number of new lows and/or an increase in new highs. Conservative members should slightly start to build up exposure if the market rallies above 2,610 and they should increase their exposure if we see further strength towards 2,640 (in combination with brightening readings in our New Highs minus New Lows Indicator). If capital appreciation is the most important motivation, they should wait until we issue the next Technical Market Outlook.

Stay tuned!!!