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August 7th 2021

Market Review

U.S. stocks finished the week with gains and with two major indexes posting new record highs.  Closing at a record of 35,208.51, the Dow Jones Industrial Average rose 0.7% for the week. The S&P 500 booked a weekly gain of 0.9% and closed at a record of 4,436.52. The Nasdaq finished at 14,835.76 and rose 1.1% this week. Most key S&P sectors finished higher, led by financials energy sector. The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, dropped to 16.2.

Short-Term Technical Condition

Once again, the market shows nearly the same picture as in the previous weeks. From a purely signal point of view, the short-term oriented uptrend of the market remains unchanged as the S&P 500 closed 73 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 4,363 (lower threshold of the Trend Trader Index). Moreover, both envelope lines of this reliable indicator are still increasing, which is another positive short-term oriented price driven trend-signal. While these signals look quite healthy from a purely price point of view, the underlying momentum of this price driven up-trend still remains outright weak. First of all, the gauge of the Advance-/Decline 20 Day Momentum Indicator finished the week nearly unchanged and once again in negative territory. Especially on Friday, when the broad index hit a new record, the gauge of the Advance-/Decline 20 Day Momentum Indicator dropped into negative territory again. And even though the Modified MACD has managed to turn bullish recently, its signal is a way too weak to be taken to seriously at the moment. Consequently, both indicators are far away from confirming the latest price action of the S&P 500. Thus, both indicators have formed an outright bearish divergence. So, from a purely trend point of view, the recent uptrend still looks outright fragile – at least from the current point of view.

We receive nearly the same picture if we evaluate the upside participation within the current short-term oriented uptrend. Even though the S&P 500 reached a new all-time high on Friday, most of our short-term oriented breadth indicators remain outright weak or only improved moderately last week. Thus, the degree of confidence that the current uptrend will continue is outright low at the moment. This applies in particular to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Although the momentum of advancing issues and advancing volume turned slightly positive last week, their signals are a way too weak to be confirmative at the moment. Especially, 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. These are quite concerning signals, since 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. This view is also supported by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Although both gauges slightly increased for the week, the SMA 50 is still trading in bearish territory (although the S&P 500 is trading at new record levels!). This is a quite bearish signal as it shows that the current upside participation is narrow based at the moment. The only real positive signal is coming from the NYSE New Highs/New Lows Indicator. There we can see that the number of new highs are still outpacing the number of new lows. As a matter of fact, the High-/Low-Index Daily slightly widened its bullish gap, albeit on quite low levels. So, from a purely short-term oriented tape point of view, the recent rally can once again be classified as large-cap driven overshoot rather than being the beginning of a new and sustainable uptrend – at least for the current point of view. Thus, the overall short-term oriented condition of the market remains extremely vulnerable at the moment.

On the contrarian side, most of our indicators remain or turned neutral last week (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 and the WSC Put-/Volume Ratio). Only the WSC Capitulation Index is still indicating a risk-on market environment, although its gauge has started to show some positive momentum recently. Given the weak tape structure this can also be interpreted as a red flag on the horizon. Anyhow, unchanged compared the 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 late July/early August. Given the current tape structure, such a scenario looks quite likely, at least from the current point of view.

Mid-Term Technical Condition

The mid-term oriented trend condition of the market slightly improved compared to last week. This is mainly due to the fact that the gauge of the Global Futures Trend Index has shown some signs of recovery recently (as it closed in the middle part of its bullish consolidation area bracket). This can be definitely interpreted as a positive signal, although its gauge has also not confirmed the latest record high of the S&P 500. If we focus on the WSC Sector Momentum Indicator, we can see that it slightly dropped for the week (although it keeps trading at quite solid bullish levels). This tells us that most sectors within the S&P 500 remain in a mid-term oriented price driven uptrend. This can also be observed if we examine our Sector Heat Map, as the momentum score of the riskless money market sector remains at 0% and all other sectors are trading above.

Analyzing mid-term market breadth supports our quite cautious view from the previous week. The percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remains outright weak (SMA 150) or even bearish (SMA 100). Thus, both indicators are far away from confirming the current levels of the S&P 500. More importantly, these signals are telling us that the current rally is still standing on weak knees and, therefore, the risk of a sudden momentum crash remains high. This view is also confirmed by the Upside-/Downside Volume Index Weekly which widened its bearish gap, whereas the Advance-/Decline Index Weekly continued to decrease for the week. This is a quite concerning development, because in the past, all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60%). Consequently, we still remain alert at the moment. Another negative mid-term oriented signal is coming from the Modified McClellan Oscillator Weekly which continued its bearish ride and even widened its bearish gap. This indicates that the tape momentum remains negative. Also, our Advance-/Decline Indicators did not confirm the record high of the S&P 500 as all of them (Advance-/Decline Line Weekly and Advance-/Decline Line Daily, the Advance-/Decline Volume Line) finished the week nearly unchanged. So, from a purely mid-term oriented tape perspective, it looks once again that the current rally is extremely fragile in its nature.

Long-Term Technical Condition

Also the long-term oriented trend of the market shows the same intermingled picture as in the previous weeks. Once again, our Global Futures Long Term Trend Index succeeded to improve last week and indicates that the long-term oriented price driven uptrend of U.S. equities remains intact. Although our WSC Global Momentum Indicator remains quite bullish, it continued to show a negative momentum indicating that the global bull market is slightly loosing steam. If we compare all relevant asset classes, U.S. equities remain the strongest in terms of relative strength (although the relative strength of all asset classes continued to deteriorate). Examining our long-term oriented tape indicators reveals 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

The situation remains unchanged compared to the previous week. Given the outright weak/deteriorating tape condition (especially on a short-term time perspective) our strategic bearish view remains unchanged. Even if we see further mega-cap overshooting/consolidating, the sustainability of the current move looks outright fragile at the moment. Thus, the risk of a sharp trend-reversal (price momentum crash) remains high. As a matter of fact, the risk-/reward ratio looks too low to justify any strategic long position at the moment. From a technical point of view, the market remains in a distribution process and, therefore, we remain cautious. In the past every stronger correction started with an outright weak tape structure, but not every week tape structure lead to a correction. So even if we see a longer-lasting and volatile consolidation period instead of another strong down-leg/correction, we would sacrifice 2 to 4% upside potential until our indicator framework would flash an all clear signal again. Thus, our bearish view will remain unchanged as long as we do not see a significant recovery within our short- to mid-term oriented indicator framework. So, in the end, we think conservative members should stay on the sideline, whereas experienced short-term traders should focus on the short side again if we see a break in the Trend-Trader Index (albeit they should use close stops given the risk of quite nasty bounces).

Stay tuned!