April 8th 2018

Market Review

U.S. stocks ended the week with losses. The Dow Jones Industrial Average dropped 0.7 percent from the week-ago close to 23,932.76. The S&P 500 recorded a 1.4 percent loss over the week and finished at 2,604.47. The Nasdaq Composite booked a weekly fall of 2.1 percent to end at 6,915.11. All key S&P sectors finished in the red for the week, dragged by technology and industrials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 21.5.

Strategy Review

It was a turbulent week on Wall Street as the S&P 500 dropped to a correction low at 2,553 on Monday, recovered and rallied until Thursday but plunged again on Friday. In the end, the S&P 500 lost 1.4 percent for the week. Last week, we highlighted the fact that from a pure contrarian- and from a cyclical point of view (Presidential Cycle), the market appeared ready for a stronger but corrective bounce into mid-April. As the overall technical condition looked pretty grim, we also suggested to place a stop-loss limit as sharp waterfall declines could not be ruled out back then. In fact, our suggested stop-loss limit at 2,595 was hit on Monday and, therefore, the market did not precisely follow our suggested bounce scenario last week. Consequently, the big question is if the market will face further declines or if the corrective bounce scenario is still in place?

Short-Term Technical Condition

The pure price driven short-term down-trend of the market remains well in force and even gained more bearish ground last week. From a pure price point of view, the S&P 500 closed 56 points below the bearish threshold from the Trend Trader Index. In addition, both envelope lines of this reliable indicator are drifting lower on a fast pace. This indicates that within the past 20 days there were lower highs and lower lows, which is a typical technical pattern for a strong short-term oriented down-trend. Also our Modified MACD dropped to the lowest level for months, indicating that the underlying trend momentum of the market remains outright bearish at the moment. Also the gauge from the Advance-/Decline 20 Day Momentum Indicator dropped below its bullish threshold on Friday, but it refused to confirm the new intra-day low on Monday. This was mainly due to the fact that its gauge was holding up pretty well on that day compared to the previous low we saw in mid-February. As a matter of fact, it formed a quite bullish divergence, although it flashed a small bearish signal on Monday. Normally, this indicator tends to be a leading one and, therefore, it signals that we might have seen the worst already – at least on a short-term time frame.

Despite the fact that the overall short-term oriented trend remains bearish, short-term market breadth showed stronger sigs of improvements last week. As a matter of fact, the current bearish price driven trend of the market is not confirmed by a broad basis anymore. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators flashed a weak but bullish crossover signal last week. This indicates that the momentum of advancing stocks (Modified McClellan Oscillator Daily) and advancing volume (Modified McClellan Volume Oscillator Daily) showed stronger signs of recovery, although the S&P 500 is trading at outright low levels.  Also the percentage of stocks which are trading above their short-term oriented moving averages (20/50) managed to improve compared to the previous week and have additionally also not confirmed the low we saw on Monday. This is another piece of evidence that the current negative price trend from the S&P 500 is only driven by a handful of heavy-weighted (tech) stocks and not by a broad basis. This is basically a quite positive signal as it indicates that the current negative price trend of the market is losing steam. This picture is widely confirmed by the NYSE New HighsNew Lows Indicator. Despite the fact that the market plunged on Monday, we have less than 250 new lows (compared to almost 500 in mid-February). Moreover, we saw again a strong reduction of new lows during the whole week, although the S&P 500 lost 1.4 percent in the same time period. As a consequence, the bearish gauge from High-/Low-Index Daily has again lost some momentum recently and has, therefore, not confirmed the latest price action from last week.

On the contrarian side, the situation is almost unchanged compared to last week. The option market remains extremely bearish which should be quite supportive until April 20th, when the option expiring date is due. As already mentioned last week, this time perspective is in line with our cyclical roadmap (Presidential Cycle), which indicates that in the past, the market used to run into a major top in that time period. However, apart from that fact the remaining contrarian indicators still look quite grim. The WSC Capitulation Index is still indicating a risk-off market environment at the moment whereas the Smart Money Flow Index dropped also to a new low, indicating major troubles ahead very soon. This outlook is in-line with our strategic call, as we think the market could run into a cyclical bear market (decline until 20 percent) within the next couple of months.

Mid-Term Technical Condition

This is mainly due to the fact that the mid-term condition of the market looks extremely damaged at the moment. With such weak readings all across the board, we do not think that equities have enough power to trigger any sustainable rally at the moment. Although the gauge from the Global Futures Trend Index slightly improved last week by a few percentage points, it is still trading shy above its bearish 20 percent threshold. As already pointed out last week, 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 gains will definitely be of a corrective nature rather than the start of a new sustainable uptrend. And as long as its gauge remains far below its bearish 60 percent threshold the current correction cycle will definitely be not over. Also the WSC Sector Momentum Indicator continued its bearish ride and dropped to the lowest level for years! This fact is a hint that the momentum score of more and more sectors within the S&P 500 are starting to underperform the momentum score of riskless money market. And this fact is clearly confirmed by our Sector Heat Map as currently already 5 sectors are underperforming the momentum score of riskless money market (five weeks ago, only one sector was underperforming). This is a strong piece of evidence that the market will face a cyclical bear market soon.

Another concerning fact is that mid-term oriented market breadth also looks quite damaged at the moment. The Modified McClellan Oscillator Weekly continued its bearish journey and dropped to the lowest level for months, signaling that the overall mid-term oriented tape momentum of the market remains outright weak. And also mid-term oriented advancing issues as well as mid-term oriented up-volume are trading above their bullish counterparts or gained more bearish power. In the past, we never saw a stronger sustainable rally with bearish readings in both of those indicators. However, some positive signals are coming from the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) and from our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) as they have shown some form of positive divergence recently. This is another piece of evidence that we might see another corrective rally attempt on a short-term time perspective.

Long-Term Technical Condition

The long-term oriented uptrend of the market shows the same picture as last week and reveals that it is has started to run out of steam. The WSC Global Momentum Indicator continued to decrease and reached the lowest level for months. This is telling us that a lot of local equity markets around the world have dropped below their long-term trend-lines recently and that the current bull-run is slightly fading out. Also the Global Futures Long Term Trend Index continued to lose some steam (although at quite bullish levels). In addition, our WSC Global Relative Strength Index shows that the relative strength of all risky markets again turned negative – although they keep trading far above the one from U.S. Treasuries. And the exhaustion in long-term market breadth is still persistent, 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) continued to weaken or have not shown any significant positive moves recently. This is another confirmation for our cyclical bear-market scenario.

Model Portfolios

If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there were no changes in the allocation last week.

Bottom Line

On a short-term time perspective, we stick to our tactical call that the market appears ready for a stronger but corrective bounce into mid-April. Two weeks ago, this bounce scenario was only supported from a pure contrarian and cyclical point of view but last week we also received further confirmation from short-term market breadth. Consequently, our tactical call that we see a stronger bounce towards 2,700/2,750 or maximum 2,800 remains unchanged. In our opinion, this bounce will be just part of a larger and complex top-building process into Q2 which could then finally lead to another significant correction into summer. The main rationale behind that call is the fact that the overall technical condition of the market looks outright grim and, therefore, any upcoming gains will not be sustainable in their nature. As a matter of fact, our bearish strategic outlook remains in place as long as we do not see stronger improvements in our indicator framework. As a matter of fact, we advise our aggressive traders as well as conservative members to enter a long-position again as long as we do not see a stronger spike (more than 125) in new lows. Additionally, a stop-loss limit at 2,588 would make sense – just in case we see a sharp decline. Members with the primary goal of capital appreciation and for those where transaction costs matters should still stay at the sideline until the overall market environment turns bullish again.

Stay tuned!!!