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October 3rd 2021

Market Review

U.S. stocks finished another week with losses. The Dow Jones Industrial Average lost 1.4% over the week to 34,326.46. The S&P 500 booked a weekly loss of 2.2% to close at 4,357.04. The Nasdaq plummeted 3.2% for the week to end at 14,566.70. The S&P 500 finished the month down 4.8%, breaking a seven-month winning streak. The Dow and the Nasdaq Composite fell 4.3% and 5.3%, respectively, suffering their worst months of the year. Nearly all key S&P sectors ended in negative territory for the week, led by health care. The energy sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 21.2.

Strategy Review

The market is heading down our expected path. More precisely, in our last week’s market comment we said that the market had successfully entered the third step of a typical top-building process (1. low quality market top > 2. initial sell-off between 3 and 5 percent > 3. oversold bounce/bull trap > 4. second sell-off towards or even below the previous low > 5. stronger bounce > 6. bottom or further selling pressure depending on the underlying tape condition). Thus, we warned our members not to chase the initial bounce since we expected to see at least another stronger sell-off towards the previous or even to a new low. In fact, the market sold off significantly, hitting a new low at 4,288 before the bounce on Friday trimmed some losses. Consequently, we saw already stage 4 and 5 of our projected path last week. Although the recent sell-off followed a textbook-like pattern it is not always that easy to identify single stages in such a process. A typical sell-off cycle is quite tricky, since the way down is always accompanied by stronger and sometimes longer-lasting counter-trend rallies. On average, the volatility is around 31 to 37 percent, when the Big Picture Indicator is showing a bearish consolidation or a bearish market environment (for further details click the Study Tab of our Big Picture Indicator). Thus, analyzing the quality (downside- and upside participation) of each correction leg as well as the following bounce will help to identify whether the market got back to stage 3 or if it has already entered stage 6 (which marks of course the end of such a cycle).

Short-Term Technical Condition

Not surprisingly, the short-term oriented price trend of the of the market turned clearly bearish as the S&P 500 closed 55 points below the bearish threshold of the Trend Trader Index. Additionally, both envelope lines of this price driven trend indicator are dropping on a quite fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows (which is another typical technical pattern for a strong short-term oriented down-trend). In this context, the S&P 500 is extremely far away from getting back into a short-term oriented price driven uptrend. The same is true if we focus on the Modified MACD, which remains in a bearish free fall and has reached the lowest level for nearly one year. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. Therefore, our entire short-term oriented trend indicators have not confirmed the bounce of the S&P 500 on Friday.

This picture is also widely confirmed by short-term market breadth since nearly all signals of our specific indicators turned or remain bearish. Although the picture looks quite grim from a purely signal point of view, we also saw less downside participation compared to the previous low.  Moreover, some of our short-term oriented breadth indicators also turned bullish or were not confirming the latest low. On the other hand side, the upside participation of the latest bounce was also quite shallow. The Modified McClellan Volume Oscillator Daily flashed a bullish crossover signal on Friday, indicating that the momentum of advancing volume turned positive again. Another bullish signal is coming from the spike in NYSE Volume, which often marks a short-term oriented trend-reversal. Moreover, we can see that the Modified McClellan Oscillator Daily did not confirm the latest low as its short-term oriented gauge was holding up quite well (compared to the previous low). Nevertheless, from a purely signal point of view the indicator itself remains bearish (indicating that the momentum of advancing issues still remains negative). The situation looks a bit different if we focus on the NYSE New HighsNew Lows Indicator. There we can see that the drop of the S&P 500 towards 4,288 was accompanied by more stocks dropping to a new low compared to the initial sell-off. On the other hand we can see, the number of stocks which are hitting a fresh yearly low is nearly offset by the ones hitting a new high. As a matter of fact, the High-/Low-Index Daily has not flashed a bearish crossover signal so far (although it might be the case soon). This weak downside participation of the latest low can also be observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). In contrast, both indicators still remain bearish from a purely signal point of view and did, therefore, not confirm the strong bounce on Friday. Basically, the same is true if we focus on the Upside-/Downside Volume Index Daily.

The situation on the contrarian side is still quite bearish indicating further selling pressure ahead. Despite the fact that the market sold off significantly we have not seen stronger signs of capitulation so far. Most of our option-based indicators (AII CBOE Put-/Call Ratio, AII Bulls/Bears Survey, WSC Dumb Money Indicator, AII CBOE Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator) remain more or less neutral or even flashed a bearish signal last week. Also the number of bears could be much worse given the recent sell-off cycle. Although Smart Money showed some recovery on Friday, the negative divergence compared to the Dow Jones Industrial Average is indicating further troubles down the road. A fact, which can also be seen if we focus on the fisher transformation of the WSC Capitulation Index, which is still indicating a risk-off market environment. Nevertheless, the WSC Capitulation Index has dropped by half of its rise recently, indicating some form of stabilization. A fact, which is also confirmed from a purely seasonal point of view (Presidential Cycle). There we can see that the market often hits an intermediate low in late September, which is then followed by some kind of stabilization phase before further stronger selling pressure can be expected. If we consider the outright bearish readings in our mid- to long-term oriented indicators, together with some bullish divergences in our short-term market breadth such a scenario looks quite likely.

Mid-Term Technical Condition

Another major reason for that negative strategic view is based on the fact that the mid-term oriented condition of the market also weakened last week. Especially, the gauge from the Global Futures Trend Index dropped further into the bearish consolidation area last week and has definitely not confirmed the latest bounce of the S&P 500. Hence, this indicator is clearly trading below the very important 60 percent threshold. In such a situation, the risk of a further fast-paced pullback/waterfall declines remains quite high (if this signal is accompanied by a weak mid-term market tape structure). So, even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains near or below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well! From a purely price point of view the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator was holding up quite well. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend (which is not a big surprise at all, if we consider the year-to-date performance of the S&P 500). This can also be seen if we focus on our Sector Heat Map as the momentum score of all sectors are still trading above the one from riskless money market.

Examining mid-term oriented market breadth reveals a quite intermingled picture. On the one hand side our entire advance-/decline indicators were holing up very well (Advance-/Decline Line Daily and the Advance-/Decline Line Weekly and especially the Advance-/Decline Volume Line Daily). On the other hand side, we can see that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly remain quite weak. Although both indicators have not confirmed the latest low, all major corrections/bear markets always started and were accompanied by weak/bearish readings in both indicators. In addition, the Modified McClellan Oscillator Weekly continued its bearish journey and widened its bearish gap. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) has not succeeded to pass the bullish threshold and remains in the bearish area. Nevertheless, both indicators also showed a weakening down-side participation of the latest low.

Long-Term Technical Condition

The long-term oriented technical picture of the market slightly weakened again. 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 but continued to weaken. A quite serious bearish signal is coming from the WSC Global Momentum Indicator which continued to decline and shows that now only 42% 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 is losing grip. 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 all of our indicators (SMA 200, Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly) weakened.

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.

Bottom Line

On a very short time frame, we saw some minor ingredients for a potential intermediate bottom building process. Moreover, from a purely seasonal point of view, some kind of stabilization into early October ruled out at the moment. The main reason why we mention intermediate and not final low is based on the fact that our entire mid- to long-term oriented indicators remain too weak to justify a V-shaped recovery. Moreover, we should not forget that the readings from most of our short-term oriented indicators still remain outright bearish from a purely signal point of view. As a matter of fact, any upcoming and stronger and longer-lasting bounce would be still categorized as corrective (as long as we do not see stronger improvements within our indicator framework). Therefore, the most advisable approach for aggressive traders is to watch the tape quality quite closely within the next couple of days. We will either see an increasing short-term oriented tape structure (which would be the final confirmation that the market entered a stabilization phase) or the recent bounce will just represent another good short-selling opportunity. Conservative members should remain on the side-line as long as we do not see stronger improvements/bullish signals within our indicator framework (especially within the Global Futures Trend Index and the Big Picture Indicator).

Stay tuned!