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July 25th 2021

Market Review

U.S. stocks experienced a roller-coaster week that saw the major averages drop several percentage points at the beginning of the week, but strongly bounced at the end of the week. In the end, major indexes rebounded from the steep sell-off, and finally closed the week in positive territory and with hitting new records. The Dow Jones Industrial Average finished at 35,061.55 and gained 1% for the week. The S&P 500 finished at 4,411.79 and ended the week up 2%, after dropping more than 3 percent during the week. The Nasdaq climbed 2.8% for the week to end at 14,836.99. Both benchmarks booked new closing records. Most key S&P sectors ended in positive territory for the week. Utilities and energy were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 17.2.

Strategy Review

Despite the fact that the market was just hitting a fresh all-time high two weeks ago, we received a growing number of evidences that the market was highly at risk for stronger disappointments. To be more precise, our indicator framework showed us that only due to the strong performance of a handful of large caps, the S&P 500 was holding up quite well, although the remaining stocks were already faltering. We warned our members that such a situation was extremely dangerous since a trend-reversal within these few stocks could have the potential to trigger a stronger pullback since there was literally no safety net around which would be able to cushion such a move. As result, we advised our members to place a stop loss limit at 4,255 as the opportunity cost (risk-/reward ratio) of not being invested was extremely low. In fact, the stop-loss limit was triggered on Monday, where we saw the worst trading day since October 2020, before stocks strongly rebounded at the end of the week. Consequently, the big question is if we have seen the worst already (at least for now) or was the latest bounce just part of a more corrective top-building process into deeper summer? To answer that question, our indicator framework (especially market breadth) remains key area of focus right now.

Short-Term Technical Condition

After the strong bounce, the market shows nearly the same picture like in the previous week. From a purely price point of view, the short-term oriented trend of the market turned bullish since the S&P 500 managed to close 95 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 4,316 (lower threshold of the Trend Trader Index). In addition, both envelope lines of this reliable indicator are still increasing, which is another positive short-term oriented price driven trend-signal at the moment. Although these signals look quite constructive in the first place, we can also see that the underlying momentum of this price driven up-trend still remains outright weak. Although the Modified MACD slightly improved for the week, it has not managed to turn bullish yet. Also, the gauge of the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of strength so far as it strongly decreased for the week. Especially on Friday, when the broad index hit a new record, the Advance-/Decline 20 Day Momentum Indicator dropped to the lowest level for weeks. Consequently, both indicators are far away from confirming the latest price action of the S&P 500. As a result, both indicators have formed an outright bearish divergence. So, from a purely trend point of view, the latest gains can still be classified as (corrective) bounce rather than being the beginning of a new and sustainable uptrend (at least from a purely trend-point of view).

Basically, the same is true if we evaluate the upside participation within the current short-term oriented uptrend. Despite the fact that the S&P 500 reached a new all-time high on Friday, most of our short-term oriented breadth indicators only improved moderately or even weakened last week. Thus, the signals of our short-term oriented tape indicators can be described as not really confirmative at the moment. This applies in particular to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators weakened significantly last week. This is signaling that the declining issues and declining volume are still outpacing advancing volume and advancing issues on a short-term time perspective. A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily. These are a 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 the case right now, which is another indication that the recent rally was mainly driven by a few heavy weighted stocks (large tech) in the index rather than being the result from a strong demand all across the board. 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, they are still trading in bearish territory (although the S&P 500 is trading at new record levels!). This is an outright bearish signal as it shows that the current upside participation is extremely narrow based at the moment. The only small positive signal is coming from the NYSE New Highs/New Lows Indicator. There we can see that the number of highs have started to pick up again at the end of the week (and have therefore, outpaced the new lows). But at the beginning of the week, the opposite was the case. As a matter of fact, the High-/Low-Index Daily nearly flashed a bearish crossover signal in the middle of the week, but finally strengthened on Friday. Still, it decreased from a weekly viewpoint. So, from a purely short-term oriented tape point of view, the recent recovery can still be classified as bounce 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.

From a purely contrarian point of view, the latest sell-off day caused increased fear in the option market (WSC Put-/Volume Ratio Oscillator, Equity Call-/Put Ratio Oscillator and the All CBOE Call-/Put Ratio Oscillator), whereas the WSC Capitulation Index and the Smart Money Flow Index have shown positive signals recently. As a result, further bouncing on a short-term time perspective cannot be ruled out. However, from a seasonal point of view (Presidential Cycle) the market should approach rough waters within the next couple of weeks. 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

From a purely signal point of view, the mid-term oriented uptrend remains intact. This is mainly due to the fact that the Global Futures Trend Index closed in the middle part of its bullish consolidation area bracket. Nevertheless, its gauge dropped significantly last week and, hence, did not confirm the latest record high of the S&P 500. If this trend continues it might be just a question of time until this gauge drops below the important 60% bullish threshold. In such a situation, the market is highly at risk for further significant and, more importantly, sustainable losses. Currently, we are not there yet but given the weak short-term oriented tape structure, such a move could happen within days. Thus, we remain a bit alert. On the other side, we can see that most sectors within the S&P 500 remain in a strong mid-term oriented price driven uptrend, since the WSC Sector Momentum Indicator succeeded to increase for the week. 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.

Examining mid-term market breadth strengthens the quite bearish picture from the previous week. Despite the fact that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) slightly increased for the week, the SMA 100 have not succeeded yet to turn bullish. On top of that we can see that the Upside-/Downside Volume Index Weekly strengthened its bearish signal, while the Advance-/Decline Index Weekly decreased its bullish gap. 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 will monitor all three indicators quite closely over the next couple of weeks (although some of them still remain quite supportive for the time being). However, another negative mid-term oriented signal is coming from the Modified McClellan Oscillator Weekly which flashed a bearish crossover signal (indicating that the tape momentum turned negative). Also, our Advance-/Decline Indicators did not confirm the record high of the S&P 500 and the Advance-/Decline Volume Line even dropped to the lowest level for months. So, from a purely mid-term oriented tape perspective, it looks like the market is running out of fuel and, therefore, the upside potential is getting increasingly thinner as well.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains nearly unchanged. Our Global Futures Long Term Trend Index continued to push (slightly) higher, indicating that the long-term oriented up-trend of U.S. equities is still gaining momentum on very high bullish levels. Basically, we receive the same picture globally. Although the WSC Global Momentum Indicator slightly decreased for another week, it shows that 77% 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 market remains intact (at least for now). In contrast, our WSC Global Relative Strength Index decreased last week and two markets even dropped below U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 remained nearly unchanged, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly declined.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Since the momentum score of energy dropped below average and below the one of the S&P 500 we received a sell signal for that sector within our WSC Sector Rotation Strategy. Additionally, we are proud to announce that the WSC All Weather Portfolio reached a new high last week.

Bottom Line

The situation remains unchanged compared to last 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, 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. Currently, it looks like the market has entered a top building process. A typical top building process always starts with an initial but limited pullback (3-5%), which is then followed by a stronger counter-trend rally that often pushes the market towards, or even slightly above its old bull market high. If such a counter-trend rally is not confirmed by improving market breadth, it will not be sustainable in its nature. This view is also supported from a purely seasonal point of view, where the risk for stronger headwinds remains high. So even if we see a longer-lasting and volatile consolidation period instead of another strong down-leg, 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!